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ADVANCED LEVEL CASE STUDY EXAMINATION
WEDNESDAY 20 JULY 2016
(4 hours)
CASE STUDY
CANDIDATE NUMBER
DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO
1. When instructed to begin the paper:
a. check that your question paper contains all the required pages. The ICAEW’s
consecutive page numbering may be found under the base line at the foot of each
page;
b. enter your candidate number in the box provided above.
2. Number each page of your answer consecutively using the space provided at the top
right of each sheet. Ensure that you write your candidate number on each page of your
answer. You must do this before you are told to stop writing.
3. Answer folders and examination stationery, used or unused, must not be removed from
the Examination Hall. Question papers may, however, be retained by candidates.
4. Your answer must be submitted on the paper provided by the ICAEW in the
Examination Hall. Any pre-prepared papers, or papers comprising annotated exhibits
from the case material, included in your answer WILL NOT be marked by the
examiners.
5. After the instruction to stop writing at the end of the paper, you will be given five minutes to
assemble your answer in this folder. You may not number pages during this time. Fasten
your complete script inside this folder using the hole in the back page and the tag
provided. Do not include your question paper in the folder. When the assessment is
declared closed, you must stop writing immediately. If you continue to write (even
completing your candidate details), it will be classed as misconduct.
ICAEW USE ONLY
ICAEW\J16
Copyright @ ICAEW 2016. All rights reserved 222389

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ICAEW\J16
Copyright @ ICAEW 2016. All rights reserved 222389

July 2016 Case Study: Bux Limited
List of exhibits
The following exhibits were included in the material provided as Advance Information:
1 About you (Bobbie Harding) and your employer (Bux Limited)
2 The UK book publishing industry: An overview
3 Children’s book publishing in the UK
4 Bux: Company overview
5 Bux: Management accounts for the three years ended 31 May 2015
6 Bux: Review of the business for the two years ended 31 May 2015
7 Bux: Key accounting areas
8 Bux: Key business processes
9a Royalties and advances
9b Examples of advances paid by Bux
10 Bux: Strategy
11 Bux: Factsheets
12 Bux: Printing and distribution arrangements
13 Media coverage
These items are newly provided:
14 Email dated 20 July 2016 from Zephaniah Bishoo to Bobbie Harding: Recent
developments
15 Information relating to the draft management accounts (Zephaniah Bishoo, 18 July 2016)
16 Bux: Draft management accounts for the year ended 31 May 2016
17a Email dated 18 July 2016 from Annette Lewis to Zephaniah Bishoo: Opportunity to offer
book contract to new author
17b Email dated 19 July 2016 from Emily Sutton to Annette Lewis: ‘Superspell’
Media article: Publishers in race for major new children’s writer
Email dated 20 July 2016 from Andres Torres to Annette Lewis: Plagiarism
18 Email dated 18 July 2016 from Rupesh Shah to Annette Lewis: Three options for printing
and distribution arrangements
19 Media coverage
ICAEW/CS/J16 1 of 15
BLANK PAGE
Bux Limited: Case Study requirement
You are Bobbie Harding, a final-year trainee ICAEW Chartered Accountant working as an
analyst at Bux Ltd, a London-based publisher of children’s books. You are on secondment
from Drummonds ICAEW Chartered Accountants. You report to Bux’s Finance Director,
Zephaniah Bishoo.
Requirement
You are required to prepare a draft report for the Bux board, as set out in the email dated
20 July 2016 from Zephaniah Bishoo to you (Exhibit 14). Your report should comprise the
following four elements:
 An executive summary
 Your responses to the three detailed requirements set out in Exhibit 14, including financial
appendices (as required).
State clearly any assumptions that you make. All workings should be attached to your answer.
Your report should be balanced across the three detailed requirements, and the following time
allocation is suggested:
Reading and planning 1 hour

Performing calculations and financial analysis 1 hour
Drafting report 2 hours
Marks allocation
All of the marks in the Case Study are awarded for the demonstration of professional skills,
allocated broadly as follows:
Applied to the four elements of your report (as described above)

 Assimilating and using information 20%
 Structuring problems and solutions 25%
 Applying judgement 25%
 Drawing conclusions and making recommendations 20%
90%
Applied to your report as a whole
 Demonstrating integrative and multidisciplinary skills 5%
 Presenting appropriate appendices 5%
100%
Of the total marks available, 15% are awarded for the executive summary and approximately
10% for the relevant discussion of ethical issues within your answer to the requirements.
In planning your report, you should be aware that not attempting one of the requirements will
have a significantly detrimental effect on your chances of success, as will not submitting an
executive summary. In addition, as indicated above, all four skills areas will be assessed
under each of the four elements of your report. Accordingly, not demonstrating your
judgement or failing to include appropriate conclusions and/or recommendations in each
element of your report will affect your chances of success.
BLANK PAGE
EXHIBIT 14
EMAIL
From: Zephaniah Bishoo
To: Bobbie Harding
Subject: Recent developments
Date: 20 July 2016
There have been a number of significant recent developments. I am attaching the following:
 Information relating to Bux’s draft management accounts for the year ended 31 May 2016
(Exhibit 15), together with those management accounts (Exhibit 16)
 An email from Annette Lewis to me about Emily Sutton, a potential new author for Bux
(Exhibit 17a)
 A series of other documents relating to the Emily Sutton opportunity (Exhibit 17b)
 An email from Rupesh Shah to Annette Lewis about Bux’s printing and distribution
arrangements (Exhibit 18)
 Recent media coverage (Exhibit 19)
I would like you to draft a report from me to the Bux board. This should comprise the following.
1. An analysis of revenue, cost of sales and gross profit for the year ended 31 May 2016 by
comparison with the previous year.
Your analysis should be based on the draft management accounts (Exhibit 16), including
relevant notes. It should also take into account the information provided in Exhibit 15.
2. An evaluation of the opportunity to offer a contract to Emily Sutton for her first book,
‘Superspell’ (Exhibit 17a), taking into account the emails and media article at Exhibit 17b.
Using the data provided, you should prepare calculations for the 18 months beginning
1 December 2016 to show whether the suggested advance of £250,000 will earn out in
this period. You should assess the adequacy of the assumptions on which your
calculations are based. You should also discuss the wider commercial and ethical
aspects, including any that relate to Emily’s agent, Liza Halstead. You must reach a
reasoned decision as to whether Bux should offer a contract to Emily.
3. An evaluation of the three options for our printing and distribution arrangements in light of
the current problems with one of our existing printing companies, Ethelred (Exhibit 18),
and the issues identified in Exhibit 19.
Your evaluation should cover the financial, operational and strategic issues relating to
each of the three options available to Bux, as well as any ethical or business trust
issues arising for Bux. Where appropriate, you should provide brief calculations to
support your arguments.
I look forward to receiving your draft report.
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EXHIBIT 15
Information relating to the draft management accounts (Zephaniah Bishoo, 18 July 2016)
I have set out below some information that should assist in the analysis of Bux’s revenue,
costs of sales and gross profit for the year ended 31 May 2016.
 Because of her continued illness, Yolande Holder has not yet completed the new books
that she had promised and sales of her existing titles remain slow. The accounts for the
year ended 31 May 2016 reflect a full impairment charge against the £110,000 advance
paid to her in the previous year for the new books. They also include a charge of
£220,000 against revenue in respect of returns for her existing titles.
 New authors:
o Revenue for the year ended 31 May 2016 includes £2,290,000 from the 31 authors
who signed contracts with Bux in the previous year. The accounts for the year ended
31 May 2016 also reflect an impairment charge of £170,000 against the advances paid
to two of these authors as sales of their books are now expected to fall well short of
our initial expectations.
o In the year ended 31 May 2016, 95 new authors approached Bux, of whom eight
signed contracts with us. Revenue for the year ended 31 May 2016 includes £626,000
from these eight authors.
 Total sales of printed books by volume in the year were 4.94 million (hardbacks 22%,
paperbacks 78%).
 Revenue from back catalogue represented 18% of e-book revenue for the year. At the
end of the year, the number of e-book titles (including back catalogue) was 529.
 Pre-production and printing costs include £11,840,000 spent with our outsourced printing
companies: 40% with Ethelred, 50% with Renoir and the remaining 10% with other
printing companies.
 Total royalties paid comprise: on printed books: £3,137,000; on e-books: £2,815,000.
BLANK PAGE
EXHIBIT 16
Bux Ltd: Draft management accounts for the year ended 31 May 2016
Statement of profit or loss for the year ended 31 May 2016

£000
Revenue (Note 1) 50,383

Cost of sales (Note 2) (28,554)
Gross profit 21,829
Marketing and distribution costs (4,755)
Administrative expenses (Note 3) (13,702)
Operating profit 3,372
Net finance income 63
Profit before taxation 3,435
Income tax expense (687)
Profit for the year 2,748
Statement of financial position as at 31 May 2016

£000
Assets
Non-current assets: Property, plant and equipment (Note 4) 2,736
Current assets
Inventories (Note 5) 9,991
Trade and other receivables (Note 6) 12,409
Cash at bank and in hand 4,168
26,568
Total assets 29,304
Shareholders’ equity
Called up share capital 100
Retained earnings 22,125
22,225
Current liabilities
Trade and other payables (Note 7) 6,392
Current tax liabilities 687
7,079
Total equity and liabilities 29,304
Statement of cash flows for the year ended 31 May 2016
£000
Profit before taxation 3,435
Adjust for:
Depreciation 737
Net finance income (63)
Operating cash flow before changes in working capital 4,109
Change in inventories (756)
Change in trade and other receivables 495
Change in trade and other payables (616)
Cash generated from underlying operations 3,232
Income tax paid (1,033)
Net cash from operating activities 2,199
Cash flows from investing activities
Net interest received 63
Purchase of property, plant and equipment (599)
Net cash used in investing activities (536)
Cash flows from financing activities
Equity dividends paid (1,250)
Net cash used in financing activities (1,250)
Net change in cash and cash equivalents 413
Cash and cash equivalents at beginning of the year 3,755
Cash and cash equivalents at the end of the year 4,168
Notes to the management accounts
Note 1: Revenue
£000
Printed books 43,378
Less: Returns (5,504)
37,874
E-books 12,509
50,383
Note 2: Cost of sales

£000
Pre-production and printing costs 17,695
E-book delivery, conversion and related costs 4,052
Royalties 5,952
Impairment of advances 855
28,554
Note 3: Administrative expenses

£000
Salaries, training and other personnel costs 10,735
Rent, rates, insurance, IT and other office expenses 1,788
Depreciation and other general expenses 1,179
13,702
Note 4: Property, plant and equipment
Short Furniture,
leasehold fittings and
improvements equipment TOTAL
£000 £000 £000
Cost
At 1 June 2015 2,812 2,973 5,785
Additions - 599 599
Disposals - (37) (37)
At 31 May 2016 2,812 3,535 6,347
Depreciation
At 1 June 2015 963 1,948 2,911
Charge for the year 281 456 737
Disposals - (37) (37)
At 31 May 2016 1,244 2,367 3,611
Carrying amount
At 31 May 2016 1,568 1,168 2,736
Note 5: Inventories
£000
Work-in-progress 2,208
Finished goods 7,783
9,991
Note 6: Trade and other receivables

£000
Trade receivables 11,778
Less: provision for returns (1,671)
10,107
Prepayments – advances 1,312
Other receivables and prepayments 990
12,409
Note 7: Trade and other payables

£000
Trade payables 2,814
Royalties payable 1,776
Other payables and accruals 1,802
6,392
EXHIBIT 17a
EMAIL
From: Annette Lewis
To: Zephaniah Bishoo
Subject: Opportunity to offer book contract to new author
Date: 18 July 2016
I have been approached by Liza Halstead, who is familiar to us as the agent for several of
our authors. Liza is representing a new children’s author, Emily Sutton. Emily has previously
written scripts for children’s television programmes in the UK but has not yet had any work
published. Emily is (in Liza’s words) “an exciting talent that any publisher would be foolish to
ignore”.
Liza asked me if Bux would consider giving Emily her first book contract. This would be for
‘Superspell’, a 300-page fantasy story aimed at both boys and girls aged 8–11, with 30
illustrations by Emily herself. The book is almost complete. Liza has proposed an advance of
£250,000.
Other relevant information (all provided by Liza) is set out below.
Hardback Paperback E-book

List price £20 £10 £8
Estimated sales (volume)
Year 1 (6-month period to 31 May 2017) 40,000 - -
Year 2 (12-month period to 31 May 2018) 60,000 90,000 40,000
Author’s royalty rate 10% 10% 25%
 ‘Superspell’ will appear first, in hardback form only, on 1 December 2016, and then be
available as an e-book and a paperback from 1 June 2017.
 All figures relate to ‘Superspell’ alone. It will be the first book in a trilogy, with the second
expected to be published on 1 December 2017 and the third on 1 December 2018.
 All bookshops will receive the usual Bux discount of 40% on the list price of the book’s
printed versions.
 ‘Superspell’ will be adapted into a film (with the rights being acquired by another media
company, in line with Bux’s normal practice). The film will appear initially in UK cinemas
from 1 December 2017, coinciding with the publication of the second book.
We must decide quickly whether to offer a contract to Emily.
EXHIBIT 17b
EMAIL
From: Emily Sutton
To: Annette Lewis
Subject: ‘Superspell’
Date: 19 July 2016
I know that Liza has been in contact with you about ‘Superspell’. I am really excited about
getting my first book published and hope that you are too! I read some extracts from it at a
recent children’s arts festival in front of an audience of over 1,000 (children and parents),
and showed them some of the illustrations. Lots of people came up to me afterwards asking
when the book would be available, as well as asking me for copies of the illustrations.
I am asking any prospective publishers to commit £50,000 of promotional expenditure to

mark the launch, together with guarantees of 20 book-signing sessions at large bookshops
in London and 10 appearances on UK television during December 2016. To help with my
cashflow, I would also like the advance paid in full upon signing of the contract.
MEDIA ARTICLE
Publishers in race for major new children’s writer (Publish Now magazine, July 2016)
Just when we thought that big advances were a thing of the past, we hear that there is the
prospect of a major battle for the rights to ‘Superspell’, the debut of budding children’s author
Emily Sutton. It is rumoured that one publisher, Terrapin, is prepared to pay £500,000 to
secure the contract – two or three times more than the amount that might normally have been
expected. However, Terrapin is known for its strategy of offering large advances but then
paying well below the market rate for royalties, especially on e-books.
EMAIL
From: Andres Torres
To: Annette Lewis
Subject: Plagiarism
Date: 20 July 2016
I am a children’s author in Spain, writing exclusively for one of Spain’s best-known publishers.
It has come to my attention that you have been approached about a book called ‘Superspell’
by a new British author, Emily Sutton. This title is almost a direct translation of the title of my
first book. In addition, my son Sergio (who is currently at university in England) attended
Emily’s recent public reading and, from what he has told me, the story of ‘Superspell’ appears
to be somewhat similar to mine and one of the characters has a name that resembles that of
one of my characters. My book was published in 2006 and has never been translated from
the original Spanish.
If ‘Superspell’ is accepted by Bux, I will expect to receive my rightful share of any future
financial success that it achieves.
EXHIBIT 18
EMAIL
From: Rupesh Shah
To: Annette Lewis
Subject: Three options for printing and distribution arrangements
Date: 18 July 2016
The contract with one of our two main printing companies, Ethelred, expires on 30 November
2016. We need to decide soon whether to renew this contract, in view of our objective to
review our outsourced printing arrangements, with a targeted saving of £1 million in annual
printing costs in the year to 31 May 2017. The decision will also need to include the
distribution arrangements.
We have in general been satisfied with the service that we have received from Ethelred, but a
number of recent issues suggest that Ethelred has been experiencing difficulties. Two incidents
in June 2016 have given us particular concern:
 The poor print quality of the limited edition Thomas Patterson books. All copies had to be
pulped and the books had to be reprinted. We did not have to pay for the reprinting, but the
incident caused us lost sales and damaged customer loyalty.
 Ethelred’s failure to complete the printing of the new ‘Wilf’ book on schedule. It had been
heavily promoted, with some large bookshops in the UK announcing that they would be
opening specially at 01.00 on Sunday 5 June (‘Wilf Day’) to launch it. Printing was
eventually completed one week late.
The account manager for Bux left Ethelred on 30 June, and we are now being served directly
by one of Ethelred’s directors, Ryan Gough – a clear sign that Ethelred views us as an
important client. On another positive note, Ethelred was announced last week as the 2016
winner of the publishing industry’s special award for socially responsible printing.
Ryan has said that if we renew the contract, Ethelred is prepared to offer us performance
guarantees in relation to quality and adherence to deadlines. He has also said that Ethelred
will reduce its prices to us by 10% for all orders from 1 December 2016 onwards. In turn,
Ethelred will expect Bux to commit to a minimum annual spend on printing (after the 10%
discount) of £4 million. If we commit to using Ethelred for all of our printing and distribution –
that is, to the exclusion of Renoir and any other printing companies – the price reduction will
be 20% on all orders. The reductions relate to both printing and distribution.
If we choose not to renew the Ethelred contract, we will have to transfer the existing Ethelred
work to our other current main printing company, Renoir. The contract with Renoir still has
another 10 months to run.
In summary, there are three options realistically available to us for printing and distribution:
1. To renew the contract with Ethelred as well as retaining the relationship with Renoir; or
2. To make Ethelred our exclusive provider and to terminate our contract with Renoir; or
3. To make Renoir our exclusive provider and not to renew our contract with Ethelred.
We are always researching the market and have been continuing to try out a number of other
companies, including Auden. However, we have not found any that we consider suitable for
our needs, and so we would cease using any printers other than Ethelred and/or Renoir from
1 December 2016. We have also looked into printing in-house, but the expenditure (both the
initial capital outlay and ongoing costs) would be prohibitive.
EXHIBIT 19
MEDIA COVERAGE
Painting a Poor Picture (Printing Press, July 2016)
High-profile French printing company Renoir is coming under scrutiny following the
announcement that it may be about to lose its ISO quality accreditations. While the facts are
still emerging, we understand that Renoir has not been adequately maintaining its top-of-the-
range printing equipment at its operation in Italy. This has led to several industrial accidents,
which the company had succeeded in ‘covering up’ until the recent announcement. Three
machine operators have suffered serious injuries and are unlikely to be able to work again.
They are expected to take legal action against the company for neglecting its duty of care to
its employees.
Renoir’s senior management deny any wrongdoing. Some industry observers speculate that
in a bid to improve its reported results in anticipation of a takeover, Renoir has been
attempting to cut costs. Observers also suggest that, as part of this process, Renoir has been
trying to negotiate higher-priced contracts with various publishers.
Jax Suffers Hack Attack (Warehousing News, 17 July 2016)
Who has got hold of the e-book version of ‘Jax Max’, the latest book in Bernard Underne’s
legendary ‘Jax’ series?
Printing company Ethelred has reported the loss from its computer systems, apparently by
hacking, of the final agreed digital copy of ‘Jax Max’. The book was due to be officially
released on 1 August 2016, simultaneously in hardback and e-book editions. Under a strict
embargo by publisher Bux, it was supposed to be kept a closely-guarded secret until that
date.
Ethelred has engaged the services of a forensic IT specialist to try to identify the culprit by
looking at computer login records and evidence of any hacking into its systems. There are
meant to be strict controls limiting access to material of such a commercially sensitive nature.
So far, the book does not appear to have found its way into the public domain, but we
understand that Bux is making contingency plans to deal with any leak, should one occur.
Bookshop Ban (PrinciplesWatch.com website, 18 July 2016)
It has emerged that two well-known printing and distribution companies, Renoir and Auden,
have been distributing the controversial new book ‘It’s Not Your Business’ to major UK
bookshops. Copies have been on sale at heavily discounted prices in their children’s
sections, alongside popular fiction and non-fiction titles. ‘It’s Not Your Business’, published by
a small Canadian company but targeted at a worldwide market, promotes unhealthy body
images to girls aged 8–11.
A spokesperson for the UK children’s book industry has expressed grave concern. “That is
the first I have heard about these companies’ actions. They are totally unacceptable. We take
very seriously our responsibility in ensuring that children in the UK grow up with positive role
models. When this sort of thing happens, it is very frustrating for us and it undermines all our
hard work.” When asked for their views, Karine Mallarme (CEO of Renoir) and Fred Brown
(Managing Director of Auden) were unavailable for comment.
CASE STUDY – JULY 2016
EXAMINERS’ COMMENTS AND MARK PLAN
Contents
Page
Part 1: Executive summary
Introduction 1
Overview of performance 2
Part 2: The Case Study examination
Scenario for the paper (Advance Information) 4
Analysis of Advance Information (AI) 4
Information provided in the Exam Paper (EP) 7
Exam requirements 7
Analysis of Exam Paper information 8
Summary of grades available 10
Part 3: Commentary on candidates’ performance
Overview of professional skills 11
Executive summary 12
Requirement 1: Review of Bux’s financial performance 12
Requirement 2: Evaluation of new author opportunity 13
Requirement 3: Evaluation of printing/distribution arrangements 14
Overall paper: Appendices 15
Overall paper: Report 16
Part 4: Appendices
Appendix 1: Financial statement analysis: Bux’s financial performance 17
Appendix 2: Financial data analysis: Calculations for Emily Sutton advance 19
Working for Requirement 3: Calculations for printing and distribution decision 20
Part 5: Marking key
© The ICAEW 2016 Page 1 of 20

PART 1: EXECUTIVE SUMMARY
Introduction
This report covers the July 2016 Case Study (CS) exam. It is issued in conjunction with two illustrative scripts
and related Examiners’ commentaries. The first script was within the top 25% of all assessed scripts; the
second failed the exam. In reviewing these documents, it is important to be aware that it is rare for a script to be
uniformly ‘bad’ or uniformly ‘good’: a successful script will often present detailed coverage of all requirements
but include errors of calculation, spelling or logic; an unsuccessful script may contain one or two strong sections
or several excellent points but be let down by poor or incomplete text elsewhere. Unsuccessful candidates will
also find helpful guidance in the ICAEW Learning Materials.
Attached to this report are two appendices plus a working with examples of the sort of financial analysis that
candidates did, or might have done. The two illustrative scripts offer further insights into this area.
Overview of performance
The pass rate was 74.7%, compared with 75.5% in July 2015 and 75.7% in November 2015. Successful
candidates once again demonstrated their higher skills and used the four hours effectively. They produced
methodical, well-balanced, relevant scripts that answered each component of each requirement and contained
high-quality financial analysis (including Requirement 3); sound judgement; commercial recommendations;
and succinct, focused executive summaries. They were able to assimilate the case material into a report,
displaying business awareness and appropriate professional scepticism. They had clearly prepared well for
the exam, making the necessary effort to master the Advance Information for themselves and to hone their
exam technique.
The subject of the case is Bux Limited, a children’s book publishing company based in London. Bux sells both
printed books (hardback and paperback) and e-books, both fiction and non-fiction, from a roster of both
established, successful authors and newly-signed authors, for the full range of ages from 0 to 18. Revenue for
the year ended 31 May 2015 (just) reached the landmark of £50 million for the first time. The candidate is in
the role of Bobbie Harding, a final-year trainee ICAEW Chartered Accountant on secondment to Bux. You
report to the FD, Zephaniah Bishoo, the only financially literate member of the Board.
The exam requirements comprised:
1. An analysis of Bux’s financial performance for the year ended 31 May 2016 by comparison with the
previous year, with reference to some additional financial and non-financial information.
2. An evaluation of the opportunity to offer a contract to a new author for her first book.
3. An evaluation of Bux’s printing/distribution arrangements in light of the imminent renewal of its contract
with one of its two principal printer/distributors.
As always, each requirement contained several parts: candidates had to identify these and then tackle them in
an orderly manner.
 At Requirement 1, the tasks to be performed by candidates (including use of the additional information)
were clearly set out and comprised detailed financial statement analysis.
 At Requirement 2, they had to perform calculations, assess the adequacy of assumptions and discuss a
number of ‘commercial and ethical aspects’.
 At Requirement 3, they had to consider the financial, operational and strategic issues for three options,
including ‘brief calculations’, and refer to any ethical and business trust issues arising.
Candidates who failed included those with poor time management, leading to unbalanced scripts
(incomplete Requirement 3; rushed executive summary). As always, the three main elements of the report
were equal in importance: candidates overrunning on any one section were likely to have missed the
opportunity to gain passing grades in others. They would have benefited from planning at the outset how
best to structure each part (including the numerical element of Requirement 3).
The most common cause of failure at this sitting lay with the skill of Applying Judgement. The lower end of
the cohort was characterised by an inability, across all three requirements, to extend what was often good
analysis work into reasoned evaluation. This in turn led among the weakest candidates to uncommercial
advice – resulting in further low grades for Conclusions & Recommendations.

Requirement 1 was “orthodox” (as one tutor put it) in testing financial statement analysis skills. There was a
need not simply to explain the headline figures (revenue, cost of sales, gross profit) but also to delve further
into these with the help of additional data, both financial and non-financial. Candidates tackled the first aspect
effectively, with many gaining passing grades. Unsuccessful ones failed to make good use of the additional
data. Equivalent figures for previous years had been provided in the AI and well-prepared candidates should
not been fazed in having to work with the new 2016 numbers.
Requirement 2 produced the best results at this sitting. Most candidates adopted the intended approach to
confirm that the new book, ‘Superspell’, would earn out under the criteria presented. They therefore achieved
passing grades for the basic number-work. They were also good at challenging the underlying assumptions,
mindful of “the need to make judicious use of information and data provided by third parties” (Exhibit 1). The
technique here was to comment in turn on each item listed. However, the development of analysis was often
lacking, with the skill of AJ being particularly poor on this requirement.
Requirement 3 yielded the lowest scores of the three requirements. It assessed wider business skills,
including a discussion of ethical and business trust aspects. Less organised candidates had overrun on the
rest of the exam, resulting in sparse answers (and then also little or no coverage in the executive summary). A
gratifyingly high number of candidates included some figure-work. They recognised the well-publicised
message that Requirement 3 would continue to have more numerical content and the specific wording in the
exam: “Where appropriate, you should provide brief calculations to support your arguments”. While it was
possible to achieve reasonable grades by focusing on the new material at Exhibits 18/19, the better scripts
displayed a deep awareness of the AI, especially Bux’s strategy (Exhibit 10), and went on to evaluate the
issues that they had identified.
In summary, in the words of one tutor: “The content of the exam requirements was clear and not unexpected.
There was plenty of information in the Exam Paper for students to use in their discussions and they were not
asked to do anything unfair or outside their capabilities.”
Another tutor commented that it “was an exam paper which provided a fair test of candidate’s professional
skills and knowledge of the information provided in the AI. The majority of the paper was indeed heavily driven
by issues previously depicted in the AI and exam contained no major surprises. The lack of a significant
‘exam-day twist’ in this exam just placed a further emphasis on establishing a thorough understanding of the
AI and developing appropriate and flexible exam technique before entering the perils of the exam room.”
A third tutor stated that there was “a clear and straightforward set of requirements which covered many of the
key issues facing Bux. The key issues and hence the requirements were well signposted in the AI. The exam
paper therefore represented a reasonable challenge for a candidate who had spent sufficient time getting to
grips with the AI and practising their approach to Case Study. As ever one of the key challenges … would be
ensuring that they balance their time to enable them to complete all tasks and produce a well-balanced report.”
The Examiners concur with all these assessments.

PART 2: THE CASE STUDY EXAMINATION
Scenario for the paper (Advance Information)
The case relates to Bux Limited, a children’s book publisher based in London. Bux sells printed books to UK
bookshops and e-books to individuals within and outside the UK. All sales are in £ sterling. Total revenue for
the year ended 31 May 2015 was just over £50 million. The candidate is in the role of Bobbie Harding, a final-
year trainee ICAEW Chartered Accountant on secondment from Drummonds ICAEW Chartered Accountants
to Bux, reporting to the FD, Zephaniah Bishoo.
Four weeks prior to the examination, candidates were provided with a package of information, containing a
series of exhibits relating to Bod and the industry in which it operates, comprising:
1 About you (Bobbie Harding) and your employer (Bux Limited)

2 The UK book publishing industry: An overview
3 Children’s book publishing in the UK
4 Bux: Company overview
5 Bux: Management accounts for the three years ended 31 May 2015
6 Bux: Review of the business for the two years ended 31 May 2015
7 Bux: Key accounting areas
8 Bux: Key business processes
9a Royalties and advances
9b Examples of advances paid by Bux
10 Bux: Strategy
11 Bux: Factsheets
12 Bux: Printing and distribution arrangements
13 Media coverage
Analysis of Advance Information (AI)
By carefully studying and analysing the 43 pages of the AI, candidates should have formed a detailed picture
of Bux and the industry, using facts and figures from across the material. Candidates should be aware of the
main contents so that they can easily locate key topics in the exam hall. Key points are summarised below:
further Examiner commentary is in italics, with emphasis on connections between exhibits.
Exhibit 1 explains that Bobbie was seconded “in order to help the other directors improve their understanding
of the accounts and of the many other financial figures that they encountered in running the company”. It also
highlights “the need to make judicious use of information and data provided by third parties and to display
objectivity when working with accounting figures that involve issues of professional judgement” – indicating the
importance of using professional scepticism when dealing with facts and figures, a key skill for an aspiring
ICAEW Chartered Accountant.
Exhibit 2 presents an overview of the UK book publishing industry. It provides statistical data on market
trends; explains the different formats available (including e-books and their heightened prominence in recent
years); describes the principal sales channels; emphasises the critical role played by printers and distributors;
and identifies some key concepts such as returns, rights, royalties and advances.
Exhibit 3 goes on to address the specific features of children’s book publishing. After a quick history, it looks at
the scope of children’s books today and how different genres appeal to different ages. It highlights market
trends and sets out some of the key challenges facing publishers, such as increased competition for children’s
leisure time and the steps taken by the UK government and other bodies to enhance reading among children.
These exhibits between them provide context for the case and creates a ‘level playing-field’ so that candidates do
not have to carry out extensive research of their own. As well as offering background and explanation of the
industry, Exhibits 2 and 3 create the setting in which the subsequent information on Bux itself can be understood.
Exhibit 4 documents Bux’s history, key personnel, current position and some important features.
 In 2004, Annette Lewis (a book reviewer) asked Yolande Holder (an old school friend and up-and-coming
children’s author/illustrator) to produce some stories for young children to help Annette with her ambition of
becoming a publisher. Soon after, Bux was incorporated, establishing Yolande as a major writer.
 In 2010, Annette received the manuscript for a fantasy book called ‘Was’ by unknown writer, GF Randall, via a
literary agent, Liza Halstead. It rapidly became a bestseller, as did its sequels ‘Would’ and ‘Must’.

 Bux has continued to sign new authors of fiction and non-fiction for children aged 0–18. As well as Yolande
Holder (its best-selling author) and GF Randall, these include: Bernard Underne, writer of adventure stories
set in an imaginary continent called Jax; and Honore Lightstone, creator of Wilfred Weasel (‘Wilf’).
 Bux has invested in technology, more recently by recruiting experts in e-book production. It outsources
printing and distribution, mainly to two companies, Ethelred and Renoir.
 Bux endeavours through its books to promote healthy lifestyles and self-esteem among children.
 There are six directors, including Annette and Zephaniah. Other key staff include the senior editors,
responsible for identifying and nurturing new talent, agreeing contracts and checking/approving books.
This sets the scene for the next two exhibits, as well as linking ahead to later exhibits.
Analysis of Exhibit 5 (May 2015 management accounts, with comparatives for 2013 and 2014) and Exhibit 6
(business review for the last two years), would reveal the following for 2015. (Note: The analysis below is a
synthesis of these two exhibits, together with some additional calculations based on their contents. It should be
readily apparent that the two documents are to be reviewed in conjunction with each other; looking at either of
them in isolation would tell only part of the financial story.)
Income statement: revenue
 After rising by 11.2% in 2014, revenue grew more strongly in 2015, from £43,798k to £50,106k (14.4%), thus
topping £50m for the first time. Growth was due to the Jax titles and GF Randall’s trilogy.
 Revenue was also up for both formats: Printed books, by £3,572k (9.8%); e-books, by £2,736k (36.6%).
 E-books thus now accounted for 20.4% of revenue (2014: 17.0%) – below Bux’s goal – and were expected
to continue growing, but more slowly, in 2016 and 2017.
 E-book titles were up 11% to 464, reflecting the new project to convert print back catalogue to e-books. (This
also caused higher e-book costs – see below.) Back catalogue contributed 14% of e-book revenue.
 Sales of printed books rose by 7.3% to 5.12 million, ie, average revenue per book up from £7.61 to £7.79.
 There was a drop in sales of Yolande Holder’s books as she was ill, giving rise to inventory adjustments. She
received an advance of £110k for new books but released no titles.
 Hardbacks’ share of printed sales volumes rose from 25% to 26% – a temporary change with GF Randall’s
paperback versions due to appear in 2016.
 Returns dropped from £5,530k to £5,487k, representing 12.1% (13.2%) of gross printed book revenue. This
followed the successful rollout of a new computer system in 2014.
 31 new authors signed contracts (16% of authors who approached Bux). Revenue included £1.88 million
from these 31 authors and £2.41 million from the 27 who signed contracts in 2014.
Income statement: cost of sales, gross profit, marketing and distribution, administrative expenses, operating profit
 There are four components to cost of sales, each with their own dynamic: pre-production and printing; e-book
costs; royalties; and impairment of advances (all deemed to relate to printed books).
 Total cost of sales rose £3,887k (16.3%) – ie, by a larger amount than revenue, causing a drop in the gross
profit margin from 45.5% to 44.7%. Absolute gross profit rose from £19,925k to £22,346k.
o Pre-production and printing costs rose by 11.4%, from £16,627k to £18,520k. Of these, £12,200k
(around two-thirds) were paid to Ethelred, Renoir and other external printers in the ratio 40:50:10.
o Total cost of sales for e-books (e-book costs and royalties) rose by 43.6%, from £3,784k to £5,434k.
As a percentage of e-book revenue, e-book costs were up from 28.2% to 30.8%.
o Royalties (printed books £3.350m, e-books £2.296m) have risen as a percentage of revenue,
reflecting the higher share of e-book sales, which command a higher royalty rate.
o Impairments are broadly unchanged. They include a charge against author Ruth Lang (Exhibit 9b).
 Marketing and distribution costs were up by 10.8%, from £3,956k to £4,384k. Around two-thirds of these
amounts are payments to the external printer/distributors.
 Administrative expenses were up by 10.1%, from £11,665k to £12,839k. The main element of growth was in
the largest single component – namely, salary costs; this partly reflected a one-off staff bonus.
 As a result of all the above, operating margin rose by 19.0%, from £4,304k to £5,123k.
Statements of financial position and cash flow
 Capital expenditure related to enhancements, principally marketing systems (2014: new returns system).
 In common with many other publishers, Bux’s accounts show high levels of inventories and receivables.
 Inventories, receivables and payables were all up significantly, mainly a function of growth in overall activity.
 Cash flow from operations was less than operating profit because of movements in working capital balances.
 Dividends were up to £1.25m from £1.0m – another reward for the strong revenue growth.
 Total cash balances stood at £3,755m – a healthy base for Bux’s future development.

As always, time spent prior to the exam on the management accounts and business review would have been
invaluable. The review at Exhibit 6 provides a range of information across the two years and offers a helping hand
with interpreting the accounts. It was intended to provide an indication to candidates of the key figures that they
would be expected to understand. The nature of the information was deliberately different for the two years, and
left a number of areas on which candidates could carry out further analysis to compare and contrast performance.
For example, they could have computed:
 gross profit for each of printed books and e-books – derivable from the notes on cost attribution;
 pre-production and printing costs as a percentage of printed book revenue, and e-book costs as a percentage
of e-book revenue;
 average revenue per new author (including revenue from 2014 new authors in 2015 – their first full year) and
revenue from these new authors as a share of total revenue: both would have revealed encouraging trends;
 changes in sales volumes for each of hardbacks and paperbacks;
 e-book revenue split into current titles and back catalogue, together with revenue per e-book title.
Exhibit 7 sets out the accounting policies for three key judgemental areas in the accounts: returns, advances
& royalties and inventories. These were provided to enable candidates to understand in broad terms how the
related figures were arrived at (the ‘accounting issues that involve issues of professional judgement’ referred
to at Exhibit 1).
This is a critical exhibit, shedding light on the figures and explanations at Exhibits 5/6.
Exhibit 8 describes key business processes, building on the Bux overview at Exhibit 4. It covers commissioning
and acceptance; design and printing; health and safety; sustainability and the environment; competitors (both
established companies such as Egmont and new publisher Terrapin); customers (bookshops/supermarkets and
individuals); formats (including typical paperback-to-hardback ratios); pricing (referring to the industry-standard
40% discount to bookshops); seasonality (40% of annual sales occur in December–February); advertising and
marketing (average promotional spend per major new book launch: £20k); and rights (Bux acquires the
exclusive UK rights to a book but no other rights).
These notes provide additional depth to the case scenario, drawing attention to issues that are key for Bux.
Exhibits 9a/9b develop a theme mentioned several times in the preceding material – royalties and advances.
Exhibit 9a explains how authors (and illustrators) are typically remunerated, and the basis on which royalties are
determined, setting out the standard tariff of royalty rates for each format. It explains that advances (upfront
payments by the publisher to the author for royalties) depend on a number of factors, such as the author's track
record and likely appeal of the book. They are usually paid in three equal parts. It goes on to explain that a book
‘earns out’ when royalties match the advance. The highest advance that Bux has ever paid is £200,000.
Exhibit 9b offers detailed examples for two Bux authors, with sales figures and list prices per format to show how
the advance was determined at the outset and the extent to which it has (or has not) earned out. The first is for
GF Randall (a successful author mentioned in several other exhibits); the second, for Ruth Lang, where Bux
overestimated the level of interest in her work, and had to make an impairment charge in the 2015 accounts for
the unearned portion of the advance (mentioned in Exhibit 6).
These documents address a subject that is clearly central for the industry in general and for Bux in particular,
pervading as it does both the accounts and the core business activity. Candidates should have ensured that they
understood the figures being presented for the two authors.
Exhibit 10 presents Bux’s strategy, “guided by an overarching theme … the ‘Bux Fives’: five core principles, five
key risks and five objectives”. The principles and risks cover quality, technology (including IT security), talent
(authors, illustrators, staff), diversification (authors, income, key suppliers), reputation (including intellectual
property protection) and ethical values. The objectives include a number of financial targets: revenue £53m in
2016, £56m in 2017, gross profit £24m and £26m respectively; £1 million annual printing cost savings in 2017.
This exhibit gave broad ideas of possible strategic developments and helped further with candidates’
understanding of the business. Once again, there are points that echo other sections, while there was scope to
consider the achievability of the financial objectives in the light of recent results and market trends.
Exhibit 11 provides ‘factsheets’ on three topics: literary agents, translation and intellectual property (IP). They
explain the role of agents, their interaction with publishers and authors and how they earn their money; how
translations are commissioned; and three legal concepts arising under the broad heading of IP: copyright,
plagiarism and embargo.

These topics are all referred to elsewhere in the material, especially agents: GF Randall and Liza Halstead
(Exhibit 3); their involvement in the royalties process (Exhibits 9a/b); Liza Halstead investigation (Exhibit 13(d)).
Exhibit 12 describes Bux’s current arrangements for printing and distribution (including production of e-books).
Bux outsources both processes under contract to external companies: Ethelred (40% of total spend) and Renoir
(50%), others (10%). Ethelred, a specialist children’s publisher in northern England, has a reputation for high-
quality, cost-effective printing and efficient distribution. It has won awards for safety and supply chain excellence.
Total 2015 revenue was £42 million. Renoir, a French company with operations across Europe, has its UK base
near London. It has a range of ISO accreditations and one of the largest book distribution networks in the UK,
underpinned by sophisticated technology. Total 2015 revenue was £105 million.
Printing and distribution have been characterised earlier (Exhibit 10) as ‘business-critical activities’. Candidates
therefore ignore the facts and figures in Exhibit 12 at their peril.
The AI concludes with a series of media articles (Exhibits 13(a)-(f)). The first is a longer piece, from a variety of
sources, on children’s reading trends. This is followed by shorter items touching on ideas that would by now be
familiar: Terrapin (Exhibit 8); decision criteria for a prospective author selecting a publisher (Exhibit 8); Liza
Halstead (Exhibits 3/9b); ‘the one that got away’, by reference to Bux author Bernard Underne (Exhibit 3) and
general commissioning practices (Exhibit 8); new printing company Auden (Exhibit 12); plagiarism (Exhibit 11).
As always with articles provided in the AI, these shed more light – and a different perspective – on issues
mentioned elsewhere.
Overall, in the words of tutors, “the AI provided students with the opportunity to develop a comprehensive
understanding of the company and industry. As in previous sittings, the information was presented in such a
way as to encourage students to perform further analysis and research” and “the AI clearly signposted the key
issues for Bux including how new and existing authors are signed, the critical relationship with printers, and
the sensitive judgements required over certain accounting treatments – such as accounting for advances and
book returns”.
Information provided in the Exam Paper (EP)
The Exam Paper contained seven new exhibits, comprising nine pages of new information:
14 Email dated 20 July 2016 from Zephaniah Bishoo to Bobbie Harding: Recent developments
15 Information relating to the draft management accounts (Zephaniah Bishoo, 18 July 2016)
16 Bux: Draft management accounts for the year ended 31 May 2016
17a Email dated 18 July 2016 from Annette Lewis to Zephaniah Bishoo: Opportunity to offer book contract
to new author
17b Email dated 19 July 2016 from Emily Sutton to Annette Lewis: ‘Superspell’
Media article: Publishers in race for major new children’s writer
Email dated 20 July 2016 from Andres Torres to Annette Lewis: Plagiarism
18 Email dated 18 July 2016 from Rupesh Shah to Annette Lewis: Three options for printing and
distribution arrangements
19 Media coverage
Exam requirements
I would like you to draft a report from me to the Bux board. This should comprise the following.
1. An analysis of revenue, cost of sales and gross profit for the year ended 31 May 2016 by comparison with
the previous year.
Your analysis should be based on the draft management accounts (Exhibit 16), including relevant notes. It
should also take into account the information provided in Exhibit 15.
2. An evaluation of the opportunity to offer a contract to Emily Sutton for her first book, ‘Superspell’ (Exhibit 17a),
taking into account the emails and media article at Exhibit 17b.
Using the data provided, you should prepare calculations for the 18 months beginning 1 December 2016 to
show whether the suggested advance of £250,000 will earn out in this period. You should assess the
adequacy of the assumptions on which your calculations are based. You should also discuss the wider

commercial and ethical aspects, including any that relate to Emily’s agent, Liza Halstead. You must reach a
reasoned decision as to whether Bux should offer a contract to Emily.
3. An evaluation of the three options for our printing and distribution arrangements in light of the current
problems with one of our existing printing companies, Ethelred (Exhibit 18), and the issues identified in
Exhibit 19.
Your evaluation should cover the financial, operational and strategic issues relating to each of the three
options available to Bux, as well as any ethical or business trust issues arising for Bux. Where appropriate,
you should provide brief calculations to support your arguments.
Candidates were also told to include an executive summary and to balance their report across the three main
requirements, with other familiar guidance on time allocation; inclusion of ethical issues; and the need to cover at
each requirement all four skills areas: Assimilating and Using Information (A&UI), Structuring Problems and
Solutions (SP&S), Applying Judgement (AJ) and Conclusions & Recommendations (C&R). They should have
spent time studying Exhibit 14 carefully so as to understand the key elements of each requirement; digest the
other new exhibits; and identify the related AI exhibits to integrate into their answers.
For Requirement 1, they should then have begun a more detailed review of Exhibit 14, enabling them to
assess Bux’s 2016 results (Exhibit 16) in light of their analysis of 2015 (including the review at Exhibit 6)
carried out in preparation for the exam. For Requirement 2, it was essential to read Exhibits 17a/b carefully to
determine the format for the calculation, and to identify all critical estimates, assumptions and other issues to
be discussed. Finally, for Requirement 3, candidates had to relate Exhibits 18/19 to relevant material within
the AI – notably the printer details, Bux’s strategy and its general situation.
Analysis of Exam Paper information
From an initial reading of the new exhibits, candidates should have established that:
 After strong growth in 2015, total revenue was largely unchanged, but with equal and opposite movements
in printed books and e-books. New author activity and related revenue were down alarmingly, as was
gross profit.
 The opportunity to take on a potentially significant new author was highly appealing but also risky.
 The decision about printing/distribution arrangements had to be made promptly but it was not clear-cut as
both current main providers had been experiencing problems.
A more detailed review of the EP should then have elicited the key facts to be addressed in the exam.
Candidates should have recognised that, for the first part of Requirement 1, they were to concentrate on the
revenue, cost of sales and gross profit. They should have realised the importance of making relevant use of
the additional information provided at Exhibit 15: they should have been completely familiar with the equivalent
figures provided in the AI.
Comparing the 2016 management accounts and ‘additional information’ (Exhibit 15) against the original 2015
management accounts (Exhibit 5) and business review (Exhibit 6) in the AI would then reveal that:
 After 2015’s record performance, total revenue is up just £277k (0.6%): printed books down £2,030k/5.1%
and e-books up £2,307k/22.6% – against the wider popularity of printed children’s books and the industry
trend of declining e-book sales. E-books now account for almost a quarter of total revenue.
 Overall cost of sales is up £794k/2.9%. As a result, gross profit has continued its downward movement –
the absolute figure has fallen by £517k/2.3% and the margin from 44.6% to 43.3%.
 The actual targets for both revenue and gross profit (£53m and £24m – Exhibit 10) have been missed by
a wide margin, as has the implied gross profit % target (£24/£53m = 45.3%). These outcomes cast doubt
on the target-setting model, Bux’s 2017 objectives and its overall direction of growth.
 The margin decline is across both printed books and e-books – for different reasons. For printed books,
print costs have fallen by less than revenue, while impairment has almost doubled – largely from one-off
items. E-book costs have risen by more than revenue – a function of the ongoing conversion project.
 The returns rate has gone back up towards past levels (from 12.1% to 12.7% of gross print revenue) –
partly because of a £220k charge against Yolande Holder’s titles.
 Overall printed book sales volumes are down by 3.5% – meaning a fall in average revenue from £7.79 to
£7.67. The hardback-to-paperback volume mix has altered, as anticipated (Exhibit 6). Further calculations
would show hardback sale volumes being down 18.4%, from 1,331k to 1,087k – a troubling change.
 From the data provided, further analysis of e-book revenue could be undertaken. This would reveal the
more positive information that both current and back titles have increased, as has revenue by title.

 It should be apparent from a quick read of Exhibit 15 that the figures for new authors are worrying. Again,
there was scope to explore these in more depth, eg share of total revenue and average revenue per author.
Thorough preparatory work on Exhibit 6 would have made this a straightforward task.
Candidates will have expected to analyse the 2016 management accounts, and to integrate these with additional
data about new authors and other topics, as these were all well signposted in the AI.
At Exhibit 17a, Annette Lewis explains in an email that she has been asked by Liza Halstead – an agent referred
to across the AI – to consider giving a first book contract with an advance of £250k to a new children’s author,
Emily Sutton, who has previously written scripts for children’s TV. The book is ‘Superspell’, a 300-page fantasy for
boys and girls aged 8–11, with 30 illustrations by Emily. Liza provides other relevant information on the proposed
list prices and publication dates for each format, sales projections and royalty rates, together with plans for
sequels and film adaptations.
Exhibit 17b comprises a series of three related documents: an email from Emily herself to Annette, setting out
certain demands in relation to promotion and payment; a magazine article with the rumour that Bux’s rival
Terrapin is prepared to pay £500k for ‘Superspell’; and a further email, from Spanish children’s author Andres
Torres, claiming that ‘Superspell’ plagiarises from his first book.
This exhibit gave candidates a clear set of data with which to work for the three parts of the requirement:
calculation; assessment of assumptions; and discussion of ‘commercial and ethical aspects’. An initial read
should have revealed that: a logical approach was needed for the calculation, using the models at Exhibit 9b;
there were numerous assumptions to query; and there were several issues for Bux to address of a commercial
and/or ethical nature. As well as the calculation and the exhibits specifically relating to advances and royalties,
many of the points raised should have rung bells from the rest of the case material, notably: normal ratios
between hardback and paperback sales (Exhibits 2/6); Bux’s current portfolio (Exhibit 4); typical promotional
activity for a book launch, seasonality norms, Terrapin (Exhibit 8); the role and remuneration of agents (Exhibit
11); Liza Halstead’s problems (Exhibit 13(d)); plagiarism (Exhibits 11/13(g)); and the danger of losing out on a
bestseller (Exhibit 13(e)). In addition, there was scope to make use of work carried out on the management
accounts at Requirement 1, for example by comparing revenue per printed book for ‘Superspell’ with Bux’s
2016 actuals.
Exhibit 18 provides candidates with the following information:
 A decision is needed on renewing the printing/distribution contract with Ethelred, which expires on 30
November 2016, in light of Bux’s target to save £1 million in printing costs in the year to 31 May 2017.
 Bux has generally had a satisfactory service from Ethelred but two recent incidents have caused anxiety
over quality and adherence to deadlines. Bux is now being served directly by one of Ethelred’s directors.
 Ethelred has just won an industry award for socially responsible printing.
 If Bux renews the contract, Ethelred is prepared to offer performance guarantees and a 10% discount on
all orders from 1 December 2016 (20% if Bux appoints Ethelred exclusively).
 Ethelred will expect Bux to commit to a minimum annual spend on printing of £4 million.
 If Bux chooses not to renew the Ethelred contract, it will have to transfer the existing Ethelred work to
Renoir. No other printers are considered suitable and Bux does not wish to print in-house.
 There are thus three options: (1) Renew the Ethelred contract and retain the relationship with Renoir; (2)
make Ethelred the exclusive provider and terminate the Renoir contract; (3) make Renoir the exclusive
provider and not renew the Ethelred contract.
Exhibit 19 comprises a series of three press articles relating to the two printing companies:
 Renoir may be about to lose its ISO accreditations, after industrial accidents at its operation in Italy. It has
allegedly been trying to cut costs prior to a takeover and negotiating higher-priced contracts with publishers.
(This creates uncertainty over Bux’s ongoing relationship with Renoir.)
 The final agreed digital copy of ‘Jax Max’, the latest book in Bernard Underne’s ‘Jax’ series due for release
on 1 August, has been lost, apparently by hacking, from Ethelred’s computer systems. (This appears to go
against Bux’s mitigation strategy in relation to IT and IP risks – Exhibit 10.)
 Renoir and Auden have been distributing a controversial new book, ‘It’s Not Your Business’ to major UK
bookshops. The book, published by a small Canadian company, promotes unhealthy body images to girls
aged 8–11. (The premise of this book goes directly against Bux’s own ethos – see Exhibit 4.)
With proper preparatory work on the AI, candidates should have been ready for a requirement of this type. The
challenge lay in integrating the new information with that previously seen, particularly in Exhibits 10 and 12,
and planning the structure of their answers so as to cover all the three options, including brief calculations.

The EP develops a number of features of Bux’s business from the AI, each needing a different technique for
advising the board. Exhibit 15 sets out the route to be followed in writing the report:
 Requirement 1 entails a clear focus on financial statement analysis, covering all the items specified.
 Requirement 2 involves financial data analysis, together with a broader business perspective, a strong
element of professional scepticism, and the need to address some wider commercial and ethical issues.
 Requirement 3 comprises strategic, operational, financial and ethical analysis. To do justice to this,
familiarity with Bux’s strategy and the wider scenario is needed.
In all cases, a logical approach with careful planning was necessary. With proper time allocation, candidates
should have been able to complete these tasks within the four hours available to write the appropriate report.
Summary of grades available
Grades were awarded under five topics: Executive summary; Review of Bux’s financial performance; Evaluation of
Emily Sutton opportunity; Evaluation of printing/distribution arrangements; Overall paper. For each topic, under
each of the four Professional Skills, there were a number of ‘boxes’ representing specific areas in which the skill
was to be demonstrated. At each box, one of five available grades was awarded: CC (Clearly Competent); SC
(Sufficiently Competent); IC (Insufficiently Competent); ID (Insufficiently Demonstrated); NA (Not Addressed). The
number of boxes per topic and skill (below) reflects (i) an even balance between the three main requirements and
(ii) more weighting towards SP&S and AJ, as indicated in the Exam Paper rubric. It is consistent with recent exams.
A&UI SP&S AJ C&R Total

 Executive summary 1 2 1 2 6
 Review of Bux’s financial performance 2 3 3 2 10
 Evaluation of Emily Sutton opportunity 2 3 3 2 10
 Evaluation of printing/distribution arrangements 2 3 3 2 10
7 11 10 8 36
 Overall paper – Report: structure, style and language 2
 Overall paper – Appendices: content and style 2
40

PART 3: COMMENTARY ON CANDIDATES’ PERFORMANCE
Overview of professional skills
Assimilating and Using Information (A&UI)
In each of the three main requirements, there were two skills boxes available under A&UI, one for use of the
financial information in the case and the other for referring to Bux’s business issues and the wider context.
For all three requirements, the first box covered the underlying calculations needed as a basis for analysis.
The vast majority of candidates achieved passing grades for Requirements 1 and 2, displaying the ability to
tackle computational work effectively, but fewer than a quarter did so for Requirement 3, where it was less
predictable. Only a few used the distribution costs and even fewer attempted to work out the percentage of
Ethelred and Renoir revenue. The increasing numerical content in Requirement 3 has been signposted in
previous examiners’ reports and in other ICAEW communications, but candidates continue to struggle to deal
effectively with it.
For the second box, the themes to be identified for each requirement had to be contextualised and integrated
into the report with a meaningful link to their impact on Bux. This could largely be done from the case material.
At each of Requirements 1 and 2, over half of all candidates achieved a passing grade. However, at
Requirement 3 they failed to make appropriate reference to the Core Principles and Key Risks that had been
set out in the AI (Exhibit 10) and which were germane to the decision that Bux needed to take.
Better candidates used their own research effectively (eg, economic statistics; publisher/author disputes).
Weaker ones introduced a topical issue that they had identified in their preparation but failed to demonstrate its
relevance to Bux. At Requirement 2, some own research was about self-publishing, which was not relevant.
Some candidates continue to include separate ‘market background’ sections at the start of each requirement.
This can be a good technique as long as it is then extended into more detailed analysis and evaluation. There
was a particular risk on this occasion that such sections could have been dominated by Brexit – the referendum
on the UK’s membership of the EU took place in the run-up to the exam. However, it was pleasing that there
were relatively few references to Brexit across the scripts as a whole. This mirrored the fact that it was not a
major issue for a company with minimal activity in Europe (for example, Bux’s dealings with the French printing
company Renoir were with its UK operation).
Structuring Problems and Solutions (SP&S)
Candidates generally displayed excellent SP&S skills, with a majority of passing grades being earned in each
box. This is largely because they followed the instructions:
 Requirement 1: Financial analysis on revenue, cost of sales, gross profit and ‘additional information’
 Requirement 2: Calculation of earn-out with comments on assumptions and commercial/ethical aspects
 Requirement 3: Consideration of the financial, operational and strategic issues for each option, plus
ethical and business trust issues
Further detail can be found in the section on each main requirement below.
Applying Judgement (AJ)
AJ was again the poorest skill across all three requirements. A significant majority of candidates failed to
develop what was often satisfactory analysis work. The best scripts contained reasonable, balanced and
appropriate judgements built on analysis and demonstrating a logical flow of decision-making and real
understanding of the case.
For all three boxes at Requirement 1, fewer than half of all candidates achieved passing grades, and most of
these were SC. Many were reluctant to consider the ramifications of their numerical work. Box 2 (focusing
mainly on new authors, a significant feature of Exhibit 15) was by far the worst. At Box 3, few discussed the
potential impact on existing authors/new authors if Bux offered more generous terms to Emily Sutton.
At Requirement 2, AJ points on the calculation and assumptions were thin. Commercial and ethical aspects
were better, with most addressing the plagiarism issue.
For Requirement 3, the majority of candidates simply failed to evaluate adequately the issues that they had
identified (the marking key is structured to show SP&S points lined up with the related AJ points).

Conclusions and Recommendations (C&R)
As often, conclusions were better than recommendations. A negative feature throughout was a lack of
commerciality. There were many examples of lists of recommendations where it was hard to find a good one.
For Requirement 1, most candidates achieved a passing grade for conclusions. Only a small proportion of
candidates achieved a passing grade for recommendations (the advice 'Review reasonableness of financial
targets' was rarely given, even by those who had noticed that the 2016 objectives had not been met).
For Requirement 2, most offered a conclusion on the assumptions and the way forward. One candidate gave the
book a definite ’yes’ while criticising the assumptions in the next sentence. Only a few concluded on the earn-out
with a relevant figure or made the ‘large advance = high risk’ point. Recommendations usually obtained a
passing grade.
For Requirement 3, most candidates missed the first bullet by not specifying the option with the largest saving.
Instead, they tended to give a summary of each with the saving/cost, so the reader had to determine the best
option. Most concluded on a way forward, which was usually to retain both suppliers. Recommendations should
have been straightforward, especially given the number of ethical issues arising, all of which needed some
investigation. However, weaker candidates gave one only recommendation or weak recommendations, eg to
consider other suppliers even though this had been ruled out in the scenario.
Executive summary
Overall, marks for the executive summary and the number of passing grades displayed the usual variations
between the three columns on the marking key.
The Examiners continued their recent practice of including specific issues for discussion at each requirement.
The marking key offered considerable flexibility here: for example, candidates could have explained any of
the main cost changes at Requirement 1, challenged any of the assumptions at Requirement 2 or mentioned
any term from Bux’s strategy document at Requirement 3.
For Requirement 1, more than half of all candidates obtained a passing grade in the first box. A pleasing
majority provided figures (for revenue, costs and gross profit) – a common shortcoming in previous sittings.
However, only around a quarter obtained a passing grade in the second box: candidates did not drill down
sufficiently into the headline numbers and/or provided uncommercial, generic recommendations along the
lines of “cut costs” or “take on more authors”. Better candidates provided explanations for the changes in
revenues/costs, which helped to differentiate them from those who simply stated the changes.
For Requirement 2, many candidates failed to give any indication of the size of the earn-out. Most queried the
assumptions, and also concluded on the way forward and made a valid recommendation. Weaker candidates
often did not include any commercial issues or missed points where a qualitative comment was required, eg
‘only just earns out’ or ‘proposed terms could create difficult precedent’.
For Requirement 3, few candidates identified the option with the largest saving. Generally, they discussed
Option 1 (with a figure) in one paragraph and then Option 2 in another, so there was no direct comparison of
the savings/costs. Many candidates discussed the problems of sole suppliers, though these were often not
matched to Bux’s situation. Most did conclude on which option to choose – usually to retain both suppliers as
individually they had had problems during the year and this outweighed any financial consideration.
As always, weaker candidates ran out of time, leading to a very short summary. In some cases, parts were
excluded altogether (over 10% of the cohort were graded ‘N/A’ for Requirement 3).
Requirement 1: Review of Bux’s financial performance
Requirement 1 was, in the words of one tutor, “an orthodox analysis of the Bux income statement down to
gross profit … The ‘twist’ was the need to provide a more detailed discussion of revenue and gross profit by
revenue stream using the non-financial information provided, and an analysis of cost of sales by type of cost”.
As another noted, “to many candidates this may have appeared to be more simplistic than some previous
sittings where they have often been asked to analyse four or five different items and occasionally even asked
to comment on potential accounting adjustments. However, they may have soon realised that this apparently
‘simpler requirement’ posed a different challenge and that there was now an onus on them to provide more
detailed analysis on the three items that had been listed.”

Candidates should have been well prepared for a review of the 2016 management accounts, with reference to
additional financial and non-financial data. However, weaker candidates were stymied by the nature and extent
of some of the movements in figures and by the need to assimilate the data at Exhibit 15 into a coherent
narrative on Bux’s performance. The challenge here was to work through the information methodically. As a
result, marks at Requirement 1 were lower than is often the case, with a smaller majority of passing grades.
In general, the numerical analysis was well done, particularly in relation to revenue and the connected areas of
returns, mix and volume. For cost of sales, some candidates did not put absolute figures for cost of sales in
the report, just percentages, thereby gaining little/no credit for the middle SP&S box. On gross profit, weaker
ones often did not calculate the margin by stream and so missed out on a passing grade in the bottom box
(the methodology for this had been indicated in the AI – Exhibit 6). In a number of scripts, calculations were in
the appendices but not discussed in the body of the report. In such cases, candidates deprive themselves of
credit if they have spent the time doing the numerical work.
The majority of candidates took the financial objectives (Exhibit 10) into account when assessing performance:
"After reaching the £50m milestone in 2015, revenue has been poor in 2016 with a rise of just £277k (0.6%).
This is significantly short of the £53m target.” However, only a few considered the GP% implied in the objectives
(£24m/£53m, ie 45.3%) and assessed the actual margin achieved against this.
As usual, AJ proved to be a differentiator. As one tutor remarked, “candidates should have been capable of
providing a detailed analysis of cost of sales. Sufficient information was provided about each of the individual
costs for them to provide insightful comments on each area”. There was plenty of scope for more extensive
numerical analysis – not only print v e-books and hardback v paperback but also in areas such as revenue per
book, royalties per format and especially the impact of the back catalogue conversion and the various facets of
new authors. However, only the stronger scripts covered these convincingly: “Bux has taken on only 8 new
authors, a sharp drop from 2015, and the number of authors approaching Bux is over 50% lower. The new
authors have generated £626k, compared with nearly £2m for the new authors in 2015 – or 1.2% of total
revenue (2015: 3.8%). While average revenue is up from £61k to £78k per new author, the change is not
significant: it is normal for revenue from new authors to increase in the second year (their first full year) – the
2015 new authors have generated £2,290k in 2016 after £1,880k in 2015.”
Similarly, candidates could have earned credit in the top and bottom AJ boxes for their discussion: “Royalties
have increased by £306k (5.4%) to £5,952k, more than the 0.6% rise in total revenue. This reflects the 2016
change in sales mix between printed books and e-books as royalty rates for e-books are significantly higher
than for printed books.”
Overall, in the words of one tutor, “… a very fair requirement that should not have been overly problematic for
candidates to complete …This should have provided a good test of their ability to discuss the financial headlines.”
Requirement 2: Evaluation of Emily Sutton opportunity
Requirement 2 produced the best results at this session. There were in effect four elements:
 Earn-out calculation
 Discussion of assumptions (professional scepticism)
 Evaluation of ‘ethical and commercial aspects’
 Reasoned decision.
Candidates scored consistently well across A&UI, SP&S and C&R; AJ was the weakest skill. As one tutor
commented, “the information for evaluating the potential contract with a new author was clearly set out in
Exhibit 17, and the earn-out calculation in the Advance Information made it pretty straightforward”. Indeed, the
vast majority of calculations were correct, indicating that candidates had familiarised themselves with the
illustrations provided in Exhibit 9b and recognised the variations from Bux’s norms (different royalty rates,
shorter timescale). As a result, they earned passing grades at the relevant places (AU&I box 1, SP&S box 1).
Candidates appear to have heeded the repeated message of the Examiners to work with the numbers given
and only then to discuss the underlying assumptions and possibly to consider flexing their figures. In the very
small number of cases where calculations were wrong, it was usually the result of mistakenly applying the 40%
discount to e-books.
Having done their calculations, surprisingly few candidates then went on to comment that the book would only
just earn out. In addition, while many realised that sales and royalties would continue beyond the 18 months (or
that it was usual to assess over 2 years), they did not state the result that this would have on the earn-out or
consider the effect of continuing to generate sales and royalties in future (ie, recognising that the author’s main
interest would be the ongoing royalty rate and steady annuity).

Many went on to do some form of sensitivity to show the impact of changing one or more variables. The most
common was to adjust the royalty rates to Bux’s norms. More astute candidates, realising that the margin was so
small that the earn-out was clearly very sensitive, did not waste time on unnecessarily complex reworkings.
Having done their initial calculation, candidates were expected to go on and look at the key assumptions and
comment with due professional scepticism on each. Many did this well, approaching the task systematically
and internalising the advice in Exhibit 1 “to make judicious use of information and data provided by third
parties”. With the material in Exhibits 17 and 18 coming from a variety of sources and vested interests (Liza
Halstead, Emily Sutton herself, the media and Andres Torres), this was a crucial reminder.
As a result, a majority of candidates gained a passing grade in the middle SP&S box. However, they then
struggled to apply their judgement to their analysis. There was much here for well-prepared students to cover.
Better ones mentioned that Bux was cash-rich for the large advance payment. There were other facts and
figures from across the case material that could have further enriched their commentary: “The prices proposed
should be benchmarked against similar books. Average revenue per printed book in Year 2 is £8.40, more
than Bux’s 2016 average (£7.67). There are likely to be others in the genre achieving around £8.40 and so this
is not unreasonable.” This made a good link with Requirement 1, as did the following: “This book should
produce £2,060k of revenue within the first 18 months, which is very high as average revenue in the current
year per new author was £78.2k.” For much of the discussion, GF Randall should have been an important
precedent: “If ‘Superspell’ is released on 1 December, it should sell well over Christmas. We need to gauge
the sales estimates against our normal seasonality. However, hardback sales of 40,000 for the first 6 months
appear plausible, compared with GF Randall’s first book (56,000 hardback copies in its first full year).” At the
bottom of the cohort, many did not question the assumptions at all, or just selected one or two, typically the
royalty rates and the scale of the advance, with a superficial comment.
Candidates were specifically asked to discuss the wider commercial and ethical aspects. These all had echoes
in content that candidates should have recalled from the AI:
 Liza Halstead – Exhibit 13(d)

 Typical contract terms, including payment dated (Exhibit 9a)
 Promotional expenditure (Exhibit 8)
 Competitors (Exhibit 8)
 Plagiarism (Exhibits 11, 13(g))
Most candidates followed the requirement and gave a reasoned decision. More than half said something along
the lines of “Go ahead after investigating potential plagiarism”; the remainder gave advice such as the following:
“I do not think Bux should sign the contract, despite this being a potential ‘big hit’, due to unfavourable terms,
large advance and possible plagiarism.” The plagiarism issue could have been – and was – a deal-breaker for
those who took it at face value, rather than adopting a more balanced position by questioning its validity and the
likely motivations of the Spanish author: “The information supplied by Andres (similarity of title, story and one
name) is inconclusive at first glance. He may have other reasons to spoil the success of ‘Superspell’ or perhaps
he needs some publicity to raise his own profile. It is also not clear whether he has contacted other publishers.”
Overall, as one tutor commented, “this requirement should not have posed too many difficulties or surprises for
well-prepared students”.
Requirement 3: Evaluation of printing and distribution arrangements
This produced the lowest scores of the three requirements. As one tutor remarked, “The overall subject matter
should not have been a shock to the majority of candidates as the information provided about the two suppliers
in the AI was plentiful”. Indeed, as often, poor time management was an issue on Requirement 3: weaker
candidates did not give themselves enough time to tackle it effectively. This led to an absence of conclusions /
recommendations, as well as perhaps no coverage in the Executive Summary (see above). With the added
need for numerical work, a strategy of leaving insufficient time for this requirement is a high-risk one.
As with the other requirements, there were a number of components. Candidates needed to cover, within a
cohesive narrative, each of the three options under the headings of ‘strategic’, ‘financial’ and ‘operational’, as
well as ethical and business trust issues. They were also specifically told: ‘… where appropriate, include brief
calculations’.
Candidates either analysed each option consecutively or adopted a more scattergun approach by listing the
headings ‘financial’, ‘strategic’, ‘operational’ and discussing the three options under each heading. The first
method tended to be more successful because it kept their answers more focused. In both cases, candidates

often kept restating points, such as Ethelred’s recent failure to meet a key deadline, under each option. This just
meant that they were using up time while gaining no further credit. A little planning of the answer at the outset
would have paid dividends in ensuring a logical and focused structure to the answer.
While it was possible to achieve reasonable grades, particularly under SP&S, by focusing on the new material
at Exhibits 18/19, better candidates displayed a strong awareness of the AI and the wider context and went on
to evaluate the issues that they had identified. In particular, they should have recognised that the strategy
document (Exhibit 10) was an important reference-point. However, many did not use it and thus failed to
achieve a passing grade in the second A&UI box. Overall there was a multitude of issues to discuss from both
the AI and EP; the challenge was to structure these into a cohesive discussion.
The Examiners continued their recent, well-signalled, practice of introducing more numerical content into
Requirement 3. Some thought was needed in working out which figures to use and how. In the event, a
gratifyingly high number of candidates did include some computations.
The requirement asked for “brief calculations”. Around half of all scripts contain an appendix; the remainder
gave their figures as single lines within their report. Candidates tended to take the calculation in its most basic
form (£11,840 x 40% x 10% in Option 1 and £11,840 x 20% for Option 2). This method gave them a number to
compare with the targeted £1m printing cost saving – but it ignored the need to work out distribution cost
savings as well for an overall assessment of the financial outcome.
In extrapolating their base figures, most candidates also ignored the need to adjust for the 10% ‘other’ printers
whose services would no longer be required by Bux (“we would cease using any printers other than Ethelred
and/or Renoir from 1 December 2016”). The most pragmatic assumption here would have been to allocate
their share of Bux’s costs pro rata to Ethelred and/or Renoir. Very few noticed that the £1m target was for the
year to 31 May 2017, and thus the savings calculated would strictly need to be annualised.
The best candidates considered the other financial aspects of the scenario: Ethelred’s £4m minimum spend
clause and its achievability; Bux’s strategic importance to Renoir and Ethelred (whose own annual revenue
figures were given in the AI – one rising and the other falling in 2015); and the circumstances in which the
contractual penalty clauses would be triggered.
The marking key gave credit for a wide range of factual data in the SP&S column – something on which a well-
organised candidate could capitalise. As usual, the AJ points were harder, requiring more thought and
development, which eluded weaker candidates. Whenever they use a fact from the EP/AI, they should ask
themselves what they can add to it – just restating it will not be enough. Here, they did this only when
comparing the savings to the £1m target (see above) or when discussing the book ‘It’s Not Your Business’
(INYB), following through to the reputational effect.
In terms of Bux’s Core Principles and Key Risks, candidates were generally good at discussing diversification
of suppliers and the fact that INYB went against Bux’s ethical stance, but only the better ones kept linking all
the points through. Weaker candidates made no link to the risks or principles at all – fundamentally failing to
realise the centrality of Bux’s strategy to a strategic scenario.
The new exhibits cast doubts over the reliability, quality and CSR values of the two suppliers under consideration.
These gave rise to a number of business trust and ethical issues, of varying degrees of severity and controllability
by Bux: IT security; IP protection; production quality; safety; controversial book. Some of these linked back to the
AI, notably: strategy document (Exhibit 10), information on the two printers (Exhibit 12), media coverage (Exhibit
13). Thus to score well here, a good knowledge of the AI was essential. Credit for discussion of these points was
given across the marking key, on an integrated basis. Candidates were good at identifying the issues but less so
at evaluating them (apart from reputation, which always earns an honourable mention).
Overall paper: Appendices
Appendices on the whole were clear and well laid out. The first, relating to Requirement 1, was mostly well done
and at a sufficient level of detail, showing key movements, with both absolute and percentage figures. Where
lower grades were awarded, this was usually because calculations on new authors were not shown. The second
appendix tended to be weaker, but more than half of the cohort still gained a passing grade. The information
transferred into the body of the report was universally correct. The main failing here was incomplete labelling
(inexcusable for what should have been a straightforward table).

Overall paper: Report
The majority of candidates achieved passing grades for the two boxes here. Under ‘Structure’, some still failed
to number their pages, despite the clear guidance now included in the front-page rubric and the sanction of an
unrewarded bullet-point. Illegibility remains a problem: markers continue to perform a consistently excellent
task by reading beyond errors of spelling and grammar and going to the essence of the report before
penalising such errors.
Many candidates attributed the report to Bobby Harding instead of Zephaniah Bishoo (“draft a report from me to
the Board” – Exhibit 15), but the language comments were usually awarded. Nearly all candidates realised that
it was an internal report and so correctly omitted a disclaimer.
Unusually, tactless comments were rare. Some criticised the impairment / returns numbers (given that the FD
prepared or approved them (“This suggests that the prudence of estimates for advances and other accounting
estimates is being adversely affected by the general lack of financial knowledge …”); others were derogatory
about Yolande Holder (who was an old friend of Bux’s MD). Language and spelling were generally good, though
there were a few scripts littered with poor examples.

PART 4: APPENDICES
APPENDIX 1: FINANCIAL STATEMENT ANALYSIS: Bux’s financial performance
Overall 2016 2015 Change Change

£000 £000 £000 %
Revenue 50,383 50,106 277 0.6%
Cost of sales (28,554) (27,760) -794 -2.9%
Gross profit 21,829 22,346 -517 -2.3%
GP% 43.3% 44.6%
Revenue and mix

Print (75.2% / 79.6%) 37,874 39,904 -2,030 -5.1%
E-book (24.8% / 20.4%) 12,509 10,202 2,307 22.6%
50,383 50,106 277 0.6%
Cost of sales
Printing and pre-production costs 17,695 18,520 825 4.5%
E-book costs 4,052 3,138 -914 -29.1%
Royalties 5,952 5,646 -306 -5.4%
Impairment of advances 855 456 -399 -87.5%
28,554 27,760 -794 -2.9%
Impact of new authors

Number of new authors (acceptance rate: 8%/16%) 8 31
Total authors approaching Bux (extrapolated) 95 194
Revenue from 2014 new authors - 2,410
Revenue from 2015 new authors 2,290 1,880
Revenue from 2016 new authors 626 -
Revenue from pre-existing authors (bal fig) 47,467 45,816
Total revenue 50,383 50,106
Average revenue per new author (this year) 78 61

Average revenue per new author (last year) 74 89
This year’s new author revenue as % of total 1.2% 3.8%
Sales of printed books by volume (000)

Hardbacks (22% / 26%) 1,087 1,331 -244 -18.4%
Paperbacks (78% / 74%) 3,853 3,789 64 1.7%
4,940 5,120 180 -3.5%
Average revenue per printed book (£) 7.67 7.79
Returns
Returns 5,504 5,487 17 0.3%
Gross print revenue 43,378 45,391
Returns as % of gross print revenue 12.7% 12.1%

2016 2015
E-book data £000 £000 Change Change
£000 %
Revenue from back catalogue (18% / 14%) 2,252 1,428 824 57.6%
Revenue from current titles (bal fig) 10,257 8,774 1,483 16.9%
12,509 10,202 2,307 22.6%
No. of e-book titles 529 464 65 14.0%

Revenue per e-book title 23.6 22.0 1.6 7.5%
GP by revenue stream
Printed books
Revenue 37,874 39,904 -2,030 -5.1%
Pre-production and printing costs (17,695) (18,520)
Royalties (3,137) (3,350)
Impairment of advances (855) (456)
Total cost of sales (21,687) (22,326) 639 2.9%
Gross profit (GP%: 42.7% / 44.1%) 16,187 17,578 -1,391 -7.9%
E-books
Revenue 12,509 10,202 2,307 22.6%
E-book costs (4,052) (3,138)
Royalties (2,815) (2,296)
Total cost of sales (6,867) (5,434) -1,433 -26.4%
Gross profit (GP%: 45.1% / 46.7%) 5,642 4,768 874 18.3%
E-book costs as % of e-book revenue 32.4% 30.8%
Pre-production and printing costs

Ethelred (40%) 4,736 4,880
Renoir (50%) 5,920 6,100
Other (10%) 1,184 1,220
Subtotal 11,840 12,200
Other costs (bal fig) 5,855 6,320
Total 17,695 18,520
As % of print revenue (gross) 40.8% 40.8%
As % of print revenue (net) 46.7% 46.4%
Impairment of advances
Yolande Holder 110 -
2015 new authors 170 -
Other 575 456
855 456
Royalties
Printed books 3,137 3,350 -213 6.4%
E-books 2,815 2,296 519 22.6%
Printed books as % of printed book revenue 8.3% 8.4%

E-books as % of e-book revenue 22.5% 22.5%

APPENDIX 2: FINANCIAL DATA ANALYSIS: Calculations for Emily Sutton advance

Volume Price Discount Revenue Royalty £
(number) (£) (%) (£) (%)
Advance 250,000
Recovery
Year 1
Hardback 40,000 20 40 480,000 10 (48,000)
202,000
Year 2
Hardback 60,000 20 40 720,000 10 (72,000)
Paperback 90,000 10 40 540,000 10 (54,000)
E-book 40,000 8 - 320,000 25 (80,000)
2,060,000 (4,000)
Sensitivity analysis on calculations – alignment of royalty rates to Bux norms
Advance 250,000
Recovery
Year 1
Hardback 40,000 20 40 10 (48,000)
202,000
Year 2
Hardback 60,000 20 40 10 (72,000)
Paperback 90,000 10 40 7.5 (40,500)
E-book 40,000 8 - 22.5 (72,000)
18,000
Calculation of average net revenue per printed book in Year 2 (ie, first full year)
Sales (hardback + paperback) = £720,000 + £540,000 = £1,260,000

Volumes = (60,000 + 90,000) = 150,000
Thus average net revenue = £1,260,000 / 150,000 = £8.40

Working for Requirement 3: Calculations for printing and distribution decision
2016 2017
Printing (Appendix 1) Option 1 Option 2 Option 3
Ethelred 40% 44.44% 100%

Renoir 50% 55.55% 100%
Other 10%
Total costs (£000) 11,840
Ethelred 4,736 * 4,736 9,472

Renoir 5,920 6,578 11,840
Other 1,184
11,840 11,314 9,472 11,840
Saving on 2016 526 2,368 -
* Proportionate reallocation from ‘other’ cancels effect of 10% price reduction; hence Ethelred revenue unchanged.

July 2016 - Bux Ltd
First Marking
DATE CANDIDATE NO.
TIME MARKER NUMBER
ES Req 1 Req 2 Req 3 Overall TOTAL
CC
SC
IC
ID
NA
Total 6 10 10 10 4 40
Abbreviations used:
SUPERVISOR CHECKER
SIGNATURE SIGNATURE
Changes made?
ID = Insufficiently Demonstrated 1
IC = Insufficiently Competent 2
SC = Sufficiently Competent 3
CC = Clearly Competent 4
Executive summary
Review of performance Evaluation of new author proposal
Revenue: comment AND comparative figures (£ AND %) States earn-out headroom amount £4k / time period
COS: comment AND comparative figure

Only just earns out / very sensitive to change
Individual costs: comment AND comparative figure
Professional scepticism on assumptions (eg Liza / prices / volumes)

GP/GP%: comment AND comparative figure
Comments on commercial issues (eg Terrapin / contract terms)
NA ID IC SC CC NA ID IC SC CC
Explains change in revenue (mix/volume) Concludes on way forward
Explains change in revenue (new authors/back catalogue) Plagiarism charge may damage reputation
Explains change in individual cost (Print/E-book/royalties) Proposed terms could create difficult precedent
Makes commercial recommendations Makes commercial / ethical recommendations
Evaluation of printing/distribution arrangements
Identifies Option with largest saving (figure)
Comments on Key Risks / Objectives / Core Principles
Comments on risks associated with sole supplier
Comments on effect of commercial/ethical issues on Bux's reputation
NA ID IC SC CC
Concludes on way forward
Concludes on operational / strategic issues
Makes recommendations on ethical issues
Makes other commercial recommendations
NA ID IC SC CC
CC
SC
IC
ID
NA
Total 6
REQUIREMENT 1 - Review of performance
ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS
Uses relevant AI & EP information (report / appendix) Analysis of revenue v 2015 (report)
Total revenue: up £277k AND up 0.6% Revenue below Objective 1 target (£53m)
Print: down £2,013k/£2,030k AND down 4.4%/5.1% Rev/book: Print down 12p/1.5% (£7.67 v £7.79) OR
E-book title up £1.65k/7.5% (£23.65k v £22k)
Returns: up 0.3% / £17k OR static

Mix: Print down at 75.2% v 79.6% OR
E-book up at 24.8% v 20.4%
E-book: up £2,307k AND up 22.6%
Volume: Print down 180k/3.5% (4,940k v 5,120k) OR

GP: down £517k AND down 2.3% E-book titles up 65/14% (529 v 464)
Volume: Hardback down 244k/18.4% (1,087k v 1,331k) OR

Paperback up 64k/1.7% (3,853k v 3,789k)
Identifies business issues and wider context Analysis of COS v 2015 (report)
E-books at early lifecycle stage in Bux Total COS: up £794k AND up 2.9%
Industry: E-book sales may have plateaued (down 1.6%) Print: down £825k AND 4.5%
Industry: continuing popularity of children's print books E-book: up £914k AND 29.1%
UK Government policy (cuts/schools) Royalties: total up £306k AND 5.4% OR

Print down £213k/6.4% AND E-book up £519k/22.6%
Fewer new authors (8 v 31)

Impairment: up £399k AND 87.5%
Own research with source NA ID IC SC CC
Analysis of GP v 2015 (report)
GP below Objective 2 target (£24m)
GP%: down 43.3% v 44.6%

NA ID IC SC CC
GP Print: down £1,391k / 7.9%
GP E-book: up £874k / 18.3%
GP%: Print down 42.7% v 44.1% OR

E-book down 45.1% v 46.7%
NA ID IC SC CC
APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS
Evaluation of revenue analysis Draws conclusions (under a heading)
Decline in Print offset by growth in E-books Results: poor compared with prior year / target
Growth rate: Print falling AND E-books falling Revenue: comment AND comparative figure
Industry comparison: E-books performed well OR COS: comment AND comparative figure
Hardback decline worrying
GP/GP%: comment AND comparative figure

Returns: higher % of revenue (12.7% v 12.1%) OR
comparison with industry standard 12%
Impact of Yolande's illness on revenue/returns
NA ID IC SC CC
NA ID IC SC CC Makes recommendations
Evaluation of new authors and back catalogue Assess reasons for fall in author approaches/signings
New authors rev: down at £626kv£1,880k / 1.2%v3.8% rev

Maintain diversity of authors to reduce overreliance
New authors approaches: significantly down at 95 v 194

Investigate revenue by genre/author to identify strong/weak
New authors acceptance rate: down at 8% v 16%

Review reasonableness of financial targets
Revenue per new author: up at £78.2k v £60.6k

Review impairment allocation to printed books
Revenue from back catalogue up £824k (57.7%) / full year

Other recommendations
NA ID IC SC CC
Evaluation of COS / GP analysis
Total COS increase faster than revenue / poor cost control
Print: falling with volumes NA ID IC SC CC
E-book: rising cost due to back catalogue

CC
Royalties: impact of mix (E-books / Hardback v Paperback) SC
IC
GP impacted by judgemental areas: returns / impairment
ID
GP% below implied Objective target (45.3%)
NA
Total 10
NA ID IC SC CC
REQUIREMENT 2 - Evaluation of new author proposal
ASSIMILATING AND USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS
Use of AI/EP in calculation (report / appendix) Calculation of earn-out (report / appendix)
Discount: 40% apply to Print only AND advance £250k Hardback royalties £48k + £72k
Volume: Hardback 40k+60k Paperback 90k E-book 40k Paperback royalties £54k
Prices: Hardback £20 Paperback £10 E-book £8 E-book royalties £80k
Royalties: Hardback 10% Paperback 10% E-book 25% Compares to £250k advance / £4k headroom
Describes business issues and wider context Comments on adequacy of assumptions
Liza: tax investigation / wants quick decision Liza: vested interest in getting a deal so figures could be optimistic
Emily: no history of published work List prices: look high (eg Hardback £20 v £15/£18)
Highly competitive publishing market Sales volumes: no track record for Emily so could be optimistic
Contract terms: 3 instalments / 5 TV slots / £ 20k promo Hardback v Paperback ratio: different from company/industry norm
Book due 1 December 2016 Royalties: Paperback/E-book higher than standard rates
Own research with source Advance: £50k/25% more than previous highest figure
NA ID IC SC CC
Comments on commercial and ethical aspects
Terrapin: pays larger advance AND lower royalty rates
NA ID IC SC CC New authors: low numbers / declining revenue in 2016
Large upfront advance payment requested would impact cashflow
Emily contract terms more demanding (10 TV slots / £50k promo)
Proposed contract covers first book only / target market genre
Plagiarism: potential case / evidence from son
NA ID IC SC CC
Evaluates earn-out calculation Draws conclusions (under a heading)
Only just earns out / very sensitive to change Concludes on earn-out in 18 months (with figure)
Evaluates sensitivity movement (volume/price/royalties) Don't want to miss a bestseller / large advance = high risk
Normal earn-out period 24 months so more headroom Concludes on working assumptions / commercial aspects
Sales/royalties would continue after 18-month period Concludes on way forward
18-month sales revenue (potentially £2,060k) significant
Evaluates assumptions Makes recommendations
Liza: GFR estimate was conservative / was achieved Evaluate quality of Emily's work
Average revenue per book: £9.16/£8.40 v 2016 £7.67 Need market research / back-up for assumptions
Sales volumes: timing capitalises on pre-Xmas sales Plagiarism: investigate facts / get Spanish book translated
HB v PB ratio: comparable to GFR / more PBs in future Negotiate T&C with Liza / Emily
Royalties: agreeing high rate may impact other deals Negotiate for trilogy
Advance: high impairment cost if book unsuccessful Other recommendations
NA ID IC SC CC
Evaluates commercial and ethical aspects
Terrapin: unknown provenance of article
May need to take a risk to achieve high rewards

NA ID IC SC CC
Bux is cash-rich / risk that advance non-refundable CC
SC
Contract terms could set precedent / increase costs
IC
Other deals (eg Terrapin) may not be better for Emily
ID
Plagiarism: costly to defend / affects reputation NA
NA ID IC SC CC Total 10
REQUIREMENT 3 - Evaluation of printing/distribution arrangements
Use of AI/EP in calculation Option 1: Renew Ethelred / maintain status quo
Provides calculation of total costs Total annual savings £659k
Other printers excluded from calculations Ethelred minimum spend £4m
Calculations include printing AND distribution Ethelred recent issues with quality/meeting deadlines
Distribution costs adjusted Maintains cover and flexibility for business-critical service
Ethelred: Bux is £6.6m/£42m (15.7%) of revenue Maintaining status quo avoids disruption to service
Renoir: Bux is £8.3m/£105m (7.9%) of revenue Jax Max: security issue
Describes business issues Option 2: Ethelred as sole provider
Currently: Ethelred 40% Renoir 50% Other 10% Total annual savings £2,968k
All other printing options rejected (Auden / in-house) Would make Bux 25% of Ethelred revenue
Printing and distribution are critical to Bux's business Sole provider increases risk
Quality reputation / high ethical standards (CP1/5) Historical reputation for quality/offering performance guarantees
Diversify suppliers / IT security / IP (KR 3/4/5) Ethelred specialises in children's books with focus on artwork
£1m print saving objective y/e 31 May not 30 Nov Ethical excellence / awards for social responsibility
NA ID IC SC CC
Option 3: Renoir as sole provider
Extra cost £75k/£100k cancellation penalty (Ethelred)
NA ID IC SC CC
Currently slightly cheaper (improved distribution terms)
Largest distributor network in UK / geographically close to Bux
Renoir expecting/welcoming takeover bid / higher prices
Recent safety issues / about to lose ISO certificate
Distributor of INYB
NA ID IC SC CC
Evaluation of Option 1 (including ethics) Draws conclusions (under a heading)
Compares savings to Objective 5 (£1m saving) Concludes on Option with largest saving (figure)
Minimum spend unlikely to be an issue Concludes on operational / strategic issues
Swift action by Ethelred shows importance of Bux contract Concludes on ethical issues
Mitigates Key Risk 3 (diverse suppliers) Concludes on way forward
Renewal avoids deterioration in current service
Jax Max: triggers Key Risks 4/5
Evaluation of Option 2 (including ethics) Makes recommendations
Compares savings to Objective 5 (£1m saving) Negotiate T&C with Ethelred/Renoir
Considers cashflow impact of credit terms (45d v 30d) Investigate Renoir takeover rumours
Recent issues emphasise risk of relying just on Ethelred Jax Max: investigate facts / ensure Ethelred tightens controls
Performance guarantees provide assurance going forward Safety issues: investigate facts / discuss potential ISO loss
Good strategic fit / good choice for Emily Sutton INYB: investigate facts / clarify own stance with Renoir
Meets Bux's high ethical standards (CP5) Other recommendations
NA ID IC SC CC
Evaluation of Option 3 (including ethics)
Termination penalty cost depends on decision date
Contract renewable in 10 months so T&C may change NA ID IC SC CC
CC
Good operational fit
SC
Takeover bid creates uncertainty over future relationship IC
Loss of ISO raises concern over use of Renoir (CP1)

ID
NA
INYB: damages reputation / against Bux's ethical stance
Total 10
NA ID IC SC CC
Appendices Main Report
Appendices R1: Content and style Report: Structure
Well presented table of £s AND %s Sufficient appropriate headings
Analyses revenue in total AND by Print AND E-book Appropriate use of paragraphs / sentences
Uses sales volumes AND author numbers/rev per author Legible
Calculates GP/GP% by revenue stream Correctly numbered pages
Appendices R2: Content and style Report: Style and language
Numbers clearly derived No disclaimer AND from Zephaniah Bishoo
Well presented and labelled Suitable (internal) language for the board
Uses given figures for calculation Tactful / ethical comments
Calculation of sensitivity Reasonable spelling / grammar
CC
SC
IC
ID
NA
Total 4
FIRST ILLUSTRATIVE SCRIPT AND EXAMINERS’ COMMENTS
The commentary below follows the order and numbering of the script, with reference to the
topics in the marking key. It should be read in conjunction with the review of the Second
Illustrative Script and full Examiners’ Report for this session.
Examiners’ comments – overview
This script was within the top 25% of all assessed scripts. It is a clearly-presented, well-balanced
report addressing the case requirements as presented and dealing with many of the key issues,
offering sound commercial advice where applicable. There is little irrelevant material, but there
are some sparse sections, primarily at Requirement 1, that prevented it from being an excellent
script.
The candidate earned 28 passing grades (Clearly Competent (CC), Sufficiently Competent (SC))
across the script. Of these: 3 (out of a maximum of 6) were in the Executive Summary and 3
(maximum: 4) in the Appendices and Overall. Sufficient CC/SC grades were obtained in each of
the three main sections.
In terms of professional skills (maximum 30), grades were as follows: in 4 out of 6 grade boxes
for Assimilating and Using Information; in 7 out of 9 for Structuring Problems and Solutions; in 6
out of 9 for Applying Judgement and 5 out of 6 for Conclusions and Recommendations. The
figure for Applying Judgement is notably high, indicative of strongly commercial script.
The total length is lower than the cohort average, vindicating the primacy of quality over
quantity. The section on Requirement 1 is by far the shortest of the three main sections –
reflected in the grades profile. The overall report, together with the appendices, demonstrates
sensible planning and careful thought.
Terms of reference and executive summary
The executive summary covers the three requirements evenly, in all cases providing a synopsis
of key issues, relevant numbers and some recommendations.
In respect of financial performance, the candidate has presented the main figures and included
a comparison with 2015 as well as the related targets. However, the explanation for increased
revenue looks at the two streams in isolation, rather than identifying the overall effect of the
change in mix between the two or the impact of change in sales volumes; while the comment on
the ‘cause’ of higher costs is really just stating the categories showing significant rises, rather
than the reason for those rises. The section ends on a strong note: the second recommendation
gets to the heart of the critical challenge facing Bux.
On Emily Sutton, the key numbers (including a succinct reference to sensitivity) are again given
clearly at the start. The candidate offers rounded views on the book’s chances of success and
on other commercial and ethical issues arising, with a neat link to Requirement 1 (“need to
diversify authors and generate new revenue”). The recommendations are mostly apposite.
Coverage of Requirement 3 is also good, especially in stating the savings available under Options 1
and 2. All three options are discussed, leading to a clear set of conclusions and recommendations.
The ethical issues are mentioned only briefly, with no reference to their impact on Bux’s reputation.
Review of Bux financial performance [Requirement 1]
This part of the report was the weakest of the three requirements, but it still earned a sufficient
number of passing grades, spread across all four skills. There are three main sections (revenue,
cost of sales and gross profit), leading into conclusions and recommendations. In general, these
address the headline numbers, with plenty of figures in both the report and the appendix (see
below). However, there is not enough focus – especially in the appendix – on the additional

information at Exhibit 15. Thus, for example, the candidate does not include any analysis on sales
volumes, such as revenue per book (Exhibit 6 should have provided a pointer here).
The candidate makes sensible use of wider business issues, for example by referring to AI material
on the competitive environment and publisher closures, as well as own research on the children’s
book market. This is done as part of the wider discussion, rather than as an introductory
‘background’ section that is then ignored (a characteristic of many weaker scripts).
A shortcoming is the failure to discuss in sufficient detail the changes in each component within
cost of sales. This was a pity because the relevant figures had been calculated in the appendix and
also the candidate must have reflected on them so as to be able to offer explanations for e-book
costs and royalties. There is a misguided reference to the £1 million print savings target: print costs
have in fact fallen by nearly £1 million in 2016 but this is due to lower sales volumes – surely not
the means by which Bux would be seeking to meet the target! Coverage of gross profit is good,
including figures for the margin by stream.
Evaluation of findings on the key figures is reasonable but does not go far enough. Revenue and
gross profit are both benchmarked against the targets (Exhibit 10), but the candidate has not gone on
to compare with the gross profit margin implied in those targets. There is a good section on returns,
and on the new author numbers, where the candidate identifies the increase in revenue per author
and offers the astute observations that “this improvement is good but could suggest Bux’s standards
are too high” and “the lack of increase in the new authors is also disappointing as Bux is attempting to
diversify its author range as one of its key risks”.
The section ends with a strong set of conclusions, replete with figures, on key findings from the
financial statement analysis. This analysis had put the candidate in a strong position to produce
shrewd commercial advice. However, while some items on the list of recommendations that follow
are relevant, others are too general and/or unrealistic.
In general, this part of the report indicates a candidate with a sound business awareness and an
ability to provide logical explanations for movements in financial statements. With better use of
Exhibit 15, it could have earned higher grades.
Evaluation of Emily Sutton opportunity [Requirement 2]
As with many candidates, this was answered very well. A majority of passing grades were earned
across all four skills, reflecting a logical pathway through the various elements of the requirement.
The outcome of the earn-out calculation is described concisely at the start, and the candidate
then moves on to consider in turn the main underlying assumptions. This part of the answer
reveals familiarity with the AI, enabling the candidate to compare with Bux’s current and recent
experiences, for example with existing author GF Randall, and norms for new book launches.
Particularly striking is the comment (made later, in the discussion on ethical aspects), which helps
to offer a balanced view of the agent: “However, Liza is well known to Bux and has brought past
success such as with GF Randall whose sales of ‘Was’ actually exceeded Liza’s estimates on
both price and volume. She should therefore be taken very seriously.”
In evaluating the earn-out, the candidate correctly notes that “it is highly sensitive with a 1.6% fall
meaning it won’t earn out within 18 months”. This is followed by the pertinent comment that “Bux
normally hopes for books to earn out within two years [rather than the 18-month timeframe of this
scenario] so this is not so much of an issue”. The candidate has also stepped back to consider the
overall opportunity, linking neatly to Requirement 1 with the remark that “the revenue from the book
is significant at £2,060k over 18 months. Given Bux’s poor performance in the year this would be
valuable sales and help to meet revenue targets”.
Coverage of the commercial and ethical aspects (under both SP&S and AJ) is comprehensive.
The candidate addresses such salient business issues as: the cashflow impact of agreeing to
Emily’s request for the full advance upfront and the problems involved in meeting her promotional
demands; competition from Terrapin; the danger of setting difficult precedents (in offering better

terms to a new author than existing ones); and the book’s apparent fit with Bux’s target market.
The discussion of ethics in relation to both Liza Halstead and the alleged plagiarism issue is
detailed, relevant and suitably balanced.
The section closes with a good set of conclusions and recommendations. These have earned
passing grades by incorporating the key findings and by highlighting the key priorities for Bux.
Overall, this was a commercially focused section.
Evaluation of printing and distribution arrangements [Requirement 3]
Requirement 3 gained a majority of passing grades. The candidate has used the headings
‘strategic issues’, ‘financial factors’ and ‘operational factors’ and has addressed the key issues
identified under each, without necessarily confining them to one or more of the specific options.
This method has reaped dividends and has meant that repetition – a feature of many weaker
scripts for Requirement 3 – has been largely avoided. It suggests that the candidate has spent
some time planning the answer and its structure – also apparent from the phrase “as we will see
later”. The candidate has appreciated the importance of Exhibit 10 (listing Bux’s Core Principles
and Key Risks) to the scenario, giving an anchor for the discussion.
Under ‘strategic issues’, the candidate begins by addressing the central question of diversification
and the benefits and risks of having a sole supplier. It goes on to address the pros and cons for
Renoir and Ethelred, referring both to the AI (Exhibit 12) and the new exhibits in the Exam Paper.
Among other issues, the candidate makes a shrewd connection between Renoir’s international
reach and Bux’s plan to expand overseas, rightly avoiding the temptation to mention Brexit. The
candidate mentions Bux’s strategic significance to Ethelred (currently around 15% of annual
revenue) but does not then develop this to show that this percentage would be somewhat higher if
Ethelred were to gain an exclusive contract with Bux.
The section on ‘financial factors’ looks at the savings achievable by transferring some or all work to
Ethelred, contrasting this with the uncertainty over any future pricing arrangements with Renoir. The
calculations do not go far enough: they ignore the distribution costs altogether and do not take
account of the work currently done by printers other than Ethelred and Renoir. As with the comment
at Requirement 1 (see above), the candidate fails to appreciate the relationship between falling
printed book sales volumes and lower printing costs. He/she also states that a £200k penalty would
be payable to Renoir if the contract were cancelled, though in fact Bux would be able to reduce this
if it made a decision promptly. Finally, there is no consideration of the different payment terms
offered by the two suppliers (30 v 45 days).
For ‘operational factors’, the candidate deals with a number of the key issues: operational fit; the
recent issues with Ethelred, resultant personnel change and promise of performance guarantees;
and the ongoing rumours about Renoir being taken over and the potential effect of this on Bux.
The script deals impressively with the various ethical issues arising (IT, IP, safety / ISO
accreditation, CSR, the book ‘It’s Not Your Business’), both in the ‘ethical considerations’ section
and under other headings. The narrative here is cleverly extended from analysis through evaluation
to conclusions and commercial recommendations, identifying the possible impact on Bux’s
reputation. In general, the conclusions summarise the strategic, financial and operational aspects of
the three options, restating the cost savings where applicable. The body of the report ends on a
fittingly strong note, with the unequivocal statement that “the Ethelred option, option 2, appears the
best and should be pursued as there is significant financial benefit and assurances have been
received over future quality”.
The candidate has included two appendices, one for each of Requirements 1 and 2.
Appendix 1 tabulates the key figures used for Requirement 1, showing changes both in absolute
terms and as percentages, as well as revenue mix and royalties expressed as a percentage of

revenue. However, there is little use of the ‘additional information’ from Exhibit 15 and the
candidate has also unnecessarily tabulated the income statement down to operating profit.
The earn-out calculation at Appendix 2 is set out neatly. The candidate has taken the approach of
showing the royalties earned as a percentage of the advance.
The script is well structured, neat and legible. There are occasional lapses in spelling and
punctuation, and the odd colloquialism (eg, “big on quality”). Overall, it has more than met the
main requirements and demonstrates a strong commercial understanding of the case scenario.

FIRST ILLUSTRATIVE SCRIPT
To: Bux Board

From: Bobbie Harding
Subject: Recent Developments
For internal use only
This report will cover

 Bux’s performance for the year ended 31 May 2016
 Evaluation of Emily Sutton opportunity
 Evaluation of three printing options
Performance for the year
Total revenue has risen by only £277k (0.5%) to £50,385k. Meaning Bux has missed its target of £53m.
Revenue from printed books has fallen by £2,030k or 5.1% to £37,874k largely as a result of a lack of new
authors being taken on which is worrying for future growth.
Revenue from ebooks has increased by £2,307k or 22.6% to £12,509k as a result of the conversion of the
back catalogue.
Cost of sales has risen above revenue with a total increase of 2.8% or £794k. This is caused by increase in
ebook costs and impairment charges.
Gross profit has fallen by £517k or 2.3% to £21,829k. This means Bux has missed its target of £24m gross
profit. This is driven by poor cost control despite slowing sales, with a margin falling from 44.6% to 43.3%.
Commercial recommendations
Bux should:
- Investigate reasons for falling printed book sales.
- Invest in new authors and review the process for attracting new talent
Emily Sutton proposal
The proposal from Liza and Emily should bring in revenue of £2,060k and royalties of £254k in 18 months,
therefore earning out its £250k advance.
This is based on assumptions provided which are highly sensitive with a 1.6% fall resulting in the book not
earning out.
The principal risk is that the popularity of the book is unproven, although the volumes and prices do not appear
unreasonable compared to ‘Was’.
There are key commercial interests here with the need to diversify authors and generate new revenue, as well
as to compete with Terrapin, being key points in the book’s favour.
Subject to assurances, such as over the plagiarism issue, Bux should accept the proposal for the book.
Commercial recommendations
Bux should:
- Meet the author and read the manuscript
- Engage legal advice over plagiarism issue
- Discuss basis of assumptions with Liza
Printing options
Option 1 has a key strength of maintaining supplier diversification which will help to reduce risk of disruption to
Bux.

This option could also help to reduce printing costs by taking advantage of the 10% discount offered by
Ethelred which could amount to £473k.
Option 2, transferring all print to Ethelred, is a financially exciting proposal with potential savings of £2,368k
(less £200k cancellation fee). Considering Bux’s performance in the year this is hard to turn down.
However Bux has experienced issues with Ethelred in the year and having only one supplier is a risk.
Option 3 would see all printing transferred to Renoir. Renoir has not caused Bux issues in the year and has
international links that would assist Bux’s strategic goals.
However, there appear to be no financial benefit of this option and there are key concerns over Renoir’s
quality and ethics with it about to lose its ISO accreditations.
Recommendations
Bux should
- Discuss with Renoir around possible discounts if all work transferred to them
- Assuming no discount is offered, Bux should transfer all to Ethelred as the saving is significant and
assurances over quality + deadlines have been received.
Review of performance
(for all figures see appendix 1)
Revenue
Total revenue has risen by £277k or 0.5% from the prior year. This is disappointing compared to the prior year
growth of 14.4% and also means Bux has missed its target of £53m revenue.
Revenue from printed books has fallen by 5.1% (£2030k) which is a significant drop. This is caused by falling
volumes and price pressure from supermarkets and online.
This is disappointing as the children’s book market grew by 7% in the first quarter of 2016 (The Bookseller).
Returns of books has increased from 12.1% in the prior year to 12.7% in the current year. This is also above
the industry average of 12%. This could have been caused by Yolande’s continued illness and her falling
sales. It could also suggest a lack of quality.
Bux has taken on much fewer new authors in the year (8 v 31 in PY) and this could be causing falling sales as
there is a reliance on old authors.
The revenue from new authors amounted to £78k per author compared to £61k. This improvement is good but
could suggest Bux’s standards are too high and it could add further authors.
The revenue from new authors for 2015 was £1.88m compared to £0.626m in 2016. This is a key cause of the
fall in printed revenue and worrying for future growth.
Revenue from ebooks increased by £2307k or 22.6%. This is very strong growth compared to the decline in
the industry of 10% and has been caused by the continued back catalogue project.
Printed books and revenue growth in general will have been affected by the continued absence of Yolande
who is Bux’s bestselling author.
The lack of increase in the new authors is also disappointing as Bux is attempting to diversify its author range
as one of its key risks.
Cost of sales
Total cost of sales has increased by 2.8% or £794K which is higher than the growth in revenue and therefore
disappointing.
Production + printing costs have fallen but not by as much as revenue, therefore it does not appear that Bux
has made savings here and is not on to meet its target of £1m print savings by 2017.

Royalties for both printed books and ebooks have remained static as a percentage of revenue. This could be
an issue as Bux may need to increase these rates to attract new authors and compete with Terrapin who we
know are paying high advances to attract talent.
ebook costs have increased beyond the rise in revenue at 29.1%. This could reflect the continued costs of the
conversion of the back catalogue.
Impairment costs have risen significantly in the year. This is caused to some extent by Yolande and the
authors signed in 2015 (£110k + £170k respectively), but also signals wider quality issues which could be
behind the slowing revenue.
Gross profit
Total gross profit fell by £517k or 2.3%. This is disappointing given the rise in revenue and also means Bux
has missed its target of £24m gross profit (only achieved £21,829k).
Revenue mix has increased towards ebooks (mix = 75:25 compared to 80:20 in 2015). This should have
improved gross profit margins as ebooks typically carry a higher margin, however margin has fallen from
44.6% to 43.3%.
Margin has fallen for both streams with ebooks down from 46.7% to 45.1% and printed down from 44% to
42.7%.
This is perhaps reflective of general difficult conditions in the industry that has seen many publishers close
down in recent years.
Conclusions
Total revenue has risen by only £277k (0.5%) to £50,383k meaning Bux has missed its target of £53m.
Revenue from printed books has fallen by £2030k or 5.1% to £37,874k largely as a result of lack of new
authors being taken on which is worrying for future growth.
Revenue from ebooks has increased by £2307k or 22.6% to £12509k as a result of the conversion of the back
catalogue.
Cost of sales has risen above revenue with an increase of 2.8% or £794k in total. This is caused by increases
in ebook costs and impairment charges.
Gross profit has fallen by £517k or 2.3% to £21829k. This means Bux has missed its target of £24m gross
profit. This is driven by poor cost control despite slowing sales, with margin falling from 44.6% to 43.3%.
Recommendations
Bux should
- Review reasons for falling printed book sales.
- Review process for new authors to ensure that the pipeline remains strong.
- Review ebook cost rises and aim to control these.
- Consider changing royalty structure to gain new authors and compete.
- Consider marketing spend to help drive sales.
Emily Sutton proposal

(for figures see appendix 2)
Superspell looks set to bring in £2,060k of revenue and earn out within 18 months, with royalties of £254k
covering the advance of £250k. On the surface this therefore looks like a good proposition.
Assumptions
The volume of sales is based on estimated popularity which isn’t proven especially as Emily is a new author.
Royalty rates are higher than standard 7.5% for paperback books. This might set a precedent if word got out
but also may be necessary to compete with Terrapin and their high advances.

The volume of sales does not look unreasonable when compared to ‘Was’ by GF Randall which was a
successful series. The volume is lower than actual sales of ‘Was’ apart from sales of hardbacks in year 2.
The price is also in line with that of ‘Was’, although we know that ‘Was’ was a long book and so could
command a higher price. Nonetheless it doesn’t look unreasonable and is also lower for paperback books
which seems appropriate given price pressure in the industry.
The ratio of hardback books to paperback looks high and exceeds the usual 3:1 ratio. This will need to be
justified.
The price is also constant over the 18 months which may not be a reasonable assumption. Discounts may be
expected after a while.
The promotional budget for the book is very high at £50k which far exceeds the normal £20k for a major
launch. This may be unreasonably high.
The calculation of the earn out is based on several variables and is highly sensitive with a 1.6% fall meaning it
won’t earn out within 18 months.
However, Bux normally hopes for books to earn out within two years so this is not so much of an issue.
Commercial issues
The book appears to be in line with our target market but we should also confirm it portrays the right image
and doesn’t contradict our values.
We don’t know the author and therefore this carries risk. Whilst she may be a successful script writer this may
not convert to books and the book may not be popular.
This would be the biggest advance Bux has ever paid (previously £200k). It may therefore set a precedent to
other authors.
However, there is the need to compete with Terrapin who are paying large advances. There is also a need to
diversify our authors which is one of our strategic risks and therefore adding Emily to the portfolio would
achieve this.
The revenue from the book is significant at £2,060k over 18 months. Given Bux’s poor performance in the year
this would be valuable sales and help to meet revenue targets.
As well as this there are further growth opportunities through the release of the film, which should drive sales
and from the next two books in the series. If successful, this book could secure significant growth for the future
and reduce the reliance on the old authors.
In order to compete with Terrapin Bux must also sell its other qualities which justify its smaller advance. These
include its awards, its reputation for quality and its values to treat authors fairly (one of the Bux Fives).
There is a significant cash flow impact of the advance. It has sufficient reserves to pay the advance but
nonetheless must be cautious. Emily’s request for it all upfront on the signing of the contract is unusual, with it
normally paid in 3 instalments. This should be discussed and Bux should resist this arrangement.
Whilst it is industry standard to not reclaim unearnt out advances Bux could potentially pursue this avenue if
Emily didn’t deliver. It has been done by Terrapin over Tom Towers and Penguin have shed authors in the
past (The Guardian).
Ethical issues
Liza Halstead is under investigation for falsifying royalty statements. Whilst this has not been proven and the
investigation is ongoing there remains a risk to Bux’s reputation through association.
The contracts from Bux are direct with the agent and Bux should bear no responsibility to the author however
an open approach might be considered whereby the author receives a copy of sales figures as well as Liza.
Liza has motivation to increase sales estimates as she received a 10-15% fee of the advance and therefore
Bux must be cautious.

However, Liza is well known to Bux and has brought past success such as with GF Randall whose sales of
‘Was’ actually exceeded Liza’s estimates on both price and volume. She should therefore be taken very
seriously.
Another ethical issue relates to the plagiarism of Superspell alleged by Andres Torres. These are just
allegations and they have not been proven however they must be taken seriously as this could cause
significant reputational and possibly financial damage to Bux.
Bux should therefore review the claim, engaging Emily if appropriate, and seeking legal advice.
Conclusions
The proposal from Liza and Emily should bring in revenue of £2,060k and royalties of £254k in 18 months,
therefore earning out its £250k advance.
This is based on the assumptions provided which are highly sensitive with a 1.6% fall resulting in the book not
earning out.
The principal risk is that the popularity of the book is unproven, although the volumes and prices do not appear
unreasonable compared to ‘Was’.
There are key commercial interests here with the need to diversify authors and generate new revenue, as well
as to compete with Terrapin, being key points in the book’s favour.
Subject to assurances, such as over the plagiarism issue, Bux should accept the proposal for the book.
Recommendations
Bux should
- Meet the author and read the manuscript
- Discuss the basis of the assumptions with Liza
- Forecast expected costs and profitability
- Engage legal advice over plagiarism issue and Liza claims
- Perform further market research into demand/sales.
Evaluation of 3 printing options
Strategic issues
One of Bux’s key risks identified was that of supplier diversification. This is important because reliance on one
supplier could be catastrophic if that supplier goes bust or experiences other issues which halt supply.
Bux has 2 options which would involve having only 1 printer which would therefore present this risk. We have
seen in the year that printers can experience issues and therefore sole reliance on one could be an issue.
However, there are economies of scale benefits as we will see later.
One of Bux’s key strategies and one of the Bux Fives in that of quality. Whilst we know that Ethelred is usually
(aside from the Thomas Patterson edition) big on quality with the best paper, Renoir is experiencing
allegations of cost-cutting which could have a long term impact on quality.
There is also talk that Renoir may lose its ISO quality accreditations which will have a reputational knock on
effect for Bux which may reduce sales. It may therefore be wise for Bux to part company with Renoir before it
suffers reputational damage.
Another strategic goal for Bux is to diversify internationally and enter bookshops in Ireland. The distribution
networks of its printers are therefore important. Renoir has operations around Europe whilst it is not clear if
Ethelred does. It may therefore be important to keep Renoir’s services so that Bux can reach foreign markets.
A key risk is regarding intellectual property and IT security. It appears that Ethelred’s have failed with the theft
of a copy of ‘Jax Max’. This is concerning as if it is released into the public domain it could damage sales of
the book.

Bux must therefore gain assurances over changes to Ethelred’s IT systems and consider legal protection or
the liability being written into the contract in the event of lost sales.
Financial factors
There is no detail on the potential offer that could be negotiated with Renoir in the event that all our printing is
transferred to them.
We would expect economies of scale but the press article also suggests Renoir is trying to negotiate higher
contract prices.
Ethelred on the other hand have detailed their offer with a 10% saving or 20% saving if we transfer all printing
to them.
Our expenditure with them in the year was £4,736k so a 10% saving would equal £473,000. This is significant
given Bux’s performance in the year and also will help to meet the target of £1m print savings.
If all the printing costs were transferred to Ethelred then the saving (based on current year expenditure of
£11,840k) would be £2,368k. This would mean Bux achieves its print saving objective and will help it to
achieve higher gross profit.
As Bux is currently struggling to control costs and gross profit and gross profit margin are falling, the savings
from this are very enticing. However, we must also consider the cost of cancelling the Renoir contract which
would be £200k but still result in net savings over £2m.
Operational factors
Both companies have been our suppliers for a number of years and therefore can already be considered an
operational fit.
However, Bux has experienced issues with Ethelred in the year. The issues were with poor quality of books
not being delivered on time.
Both of these will have caused reputational damage to Bux and will have come at a financial cost through lost
sales, staff time and lost marketing from the Wilf book.
However, this appears to be the first instances of such issues with Ethelred who are renowned for their quality
+ supply chain ethics.
The account has now been taken over by a director and it appears Bux is being taken very seriously Bux’s
customer amounted to 14.3% of Ethelred’s revenue in 2015 so it is clearly an important customer.
Ethelred has now also offered performance guarantees and deadline assurances and should therefore not
experience further issues.
Renoir is a potential takeover target for someone in the industry and this is likely to significantly impact Renoir
and its relationship with Bux. There is therefore uncertainty over the future of the contract and therefore
moving all operations to Renoir appears to be a risk.
Ethical considerations
Ethelred has a very strong image of supply chain excellence and has recently won an award for socially
responsible printing.
Bux’s reputation for quality is likely to be increased through its association with Ethelred.
Renoir has ISO accreditations for quality and working conditions but it could be about to lose these due to
recent events. These include apparent cover up of industrial accidents and injuries to employees.
This cover-up will damage Bux’s reputation through association and contradicts Bux’s ethical values and
interest in its supply chain. It is therefore important that Bux distances itself from these claims, either through
working with Renoir to find a solution or through the cancellation of the contract.

A further ethical problem posed through association with Renoir is that it has recently released a title
promoting unhealthy body image which goes against Bux’s values.
This is a key part of the Bux image so could be very damaging. However it is unclear if the printing company
will actually receive the negative press or just the publisher/author.
Conclusions
Option 1 has a key strength of maintaining supplier diversification which will help to reduce risk to Bux of
disruption.
This option could also help to reduce the printing costs by taking advantage of the 10% discount offered by
Ethelred which could amount to £473k.
Option 2; transferring all printing to Ethelred is a financially exciting proposition with savings of £2,368k (less
cancellation costs of £200k), which will have a big impact on Bux’s results.
However Bux has experienced issues with Ethelred in the year and having only one supplier is a risk.
Option 3 would see all printing transferred to Renoir. Renoir has not caused Bux issues during the year and
has international links that would assist Bux’s strategic goals.
However, there appear to be no financial benefits of this option and there are big concerns over Renoir’s
quality ethics with it about to lose its ISO accreditations.
Recommendations
Bux should
- Discuss with Renoir possible discounts if all print is transferred to them.
- Take legal advice on contract cancellations.
- Discuss Renoir's potential takeover with them.
Based on the information provided and assuming Renoir offers no discount, the Ethelred option, option 2,
appears the best and should be pursued as there is significant financial benefit and assurances have been
received over future quality.

Appendix 1
£000 £000 Movement £ Movement %

P+L 2016 2015
Revenue 50 383 50 106 277 0.5%
Cos (28 554) (27 760) (794) 2.8%
Gross Profit 21 829 22 346 (517) (2.3%)
Marketing + distribution (4 755) (4 384) (371) 8.4%
Admin expenses (13 702) (12 839) (863) 6.7%
Operating profit 3,372 5 123 (1751) (34.2%)
Margin Mix Printed Book (£000)
2016 2015 Movement £ Movement %
Revenue (net) 37 874 39 904 (2030) (5.1%)

Production + printing (17 695) (18 520) 825 (4.4%)
Royalties (3 137) 8.3% (3 350) 8.4% 213 (6.4%)
Impairment (855) (456) (399) 87.5%
Gross profit 16,187 17,578 (1391) (7.9%)
Margin 42.7% 44%
Ebook (£000)
2016 2015 Movement £ Movement %
Revenue 12 509 10 202 2307 22.6%

ebook costs (4 052) (3 138) (914) 29.1%
Royalties (2 815) (2 296) (519) 22.6%
Gross profit 5 642 4 768 874 18.3%
Margin 45.1% 46.7%
Total gross margin

2016: 43.3%
2015: 44.6%
Revenue mix 2016 2015

Printed 75% 80%
eBooks 25% 20%
Appendix 2
Sales Volume Price (less 40% printed) Revenue Royalty

Year 1 HB 40 000 £12 480 000 48 000
Year 2 HB 60 000 £12 720 000 72 000
Year 2 PB 90 000 £6 540 000 54 000
Year 2 ebook 40 000 £8 320 000 80 000
2 060 000 254 000
Advance 250 000
∴ 101.6% earnt out after 18 months

SECOND ILLUSTRATIVE SCRIPT AND EXAMINERS’ COMMENTS
topics in the marking key. It should be read in conjunction with the review of the First Illustrative
Script and full Examiners’ Report for this session.
This script failed the exam. Although it addresses some of the key issues and contains some
good sections, it has not gained sufficient passing grades (Clearly Competent (CC) and
Sufficiently Competent (SC)).
In overall terms, the candidate earned 16 passing grades. However, 4 of these (from a total of 4
available) were achieved on the back page of the marking key (Appendices and Overall). For the
rest of the script, only in Requirement 1 were sufficient passing grades obtained; Requirements 2
and 3 and the Executive Summary did not display the necessary breadth and depth. In terms of
professional skills (maximum 30), passing grades were achieved in 4 out of 6 boxes for Assimilating
and Using Information; 6 out of 9 for Structuring Problems and Solutions; 1 out of 9 for Applying
Judgement; 1 out of 6 for Conclusions and Recommendations. The report is fairly evenly balanced
between the three requirements. The poor performance on Applying Judgement is a common
weakness among failing candidates.
Executive summary
The executive summary contains a section for three main requirements, in each case comprising
an overall review followed by a set of recommendations. Coverage in most instances is not quite
enough for a pass, resulting in a preponderance of Insufficiently Competent (ID) grades.
For Requirement 1, the candidate has included figures for revenue, cost of sales and gross profit,
but has not considered any individual cost categories or explained the changes in revenue by
reference to the mix in book formats or sales volumes. The recommendations are adequate.
For the Emily Sutton opportunity, the candidate begins by summarising the outcome of the earn-
out calculation. He/she makes appropriate comments on the commercial aspects but the
coverage of assumptions is too general. Again, the recommendations are adequate.
Under Requirement 3, a pleasing feature is the inclusion of the key numbers (print cost savings).
Indeed, there is too much on the financial position and not enough on the strategic or operational
considerations. The candidate has reached an overall conclusion and has also dealt sufficiently
with the ethical issues.
Review of Bux financial performance [Requirement 1]
This is the best of the three main requirements, gaining just enough passing grades. The
candidate has approached it methodically, with successive sections on the relevant accounts
captions, of which the one on revenue is by far the longest. Many of the key figures (including
mix, changes in sales volume and revenue per printed book) are provided and there are
appropriate references to some key industry developments, especially in the children’s book
market and hardback-to-paperback ratios. Some use has been made of the data on new
authors; this could have been extended into, for example, a discussion of revenue per author.
For cost of sales, the candidate clearly understands the overall position, but has not delved into
the individual cost components in enough details, despite having done the arithmetical work at
Appendix 2. He/she has attempted to link printing costs to the savings target (more of an issue
in Requirement 3), but the discussion here is muddled. There is very little on royalties.
For both revenue and gross profit, the candidate has compared 2016 actual figures with targets
but has not reflected on Bux’s gross profit margin against its implied target.

The conclusions cover the main overall figures but with only a vague qualitative comment; while
the recommendations lack the necessary focus on the company’s key priorities.
Evaluation of Emily Sutton opportunity [Requirement 2]
This was weaker than Requirement 2 answers for most of the cohort. It has obtained passing
grades for the numerical work but lower marks for the evaluation of issues, and subsequent
extension into conclusions and recommendations. In a number of places, it just fails to develop
the analysis in enough detail to gain SC or CC grades.
The candidate begins strongly by summarising his/her calculation and noting that the assessment
period of 18 months is less than Bux’s usual one. As with Requirement 1, he/she has produced
clear, accurate calculations at Appendix 2 and has thus scored highly on the left-hand side of the
marking key.
In respect of the assumptions, the script deals with the hardback-to-paperback ratio; the size of
the advance by reference to Bux precedents; and list prices. However, these are not then
evaluated sufficiently. For example, the candidate has not considered Liza Halstead’s track
record with GF Randall or used the work from Requirement 1 to assess whether the implied
revenue per book is reasonable. Also, the discussion on the hardback-to-paperback ratio fails to
appreciate that only hardbacks are sold in the first six months. In addition, there is no
consideration of whether the royalty rates are appropriate and/or in line with norms.
Coverage of the ‘commercial and ethical aspects’ is limited. The issues of promotional costs and
plagiarism are discussed but the candidate has not discussed the importance of signing a major
new author in the context of Bux’s current situation; or the broader implications of the contract
terms that Emily and Liza are demanding.
The candidate has expressed the margin of error in percentage terms. This has enabled him/her
to include a sensitivity analysis (which shows the positive effect of flexing sales volumes).
In terms of the overall picture, the candidate has shown a better awareness than many in some
areas, with observations such as “with a large advance comes greater risk for Bux as they are
exposed to larger impairments in the future” (a point made by few others). However, other
comments are somewhat gratuitous, eg, the paragraph on self-publishing.
The candidate concludes on the way forward but the rest of this section is superficial. He/she
could, for example, have brought forward earlier work to conclude on the suitability of list prices
or sales volume ratios. The recommendations are adequate.
Evaluation of printing and distribution arrangements [Requirement 3]
The section is well structured. It deals with each of the three options in turn (coverage of Option
1 is the best of these), followed by the ethical and business trust issues and then conclusions
and recommendations. The candidate has identified most of the key issues, and so has earned
passing grades under Structuring Problems & Solutions, but has not then evaluated them with
sufficient depth.
The candidate includes some calculations, within the body of the report, to show the printing
cost savings under Options 1 and 2 and comparing them with the £1m target. As with most
candidates, there is no calculation for distribution costs. The candidate also assesses the
proposed £4m minimum spend on Ethelred – revealing real understanding of Bux’s situation
with the comment “should sales volumes continue to drop for printed books this minimum
contract value may become an issue”. The comparison of the payment terms offered by the two
printers is equally effective.
He/she additionally considers Bux’s financial importance to Renoir by reference to the latter’s
annual revenue, but does not do the same for Ethelred, where it would be a more critical issue

as there is a far greater dependence. He/she also notes that the £200k cancellation fee in the
Renoir contract would be triggered: this fails to realise that Bux would be giving more than 3
months’ notice.
A number of important issues are not addressed at all, such as the rumours about Renoir as a
takeover target and the resulting uncertainty, or the performance guarantees now being offered
by Ethelred. This is unfortunate because the candidate identifies the change in account manager
at Ethelred, even adding the cynical observation “this could revert to a less senior figure once we
have renewed our contract”.
The ethical points are covered briefly but adequately: the ‘Jax Max’ hacking; the controversial
book ‘It’s Not Your Business’; Ethelred and Bux’s shared commitment to social responsibility;
and the quality issues affecting Renoir.
The conclusions section summarises the findings for each option by reference to financial
savings. The candidate goes on to recommend retaining both suppliers without linking this to
the foregoing remarks. Other recommendations are limited to the ethical issues.
The candidate has included two Appendices, one each for Requirements 1 and 2.
Appendix 1 sets out clearly the movements (both £ and %) in revenue, cost of sales and gross
profit for Bux overall and by business stream. However, there is no analysis in relation to new
authors – the main item in Exhibit 15.
This is followed by Appendix 2, in which the calculation for the Emily Sutton opportunity is given,
together with a sensitivity. Both would have benefited from being more clearly labelled.
The report is mostly well written, but with some lapses in grammar, punctuation and spelling,
and the odd colloquialism (eg, ‘a big hit’). Overall, it is well structured, with clear headings.

SECOND ILLUSTRATIVE SCRIPT
To: Board of Bux Ltd
From: Bobbie Harding
Title: Financial Review and Strategic Options
1. Executive Summary
1.1 Financial Performance
Revenue has increased overall by £277K (0.6%) which is below 7% industry average, and is now
£50,383K.
Revenue from printed books has fallen significantly by £2,030K (22.6%) as less new authors have been
signed and generated less revenue.
E-books revenue has on the other hand risen by £2,307K (22.6%) and this is due to the continued
conversion of the back catalogue.
Cost of sales has increased more than the proportionate increase of revenue and this has caused gross
profit as a whole to decrease to £21,829K, a decrease of £517K (2.3%) and this is largely due to less
printed book profits.
As expected E-book gross profits have increased due to increased revenue but again not proportionately.
Gross profit margins have therefore decreased to 43.3% from 44.6%.
1.2 Recommendations
Bux should investigate procedures of attracting new talented authors.
Bux should also aim to reduce E-book conversion costs by investing in new technology.
1.3 Evaluation of contract
Calculations suggest the advance of £250K would ‘earn out’ within 18 months.
The royalties due would total £254K giving a 1.6% margin of error.
This would be Bux’s largest advance and be given to a new author with no track record.
The advance would be payable immediately in full.
There are underlying assumptions which are questionable when compared to GF Randall’s ‘Was’ title.
Young adult fiction is a growing market and this is a potential opportunity to capitalise on it.
1.4 Recommendations
Legal advice should be sought before accepting as there are potential plagiarism issues.
Negotiate with Liza for a smaller advance.
Accept the proposal
1.5 Printing + Distribution options
 Option 1 would mean no overreliance and savings of £470K per annum.
Minimum order levels by Ethelred should be achieved if volumes stay the same.

 Option 2 would mean relevance on Ethelred and savings of £2.37m meeting the £1m target.
Cancellation of £200K incurred.
 Option 3 would mean relevance on Renoir and no cost savings.
Association of Renoir and Auden could damage Bux reputation due to the release of ‘It’s Not Your
Business’.
1.6 Recommendations
Continue with all suppliers.
Discuss publication of ‘It’s Not Your Business’ with suppliers.
Ensure Ethelred’s issues of IT security are resolved.
2. Review of Financial Performance
2.1 Revenue
Overall revenue has increased by a moderate £277K (0.6%) to £50,383K.
This is below the industry average of 7% growth for the first quarter of 2016 in the UK’s children’s book
market (The Bookseller, 14 April 2016).
This would suggest Bux have underperformed in the period.
Bux have therefore not achieved their revenue target of £53m for the year and no staff bonus payment
would be recommended this year.
The sales mix has moved significantly as more revenue is being generated from E-books and the split is
now 75.2% to 24.8% from 79.2% to 20.4% in favour of printed books.
This suggests that although printed books is still Bux’s main source of revenue, E-books are becoming of
greater influence on Bux’s financial performance.
Revenue from printed books has decreased by £2,030K (5.1%) to £37,874K.
This is significantly lower than the 2015 industry growth of 0.4% as children’s printed books continue to
be popular due to them preferring to be able to physically hold them and enjoy illustrations.
The average sales price of a printed book has decreased from £7.79 to £7.67 and this is reflective of
higher priced hardback books becoming less popular at 22% of sales as opposed to the industry norm of
25%.
The sales volume of printed books has also fallen from £5,120K copies to 4,940K copies, a contributing
factor to this is likely to be the return of Yolande Holder’s existing titles due to being unavailable for
promotional work.
The returns value of £220K for Yolande’s work will have effected both revenue as a whole and also
reduced the value of revenue from printed books.
Had this revenue being realised Bux would still have been behind on last year’s performance and there is
therefore additional factors to look into.
Revenue from new authors this year amounted to £626K as opposed to the £1,880K for new authors last
year, this could be reflective of Bux’s inability to attract new suitable authors as only 8.4% of those
approached were signed in the year as opposed to 16% last year.
E-book revenue has increased significantly by £2,307K (22.6%) to £12,509K. This is far in excess of the
2015 industry decline of 1.6% as Bux continues to process its back catalogue of titles, with titles now
reaching 529.

2.2 Cost of Sales
Total cost of sales has increased by £794K (2.9%) to £28,554K and this is above the revenue growth of
only 0.6% which suggests less profitability this year.
While printed book costs have decreased £639K (2.8%) to £21,687K, which goes towards the company’s
targets of reducing annual cost savings of £1m from printing this has not quite been met as pre-production
costs have reduced £825K only on similar sales results.
E-book cost of sales have conversely risen significantly by £1,433K (26.4%) to £6,867K with increased
royalty payments and E-book delivery which will largely be due to the conversion of the back catalogue.
Bux could target more efficient ways of converting the back catalogue.
2.3 Gross Profit
Gross profit has decreased £517K (2.3%) to £21,829K despite increased sales in the year.
Gross profit margins have similarly fallen from 44.6% to 43.3%.
The gross profit target of £24m has therefore not been met with the main factors for this being reduced
level of sales then expected, higher E-book conversion costs and impairment to authors including
Yolande Holder.
This is reflective of GP margins from E-books falling from 46.7% to 45.1%. However this may rise again in
the future once the costs of the back catalogue is complete.
Gross profit margins do however remain above that of printed books as this has similarly fallen to 42.7%
as a result of impairments of advances.
2.4 Conclusions
Revenue has increased overall by £277K (0.6%). However, this is far behind industry average of 7%
growth.
Printed books revenue has fallen by £2,030K (5.1%) as revenue from new authors is less than last year
and Yolande Holder has not released any new titles.
E-books revenue has increased significantly by £2,307K (22.6%) and this is reflective of growing
popularity and the continued conversion of the back catalogue.
Gross profit margins have fallen from 44.6% to 43.3% as cost of sales have increased by 794K (2.9%)
more than revenue.
This is a cause for concern.
2.5 Recommendations
It is advisable that Bux look into the reasons why less new authors have been signed this year and find
out if there are weaknesses in recruiting new successful authors.
Bux should also investigate the costs incurred in converting the back catalogue and see if there are more
efficient techniques available.
Bux should also avoid making any further advances to Yolande until they are adequately convinced she is
available to promote existing titles.

3. Evaluation of Contract to Emily Sutton
3.1 Calculation of Advance Earn Out
From the information provided it would appear that total royalty payments due to Emily would amount to
£254K.
This should therefore cover the £250K advance that is proposed.
It also suggests that the advance would ‘earn out’ within the 18 month period which is within Bux’s
specification of a 2 year timeframe.
The fact it would be due to earn out within 18 months could help Bux’s cashflow position in the future.
By paying the advance of £250K, this would exceed Bux’s previously highest advance of only £200K.
However, a high advance may be required to compete with Terrapin who has previously paid out an
advance of up to £2m.
With a large advance comes greater risk for Bux as they are exposed to larger impairments in the future.
This risk is increased given that it is a new author with no previous successful titles. This however may be
reduced given that Emily has worked in children’s TV successfully.
There is also increased risk given that the advance would be in full rather than in 3 installments which is
the usual procedure.
The ‘earn out’ is highly sensitive with only 1.6% margin of error calculated and therefore there is a large
amount of reliance on the figures provided.
Emily has suggested a large contribution to the promotion also with £50K planned to be spent which is far
in excess of the normal £20K for a new book launch.
The threat from self-publishing which offer E-books at half the price of publishers titles (The Bookseller 23
March 2016) which means that publishers need to offer more to authors and this is an option to counteract
this growing trend and threat.
3.2 Underlying Assumptions
As mentioned the ‘earn out’ has a sensitivity of only 1.6% of margin for error before potential impairments
are required.
To break even on the advance, Bux must sell a total of 98,400 hardbacks. 88,360 paperbacks and 39,360
E-books.
This would appear to be very ambitious given that GF Randall whose successful title ‘Was’ only generated
56,000 hardbacks, 125,000 paperbacks and 55,000 E-books in a two year period rather than 18 months as
is proposed.
The projections suggest that 52.6% of printed books will be hardbacks and this is far in excess of the 25%
industry norm.
Similarly, the list prices appear to be higher than equivalent books such as GF Randall with hardbacks
being priced £5 higher.
The figures have been prepared by Liza Halstead who has a lack of independency and has had ethical
issues in the past.
3.3 Commercial + Ethical Factors
Young adult fiction is a growing market and the title proposed would suggest that Bux could benefit from
this if the contract is accepted.

There are obvious likely comparisons to the successful Harry Potter series which generated huge
profitability for its publishers.
As the book is part of a trilogy there is future earnings potential as well as this proposal.
There is however an outstanding matter of potential plagiarism and this could reduce Bux’s profitability if
further royalties become due to Andres.
Further discussion will be needed with Liza and Emily to substantiate the plagiarism allegations.
Liza has had past practice of acting unethically and therefore Bux should evaluate this as well before
accepting.
3.4 Conclusions
The calculations suggest that the contract would generate royalties of £254K which is marginally above
the £250K advance.
Margin of error of 1.6% on calculations could lead to impairments required.
The underlying assumptions do not appear reliable.
There is potential for the book to be a huge success and Bux could benefit from this.
3.5 Recommendations
Seek legal advice over potential plagiarism.
Negotiate a lower advance with Liza and Emily.
Discuss potential plagiarism with Liza and Emily.
Accept the contract as it could be a big hit.
4. Printing and Distribution Options
4.1 Option 1 – Ethelred + Renoir
By continuing to contract services to both Ethelred and Renoir there will be no overreliance on either
supplier which would give Bux greater bargaining power in the future.
By reducing the prices of Ethelred by 10% Bux could save a further £470K (11.84m x 40% x 10%) which
would go towards its targets of reducing annual production costs of £1m but would not achieve it solely.
It would however help gross profit margins rise again in the future.
Ethelred are demanding a minimum contract value of £4m annual spend and Bux would be on course to
meet that requirement based on 2016 figures where £4.7m (11.84m x 40%) was paid to Ethelred.
However should sales volumes continue to drop for printed books this minimum contract value may
become an issue.
4.2 Option 2 – Ethelred only
By using a single supplier of production Bux could benefit from operational procedures and could invest in
integrated IT systems making the processing less labour intensive.
This would come at a cost of becoming overreliant on Ethelred and gives less bargaining powers on
renewal of contract.
It also limits Bux’s ability to use another supplier should further issues such as the late arrival of the ‘Wilf’
books and Ethelred could abuse their dominance in such ways as using poor quality paper for which
Bux’s reputation for high quality would be damaged.

Ethelred have however recently won a prize for socially responsible printing and this fits well with Bux’s
core principle of values and ethical standards.
The fact that a director has been appointed as Bux’s account manager suggests that they value our
requirements. However this could revert to a less senior figure once we have renewed our contract.
By undertaking Ethelred as a sole supplier would mean that it would trigger a £200K cancellation fee with
Renoir.
A total 20% saving would be available and this could reduce printing costs by £2.37m (11.84m x 20%)
and would mean Bux do meet its targets of £1m per annum saving.
4.3 Option 3 – Renoir Only
Similarly with option 2, there would be an overreliance on Renoir, however no cancellation fee would be
payable to Ethelred as that contract would simply run out.
The main disadvantage of using Renoir would be that they operate on shorter payment days (30) than
Ethelred (45) and this could therefore put a strain on future cashflow.
They also have higher cancellation fees which could cost Bux £200K if they wish to reverse their decision.
No discounts have been offered by Renoir for exclusivity and this might compromise Bux targets of
saving £1m per annum.
Renoir does however have access to European markets. Should Bux be considering diversifying into this
market in the future.
4.4 Ethical and Business Trust Lives
Renoir has had industrial accidents recently which they have tried to cover up, this could indirectly effect
Bux’s reputation.
The hack of Ethelred’s IT systems is also a concern as this can effect the earnings potential of subsequent
releases.
Assurances would need to be gained that this will not happen again.
Renoir’s association of ‘It’s Not Your Business’ is against Bux’s core principles of values and contradicts
their desired image of encouraging active and healthy lifestyles of children.
4.5 Conclusions
Option 1 would mean no overreliance of suppliers and no cancellation fees. Savings of £470K could be
made.
Option 2 would mean overreliance of Ethelred, cancellations fees of £200K will be incurred but annual
savings of £2.37m achieved meeting Bux’s targets.
Option 3 would be overreliance of Renoir with no cancellation fees but not cost savings.
4.6 Recommendations
Continue to use all current suppliers to prevent overreliance.
Discuss the publication of ‘It’s Not Your Business’ with Renoir and Auden.
Gain assurances that Ethelred have invested in new IT systems preventing further information breaches.

Appendix 1
2016 2015 ∆ %
Revenue
Total (Net) 50,383 50,106 227 0.6%

Printed (Net) 37,874 39,904 (2,030) (5.1%)
E-book 12,509 10,202 2,307 22.6%
Mix – Printed 75.2% 79.6%

Mix – E-Book 24.8% 20.4%
No. Books Sold 4,940 5,120 (180) (3.5%)
Average Price £7.67 £7.79 (£0.12) (1.5%)
2016 2015 ∆ %
Cost of Sales
Pre-Production 17,695 18,520 (825) (4.5%)

Royalties (Printed Book) 3,137 3,350 (213) (6.4%)
Impairment of Advances 855 456 399 87.5%
Total (Printed Book) 21,687 22,326 (639) (2.9%)
E-book delivery 4,052 3,138 914 29.1%

Royalties 2,815 2,296 519 22.6%
Total (E-book) 6,867 5,434 1,433 26.4%
Total cost of sales 28,554 27,760 794 2.9%
2016 2015 ∆ %
Gross Profit
Total GP 21,829 22,346 (517) (2.3%)

GP – Printed 16,187 17,578 (1,391) (7.9%)
GP – E-book 5,642 4,768 874 18.3%
GP Margin % 43.3% 44.6%

GP Margin – Printed 42.7% 44.1%
GP Margin – E-book 45.1% 46.7%
Appendix 2
Earn-Out of Advance
Hardback £20 x (40,000 + 60,000) x 60% x 10% = 120,000

Paperback £10 x 90,000 x 60% x 10% = 54,000
E-book £8 x 40,000 x 100% x 25% = 80,000
Total royalties expected 254,000
Less advance (250,000)
Potential further payment 4,000
Sensitivity:
254,000 - 1 = 1.6%
250,000
To break even:
(40,000 + 60,000) x (100 - 1.6%) = 98,400 copies
90,000 x (100 - 1.6%) = 88,360 copies
40,000 x (100 - 1.6%) = 39,360 copies

Wednesday 9 November 2016
(4 hours)
CASE STUDY
CANDIDATE NUMBER
page;
examiners.
ICAEW USE ONLY
ICAEW/CS/N16 225452
BLANK PAGE
ICAEW/CS/N16 225452
November 2016 Case Study: True Taste Limited
List of exhibits
1 About you, Lu Tobyn; your employer, Porterfields Hunter ICAEW Chartered

Accountants (PH); and your client, True Taste Limited (TT)
2 The UK fruit juice industry
3 True Taste Limited: history and overview
4 Email from Esme Hext to Andy Rode: True Taste financial history and review of
management accounts for the three years ended 30 September 2015
5 True Taste: management accounts for the three years ended 30 September 2015
6 Email from Esme Hext to Andy Rode: review of True Taste business operations to
30 September 2015
7 True Taste: apple juice operations
8 True Taste: orange juice operations
9 True Taste: toll processing operations
10 True Taste: fruit trading operations
11 True Taste: operational and strategic review
12 Toll processing contract issues
13 Email from Myra Ashyana to True Taste board: fruit imports from Kadar
14 Media articles
15 Email from Andy Rode to Lu Tobyn, 9 November 2016: True Taste Limited (TT)
16 True Taste: management accounts for the year ended 30 September 2016
17 Email from Esme Hext to Andy Rode, 8 November 2016: operational and financial
issues
18a Email from Kelan Teague and Paul Klakter to Andy Rode, 7 November 2016: new toll
processing proposal from Spring Water of Hampshire Limited (SWH)
18b Recent media articles
19a Email from Myra Ashyana to Andy Rode, 4 November 2016: Kadar fruit trading issues
ICAEW/CS/N16 1 of 15
BLANK PAGE
True Taste Limited: Case Study requirement
You are Lu Tobyn, a final-year trainee ICAEW Chartered Accountant working in the
business advisory unit of Porterfields Hunter (PH), a firm of ICAEW Chartered Accountants.
One of your clients is True Taste Limited (TT), a company which manufactures and sells
fruit juice and also imports and sells fruit. You report to Andy Rode, a partner in Porterfields
Hunter.
Requirement
You are required to prepare a draft report for the True Taste board, as set out in the email
dated 9 November 2016 from Andy Rode to you (Exhibit 15). Your report should comprise
the following four elements:

Marks allocation

90%
100%
BLANK PAGE
EXHIBIT 15
EMAIL
From: Andy Rode
To: Lu Tobyn
Subject: True Taste Limited (TT)
Date: 9 November 2016
TT has produced its management accounts for the year ended 30 September 2016. TT’s
board has asked PH to help with assessing TT’s financial performance for the year ended
30 September 2016. The board has also asked for advice on some specific financial matters
and broader strategic and operational issues. I am attaching the following:
 TT’s management accounts for the year ended 30 September 2016 (Exhibit 16)
 An email from Esme Hext concerning operational and financial issues (Exhibit 17)
 An email from Kelan Teague and Paul Klakter about a new toll processing proposal
(Exhibit 18a) and related media articles (Exhibit 18b)
 An email from Myra Ashyana about a proposed new transport route for grapes from Iran
(Exhibit 19a), with media articles identifying transport and supply issues (Exhibit 19b).
Please draft for my review a report addressed to the TT board. The report should comprise
the following.
1. A review of TT’s revenue and gross profit by business line and overall operating profit for
the year ended 30 September 2016 in comparison with the year ended 30 September
2015.
Your review should be based on the management accounts as set out in Exhibit 16. You
should also take into account the additional information contained in Esme Hext’s email
(Exhibit 17). Subsequently you should explain the impact of the trade receivables issue
identified in the last item on Esme’s email, both on operating profit for the year ended
30 September 2016 and on future cash flow.
2. An evaluation of the proposal for a new toll processing contract, as detailed in

Exhibit 18a, and with reference to the related media articles in Exhibit 18b.
Using the revenue and operational information in Exhibit 18a you should prepare, for
each alternative, a one-year profit or loss account for the toll processing business line.
You should refer to TT’s typical toll processing contract details (Exhibit 9) and the
segmental analysis for the year ended 30 September 2016 (Exhibit 16). You should also
discuss the adequacy of the assumptions used in your calculations and assess the impact
of each of the alternatives on TT’s business operations and cash flow. Advise TT whether
it should accept this contract and, if so, under which alternative. Your advice should take
into account any potential business trust and ethical considerations, including those
arising from Exhibit 18b.
3. An evaluation of the proposal for airfreighting grapes from Iran (Exhibit 19a), taking into
account the issues identified in Exhibit 19b.
You should evaluate the financial, operational and strategic issues, including any
potential business trust and ethical issues arising from the Kadar operation managed by
Dax. You should also assess the overall implications for TT’s fruit trading operations.
You should provide appropriate calculations to support your evaluation.
BLANK PAGE
EXHIBIT 16
True Taste Limited

Management accounts
Statement of profit or loss

Year ended 30 September 2016
£000s
Note
Revenue 1 39,065
Cost of sales 1 (31,995)
Gross profit 1 7,070
Selling and administrative expenses (6,174)
Operating profit 896
Interest payable and finance charges (613)
Profit before taxation 283
Taxation (57)
Profit after taxation 226
Statement of financial position

As at 30 September 2016
£000s
Non-current assets
Tangible assets 2 7,363
7,363
Current assets
Inventories 3 3,654
Trade and other receivables 4 8,369
12,023
Total assets 19,386
Shareholders' equity
Ordinary share capital 1,000
Total shareholders' equity 7,932
Non-current liabilities
Bank loan 7,000
7,000
Current liabilities
Trade and other payables 5 3,158
Bank overdraft 1,296
Total current liabilities 4,454
Statement of cash flows
£000s
Profit before tax 283

Adjustments for:
Depreciation & loss on disposals 2,018
Net finance expenses 613
2,914
Change in trade and other receivables (273)
Change in trade and other payables (204)
Cash generated from operations 1,930
Taxation paid (467)
Net finance expenses (613)
Net cash from operating activities 850
Investing activities
Purchase of tangible assets (1,596)
Proceeds from disposal of tangible assets 36
Net cash used in investing activities (1,560)
Net change in cash and cash equivalents (710)
Cash and cash equivalents at start of year (586)
Cash and cash equivalents at end of year (1,296)
Notes to the management accounts year ended 30 September 2016
Note 1: Segmental analysis

Apple Orange Toll Fruit Total
Juice Juice Processing Trading
£000s £000s £000s £000s £000s
Revenue 7,087 14,199 8,551 9,228 39,065
Cost of sales
Production personnel costs 383 1,607 1,036 - 3,026
Materials: fruit, juice, ingredients 1,012 4,036 - 847 5,895
Materials: bottles, packaging 3,217 3,522 - - 6,739
Logistics 1,041 2,077 1,278 5,484 9,880
Juice processing costs 546 1,503 1,705 - 3,754
Agent’s fee - - - 1,846 1,846
Toll contract costs - - 855 - 855
6,199 12,745 4,874 8,177 31,995
Gross profit 888 1,454 3,677 1,051 7,070
Note 2 Non-current assets
Tangible assets Leasehold Plant, IT &
Improvements Machinery Vehicles Total
Cost £000s £000s £000s £000s
At 1 October 2015 2,211 10,398 1,208 13,817
Additions - 1,254 342 1,596
Disposals - (145) (168) (313)
At 30 September 2016 2,211 11,507 1,382 15,100
Depreciation
At 1 October 2015 1,436 4,150 410 5,996
On disposals - (95) (82) (177)
Charge for the year 259 1,427 232 1,918
At 30 September 2016 1,695 5,482 560 7,737
Carrying amount at 30 September 2016 516 6,025 822 7,363
2016
Note 3 Inventories £000s
Raw materials 382
Bottles, cartons, packaging 1,669
Finished goods 1,603
3,654
Note 4 Trade and other receivables £000s

Prepayments and sundry 1,074
8,369
Note 5 Trade and other payables £000s

Other payables 916
3,158
BLANK PAGE
EXHIBIT 17
EMAIL
From: Esme Hext
To: Andy Rode
Subject: Operational and financial issues
Additional information for the year ended 30 September 2016
 Consumers in the UK became increasingly aware of the potential health problems caused
by sugars in processed food and drinks. This new awareness, combined with the UK
government’s proposal to apply a levy on the sugar content in many soft drinks, affected
some aspects of TT’s business.
 Despite a TT marketing and sales campaign, the above issue affected orange juice sales
– particularly in the second half of the year – as can be seen in the financial results. Apple
juice maintained its market.
 As a result of the decline in TT orange juice sales, more production capacity became
available and TT was in a position to expand its toll processing business line. TT has
successfully gained new toll processing customers.
 General uncertainty in the currency markets during the year had an impact on sterling.
This meant that our suppliers from abroad, particularly in fruit trading, negotiated hard for
higher sterling prices, and they also requested early payment from TT for their invoices.
This reduced the risk to them of any currency fluctuations and allowed them to maintain
their revenues in their local currencies. Overall the effect was that TT grape costs
increased by around 20%. Supermarkets accepted some of these price increases,
enabling TT to increase prices by around 10% over prices in the previous year.
 TT imported 144 containers from Jat during the season. Continued efficiencies and
reductions in logistics costs have helped maintain our overall gross margins on Jat
grapes.
 TT imported 84 truck-loads of grapes from Kadar in the 14-week 2016 season. However,
the logistical difficulties of bringing grapes overland from Iran continued. As a result,
logistics costs increased by an average of around 15% per truck during this season.
These costs could not easily be passed on to the supermarkets.
Trade receivables
We have just become aware that one of our toll processing customers may have serious
difficulty paying the amount that it currently owes us. In the last three months of the year
ended 30 September 2016 this customer requested us to process large quantities of its
grapefruit juice – which we did. All of this processed juice was despatched to the customer.
The customer’s balance outstanding at 30 September 2016 was just over £800,000 – no
adjustment has yet been made in the management accounts.
EXHIBIT 18a
EMAIL
From: Kelan Teague and Paul Klakter
To: Andy Rode cc: TT Board
Subject: New toll processing proposal from Spring Water of Hampshire Limited (SWH)
We have been approached by SWH to act as its toll processor by providing a processing
service for its new mineral water based drinks. The proposal is for an initial one-year
contract, although a start date has not yet been discussed. Key features of the proposal are
shown in the table below – together with TT’s initial response.
SWH has stated that it is using mineral water drawn from a recently discovered, natural local
spring. It is flavouring that water with a series of different natural juices from berries and
fruits. SWH has started selling it under the brand name H2B – a combination of H2O (water)
and Berries. SWH is claiming that H2B has low sugar levels but sufficient taste to make it
very appealing to children, and therefore to parents, as a daily drink. Good sample sales,
driven by strong marketing and advertising, have led a major supermarket to agree to sell it
nationwide.
SWH’s proposal TT’s response

1 TT would process 16 million H2B plastic The final revenue figure will be subject to
bottles for SWH. The initial one-year toll processing contract negotiations. There
contract would be worth £12 million in are two alternatives – see below.
revenue for TT.
2 SWH requires a full logistics service TT estimates that this would increase
comprising a collection and distribution logistics costs for the contract to
service from its source to all of its approximately 25% of the contract
customers nationwide. revenue.
3 SWH would want to have a 90-day credit TT would have to consider the impact of
period from TT to allow for SWH sales to this on its cash flow.
be made to the supermarkets and for
SWH to be paid by the supermarkets.
TT’s initial review has revealed that in order to fulfil this contract TT would have to choose
between the following toll processing alternatives:
Alternative 1: continue with single shift

Based on the 2016 capacity, if TT continues operating with its single shift, the worst case
scenario is that in order to fulfil the SWH contract the other external toll processing work
would have to be reduced to 30% of the level achieved in the year ended 30 September
2016.
Alternative 2: operate a second shift

If TT starts to operate a second shift, it could maintain all of its existing external toll
processing work and could fulfil the SWH proposed contract. This alternative would mean
that all toll processing production personnel costs would increase by 100%. Allocated juice
processing costs would remain at an average of 20% of revenue on all toll processing
contracts.
EXHIBIT 18b
Juicy News September 2016

Waste dispute
Significant quantities of waste material from a fruit and vegetable juicing factory in Italy have
been discovered in landfill sites and drainage systems near that factory. The company
involved has stated that the effect on the environment is neutral and that the orange and
lemon peel waste made the drainage systems smell much better – particularly in the heat of
the summer. The Italian authorities have described this response as unacceptable.
The implications are likely to be heavy fines and compensation claims, plus possible closure
of the juicing factory. If closure occurs, this will have a direct impact on a large number of UK
juice businesses that have relied on this source.
The CEO of Citrus Juice Processors Limited, one of the UK businesses involved in importing
juice from this factory, stated: “We do not really see this as being any of our concern. We
cannot be held liable for the actions or lack of action by some organisation in another
country.”
UK Geographic October 2016

Where did all the water come from?
Suddenly there are numerous claims of new fresh water springs being found in the UK – all
being fed from previously undiscovered underground lakes. In almost every case, either the
discovery has been made by a large juice manufacturing organisation on land recently
purchased, or the legal rights to the water discovery have just been acquired by a similar type
of company from a very happy farmer located in a convenient location in the UK.
For most organisations selling fruit juice, there is currently a huge need to be able to dilute it
or diversify into a flavoured water alternative. It seems almost too much of a coincidence that
at this time such discoveries of new fresh water springs are being made so frequently.
A spokesperson for Natural Geography of England has stated that it would be unlikely that
any organisation searching for water could easily locate a new natural and substantial source
of spring water in the UK. It was in fact highly likely that these natural sources had been
discovered, or created, by illegal drilling.
The additional problems associated with that type of drilling activity are threefold. First, water
from such sources can certainly not be labelled “natural spring water”. Secondly, if water is
being forced out from underground by an injection of pressurised air, there is bound to be a
risk that this process will cause the ground to shift and will pose a risk to buildings and other
structures on the surface – leading to very strong local opposition to this action and any
company involved in it. Thirdly, such water can easily become contaminated by the forced
pumping process, which would affect its quality, and this in turn could affect any final
consumer who drinks that water or any related product.
EXHIBIT 19a
EMAIL
From: Myra Ashyana
To: Andy Rode cc: TT Board
Subject: Kadar fruit trading issues
The ongoing logistics issues of bringing Kadar grapes overland from Iran look set to continue
and we therefore need to consider carefully another form of transporting the grapes from Iran
(airfreight), as described below.
From discussions with Kadar and initial research, Dax has provided the following information.
Kadar discussions with Dax:
a) An alternative to truck transport would be to transport the grapes by air directly into the
UK. Kadar has made contact with a small locally-managed airfreight company, Alborz Air
(AA), which has indicated that it could handle this operation.
b) Airfreight by AA would be by standard size container (same as the Jat containers).
c) Airfreight would deliver grapes more rapidly and effectively extend the Kadar grape
season.
d) Using airfreight would enable the overall volume supplied by Kadar to increase by up to
40% in the 2017 season.
e) The grapes supplied by Kadar would continue to be of premium quality.
Further Dax research, provided to TT:
1. Using AA would mean that the total cost of all logistics and distribution would be
approximately £17,000 per container delivered to the supermarkets. However, 50% of that
total comprises the actual airfreight costs (which would have to be paid in US dollars).
2. Although airfreight would remove some of the uncertainty of supply, there are still
potential security and administrative problems which could cause delays.
3. There may be new additional local facilitation and ad-hoc costs which Dax would have to
cover separately.
4. Dax, on behalf of TT, imported 84 truck-loads in the 14-week 2016 season.
5. Dax is confident that it can negotiate appropriate prices and sell all the good-quality
grapes that TT imports from Kadar at the 20% premium over Jat grapes.
Dax has also stated that it proposes to increase its agent’s fee from 20% to 25% for the
Kadar work in future. This is because of the additional problems, risks and ad-hoc cost issues
associated with the whole process of acquiring the Kadar fruit, agreeing quality, monitoring
and transporting it by air, as well as negotiating the final sale to supermarkets,
TT will have to consider the impact of these possible logistics changes on its fruit trading
activity from Kadar and would welcome your advice.
EXHIBIT 19b
International trader monthly October 2016
The real cost of airfreight
With so much of long-haul road transport through Europe subject to delays and endless
security checks, there has been a surge in transporting perishable goods by airfreight.
However, airfreight is not a simple alternative. A range of factors can affect any company
trying to bring fresh produce into the UK by this means. In some airfreight operations there
can be long and essential delays caused by extensive security checks, particularly where any
flights are mixed – meaning they are carrying both freight and air passengers.
At the other end of the scale there are those airfreight airports that are little more than a big
shed at the end of a dusty field – where security, sadly, appears to be totally absent. Often in
these locations the ability to handle, or offer appropriate maintenance or support to, any
organisation delivering significant volumes of airfreight is questionable.
There are still others where additional security charges and facilitation payments are applied
to goods on an arbitrary or ad-hoc basis, with little or no record of the transaction.
Then there are all the environmental issues. Air pollution by aircraft is the highest of all forms
of transport, and this issue is moving up in the discerning public’s attention.
European Times October 2016
UK supermarkets reject fresh fruit imports
Another incident of food contamination discovered with fresh fruit waiting to be imported into
the UK has highlighted the problem of quality control when importing fresh food products.
Very high levels of pesticide have been found during tests on batches of fruit being imported,
resulting in UK supermarkets rejecting this fruit.
The official reason given by the importers is that because overland journeys can now take
longer than in previous years, due to delays at borders, there is a need to ensure that no
insects can survive in the containers and infect the fruit during the journey – hence the need
for heavy spraying before the containers are sealed.
An alternative, unofficial, reason being circulated is that the pesticide also acts as a chemical
that delays the fruit ripening process. Delaying fruit ripening is becoming essential to
overcome the problem of current long delays on European road journeys.
Whatever the reason, the pesticide is being applied after the GAP certificate has been
obtained and after all BRIX tests have been conducted – in clear violation of agreed
procedures and at the same time rendering all such previous paperwork of no value.
CASE STUDY – NOVEMBER 2016
Contents
Page

Introduction 2
Analysis of Advance Information 4
Information provided in the Exam Paper 8
Examination requirements 8
Analysis of Exam Paper Information in other exhibits (Exhibits 15-19) 9
Professional skills 12
Requirement 1: Review of True Taste’s financial performance 13
Requirement 2: Evaluation of SWH toll processing proposal 14
Requirement 3: Evaluation of airfreight proposal 14
Appendices and overall paper 15
Part 4: Appendices
Appendix 1: Analysis of TT’s management accounts 15
Appendix 2: Analysis of SWH TP proposal 17
Workings for answer for Requirement 3 18
Part 5: Marking Key
ICAEW © 2016 Page 1 of 18

Introduction
This report covers the November 2016 Case Study exam. It is issued in conjunction with two illustrative scripts
and related examiners’ commentaries. The first script was in the first quartile of all assessed scripts; the second
failed the exam. In reviewing these scripts, it is important to be aware that it is rare for a script to be uniformly
‘good’ or uniformly ‘bad’. A successful script will present appropriate coverage of all requirements but may
include errors of calculation or logic; an unsuccessful script may contain one or two appropriate sections and/or
some good points but be let down by poor or incomplete text elsewhere.
Attached to this report are appendices with examples of the sort of work that candidates did, or might have
done, under ‘financial analysis’. The two illustrative scripts offer further insights in the area of financial analysis.
74.9 of all candidates sitting the paper passed, compared with 74.7% in July 2016 and 75.7% in November
2015. The pass rate reflects the fact that this case was of a similar standard to all recent case studies. As in
recent papers, the Examiners had introduced factors within the requirements which made them less predictable.
The Advance Information (AI), including management accounting information up to 30 September 2015, informs
candidates that the True Taste Limited (TT) case concerns a company engaged in four business lines:
producing and selling apple juice (AJ); processing and selling orange juice (OJ); processing juice on behalf of
other juice suppliers – toll processing (TP); and fruit trading (FT) – importing grapes which are then sold to
supermarkets. The business has been experiencing good revenue growth in recent years. The candidate is in
the role of Lu Tobyn, a final-year ICAEW trainee Chartered Accountant working in the business advisory
department of Porterfields Hunter ICAEW Chartered Accountants (PH), reporting to the engagement partner
Andy Rode. True Taste is a recently acquired client.
The AI identifies that the company went through a transition in October 2014 whereby it invested heavily in new
processing equipment, enabling it to control all of its own processing and, with its spare capacity, to offer a TP
service to other juice suppliers. Revenue has grown strongly up from £25 million in 2013 to £30 million in 2014
and almost £38 million in 2015. The company relies on an overdraft (agreed limit of £2 million) and has to work
hard on its cash flow to stay within its limit. The management accounting information in the Exam Paper (EP)
shows that TT grew only marginally in 2016 as a result of a steep decline in OJ revenue (caused by public
awareness of the sugar content in soft drinks) which was offset by a significant increase in TP and FT revenue.
The requirements in the EP followed on from the information provided in the AI. In summary, they comprised:
(1) an analysis of the revenue and gross profit by business line and overall operating profit from the statement of
profit or loss, to 30 September 2016, by comparison with the previous year. There was also a request to explain
the impact of a TP customer owing £800k at 30 September 2016 being unable to pay
(2) an evaluation of a new TP proposal from Spring Water of Hampshire (SWH) for a one-year contract to
process 16 million items for a fee of £12 million. Two alternative processes had to be evaluated, together with
the consideration of all the assumptions and business trust and ethics issues and the cash flow impact of this
project for TT
(3) an evaluation of the proposal to airfreight Kadar grapes from Iran by considering the financial, operational
and strategic factors, together with any business trust and ethical issues.
As in previous case studies, the exam rubric specifically told candidates that an executive summary
was to be provided and that the report should be balanced between the three elements. This exam
rubric is provided as an important guide to candidates and following that guidance is crucial to a
candidate’s success.
Tutor firms in their reviews have commented that “the AI was written in a way that ensured that candidates could clearly
identify the big issues without making it too obvious how these would manifest themselves in the exam” and that “the exam
paper suitably extended the AI … and provided a balanced assessment of the Case Study learning objectives”.
The Case Study examiners consider that these tutor comments reflect an appropriate summary of this Case
Study from the candidates’ perspective and that this exam was of a comparable level with previous Case Study
exams in assessing candidates’ professional skills.

Successful candidates followed the instructions provided in the rubric, and the detailed instructions in each of
the three requirements, and produced full and well-balanced answers to those requirements, within the time
available. Their reports were clearly structured, covered all requested aspects, contained appropriate, clearly-
labelled appendices and concise, relevant executive summaries. Successful scripts provided logical, clear
answers to the requirements, with little superfluous information. The top scripts were of an excellent quality.
Candidates who failed did so for a variety of reasons but, as always, a significant number who failed appear to
have “stayed within their comfort zone” (as one tutor surmised) on Requirement 1 and misallocated their time
between the three requirements. In other instances, candidates failed to provide appropriate analysis or
judgement in a particular section of the report, together with only basic conclusions and poor recommendations.
Review of professional skills
Assimilating and using information (A&UI). Candidates provided clear evidence of being competent under this
heading with good integration of AI and EP information – particularly for financial analysis calculations – and a
sufficient use of relevant facts provided throughout the case. However, the business issues and wider context in
Requirements 2 and 3 posed some problems for weaker candidates.
Structuring problems and solutions (SP&S). Most candidates demonstrated good analytical skills throughout
their scripts: picking out the relevant facts; accurately calculating the impact; and then assessing the information
derived. However, some weaker candidates provided poor-quality analysis, particularly for specific aspects of a
requirement or calculation (see below); and, because of the importance of good analysis to any section of the
report, it is difficult for a candidate to recover from inadequate or sub-standard analytical work.
Applying judgement (AJ). Good candidates demonstrated their ability to apply judgement by good evaluation of
their analysis. Weak candidates failed to demonstrate their judgement by not critically evaluating assumptions
presented in the case or by not reflecting adequately on their own (sometimes weak) analysis. The ability to
apply judgement is a major differentiator in scripts.
Conclusions and recommendations (C&R). In most scripts the conclusions and recommendations were logically
derived from the previous work in the relevant section of the report and were commercially focused. Weaker
candidates often presented only basic conclusions, and offered limited or general recommendations.
Review of requirements
Requirement 1 comprised financial statement analysis of the items requested from the statement of profit or
loss. It also required a consideration of the adjustment needed for a potential bad debt. Most candidates
demonstrated the required level of competence in performing the financial analysis against prior year – assisted
by good preparation from the AI. However, weaker candidates failed to assess the accounts receivable
adjustment appropriately, in particular by failing to identify the future cash flow implications of the lost trade
receivables. These weaknesses affected judgements, conclusions and, in particular, recommendations.
Requirement 2 was to evaluate the proposal for a new toll processing proposal from SWH by calculating the
cost of the SWH under two alternatives. Candidates were also specifically asked to assess the adequacy of the
assumptions made. Strong candidates provided comprehensive analysis and evaluation of all issues based on
good preparatory work. Weak students struggled with the relatively simple calculations and tended not to
question assumptions adequately or use appropriate professional scepticism. Their conclusions and
recommendations were similarly weak.
Requirement 3 concerned the evaluation of the future supply of Kadar grapes from Iran. Good candidates
presented a clear analysis of the financial, operational and strategic issues. Weaker candidates were less
convincing on their numerical analysis and poor on related judgement. They failed to provide an appropriately
balanced consideration of all the issues or to tie the information back to matters previously identified in the AI.
Their scripts were not competent on judgement and many had weak conclusions and recommendations.
Appendices, Executive Summary (ES) and overall. All reports contained some appendices and the vast majority
were clear and relevant. However, some – particularly relating to Requirement 2 – were difficult to understand,
with no evidence of clear planning. Most reports contained an ES which dealt with the different sections of the
report, but some weaker scripts were very superficial. Successful candidates demonstrated the ability to
assimilate, analyse and assess the information in the TT case and write a clear and relevant report. Weaker
scripts showed less evidence of a well-structured report in sections – frequently the result of poor planning.
Conclusion
TT was a topical Case Study, dealing with current business issues in changing economic conditions, set at an
equivalent and appropriate level to previous cases. As one tutor firm concluded, “this was an exam paper which
provided a fair test of candidate’s professional skills and knowledge of the information provided”. The examiners agree
that the TT case was a fair assessment and one which exposed the weaknesses of the poorly-prepared
candidate and those who could not respond in the exam to the specific issues which had to be addressed.

The Case Study relates to True Taste Limited (TT), an owner-managed company which manufactures and sells
fruit juice and also imports and sells fruit in the UK. TT was created by Ida Marsh, who remains its current
Managing Director, and is an expanding business. This is despite operating in a market sector which has
experienced some general decline in recent years, caused by an awareness of the health implications of
consuming too much sugar contained in many soft drinks. The candidate is in the role of Lu Tobyn, a final-year
trainee ICAEW Chartered Accountant working in the business advisory department of Porterfields Hunter
reporting to the engagement partner Andy Rode. TT is a recently acquired client.
Four weeks prior to the examination, candidates were provided with a 46-page package of information,
containing a series of 14 exhibits:
1 About you, Lu Tobyn; your employer, Porterfields Hunter ICAEW Chartered Accountants (PH); and your
client, True Taste Limited (TT)
2 The UK fruit juice industry
3 True Taste Limited: history and overview
4 Email from Esme Hext to Andy Rode: True Taste financial history and review of management accounts
for the three years ended 30 September 2015
5 True Taste: management accounts for the three years ended 30 September 2015
6 Email from Esme Hext to Andy Rode: review of True Taste business operations for the year ended 30
September 2015
7 True Taste: apple juice operations
8 True Taste: orange juice operations
9 True Taste: toll processing operations
10 True Taste: fruit trading operations
11 True Taste: operational and strategic review
12 Toll processing contract issues
13 Email from Myra Ashyana to True Taste board: fruit imports from Kadar
14 Media articles
By studying and analysing this Advance Information an overall picture of TT could be established. (Additional
commentary by the examiners is provided in a different font and in brackets.)
Exhibit 1 provides a brief background to the candidate Lu Tobyn, the firm Porterfields Hunter (PH) ICAEW
Chartered Accountants and one of its clients in the business advisory department, True Taste Limited (TT).
(This exhibit identifies the range of work covered and necessary skills expected of the candidate, including the skills of
assessing a client’s business in the market in which it operates, identifying changes or trends in that market and any related
client strengths or weaknesses.)
Exhibit 2 is a short exhibit which provides a brief description of the UK fruit juice industry. (In particular, it
provides a definition of juice products and the switching by customers to reduced calorie drinks out of high calorie (sugar
rich) soft drinks.)

Exhibit 3 gives a brief history of TT and its four business lines:

 producing and selling apple juice (AJ)
 processing and selling orange juice (OJ)
 processing juice on behalf of other juice suppliers – toll processing (TP)
 fruit trading (FT) – grapes purchased from abroad and sold to supermarkets in the UK.
Based in Hampshire in the south of England, TT started out by using local suppliers for its AJ and its customers
tend to be local organisations. Since moving into the OJ market it has broadened its purchasing and selling
operations. Exhibit 3 also includes the composition of the board and the senior management posts. TT has an
ICAEW-qualified Finance Director: Esme Hext.
Exhibit 4 is an e-mail from Esme Hext (EH) to Andy Rode (AR) accompanying the TT management accounts
for the three years ended 30 September 2015. It provides a short review of TT’s financial history and
management accounts highlighting key points which cannot easily be discerned from the actual financial
statements. This includes such facts as: “the year to 30 September 2014 was a year of major change for TT”. TT made
a significant investment in processing equipment, enabling it to bring all its own juice processing operations in-
house and enabling it to offer a juice processing service to other juice suppliers – a process known as toll
processing. By the start of the 2014 financial year TT was also importing and selling grapes from two growers:
Jat (India) and Kadar (Iran). TT has a bank loan (principal £7 million – to be repaid in full in 2023) and also
operates with an overdraft – maximum facility £2 million. (This summary financial story, provided by EH, explains the
main recent changes to TT’s operations and this information must be integrated with other numerical information by
candidates to enable a comprehensive understanding of TT.)
Exhibit 5 provides five pages of TT’s management accounts and notes for the three years to 30 September
2015, containing the following key information:
 TT has achieved impressive revenue growth from 2013 to 2015 (almost 50%) as a result of the quality of its
products and the investment in new processing equipment. (The specific successes in revenue from the four
business lines will need further analysis to understand the detail of what has occurred – this is to be analysed from the
notes and other facts provided elsewhere.)
 Gross profit % has improved marginally over the three years from 20.5% (2013) to 23.6% (2015) which is a
positive trend. (This is a solid performance coupled with the growth in sales indicating that TT has strong products
and a firm control of costs.)
 There are very small percentage changes in the selling and administrative expenses by comparison with
sales. (This also indicates firm control of costs – see below).
 Operating profit has been improving steadily in absolute terms over the three years (from £1,154k in 2013 to
£2,920k in 2015) and in percentage terms when compared with revenue (from 4.6% in 2013 to 7.7% in 2015).
(This is a very positive trend and reflects the strong growth in sales and overall firm control of costs.)
 The statement of financial position confirms that TT made a significant investment in non-current assets in
2014 (an analysis of the relevant note 5 (below) reveals more).
 Inventory has undulated slightly but has remained at under 11% of the cost of sales. In absolute terms, it
has increased by over £1 million over three years. (This absolute and percentage increase in inventory held
appears in line with activity.)
 There has been a slackening of the accounts receivable against revenue. (This may reflect changes in trading
terms – eg with FT supermarket sales increasing – but may also indicate weaker controls by TT.)
 The bank loan of £7 million was taken out to fund the purchase of non-current assets – it is due to be repaid
in 2023. (Despite the fact that it is an interest-only loan, it is an appropriate method of funding these assets.)
 Although the level of trade and other payables is increasing steadily in absolute terms (from £3,495k in
2013 to £3,772k in 2015), there is a decrease in percentage terms against relevant costs in the statement of
profit or loss (from 14.6% in 2013 to 10.8% in 2015). (This proportionate reduction in trade and other payables
indicates that TT pays its creditors promptly. This policy may need a review – see further analysis of payables below.)
 The statement of cash flows (SCF) – incorporating the bank overdraft – indicates that increasing levels of
cash are being generated from operations, although within that section it can be seen that large sums are
being applied to the increases in inventory and significant increases in accounts receivable. The investment
in non-current assets in 2014 is clearly significant (£8,232k) as is the almost matching funding from the bank
loan (£7 million). The bank overdraft undulates over these three years. (This SCF requires detailed reading and
understanding and should be reviewed again after the information on the notes to the accounts has been assimilated
and other exhibits later in the case to ensure full comprehension.)
 From the Notes to the accounts the following information can be seen:
o Revenue The analysis of four business lines is only really relevant after 2014 – the year of
significant operational change. (The 2015 sales mix is: AJ 18.5%; OJ 46.5%; TP 16.4%; FT 18.5%)

o Cost of sales Overall these costs are decreasing against revenue, from 79.4% (2013) to 76.4%
(2015). (Although there is a lot of detail which could be sub-analysed the overall picture is of good control of
costs – more useful analysis may be available when the business line details are reviewed below.)
o Selling and administrative expenses There is only marginal movement in these expenses as a
percentage of revenue. (No real story can be deduced apart from good control over necessary expenditure.)
o Non-current assets information is provided for all the three years since the beginning of October
2012, broken down into the major categories and showing the related depreciation. (As already
known, the most significant transactions occurred in 2014. There are relatively low losses on disposal
particularly in 2014 and 2015, which indicates reasonable depreciation policies.)
o Trade and other receivables Given the low and consistent level of prepayments the large changes
in this figure are in trade receivables. (These have increased from 48 days in 2013 to 69 days in 2015 –,
which indicates a slackening in control and needs to be reviewed.)
o Trade and other payables show that approximately 77% relate to trade payables – and the
proportionate reduction of trade payables against relevant costs indicates that TT pays its trade
suppliers promptly. (Given its overdraft, TT may need to consider paying less promptly.)
(As in any Case Study, all the financial information should be read and fully analysed by candidates, ahead of the exam
itself, in order to understand the detailed financial story and current financial position of the business.)
Exhibit 6 is an e-mail from EH to AR, comprising an overview of TT’s business operations. It starts with a
segmental summary for 2015 showing the four business lines and their related cost of sales. This identifies the
gross profit (GP) per business line and provides the detail of the direct costs associated with each line. From an
initial analysis of the four lines it can be seen that not only is OJ the largest in revenue terms but it also makes
the biggest contribution in terms of absolute GP (£4,400k) and its GP margin is 25%. Only TP has a higher GP
margin at 43% and at £2,671k its absolute GP is second highest. TT’s original line, AJ, is making a contribution
of £865k – a margin of 12.4%. FT, which is almost a standalone line, makes a contribution of £960k – a margin
of 13.7%. Following the financial schedule is a narrative analysing the revenue, cost of sales and operational
issues for the year to 30 September 2015 – which identifies a number of key current issues. (This is clearly an
important exhibit. It identifies that two of TT’s business lines in particular (TP and FT) have the majority of their costs
allocated in proportion to revenue – making the GP analysis of these lines fairly straightforward. Some of the costs for OJ
and AJ are also linked to revenue and activity. The fact that this exhibit contains such a succinct yet detailed financial
schedule, which could be compiled by candidates as preparatory work from information provided elsewhere, indicates that
it would pay candidates to be fully familiar with this schedule.)
Exhibit 7 describes the AJ operations by way of a marketing document/diary, and provides a three-year AJ
profit or loss up to 30 September 2015. In the three years shown this business line has grown steadily in
revenue terms – from £6 million in 2013 to £7 million in 2015. Its GP has risen from £535k in 2013 to £865k in
that time. Its GP margin has risen from 8.9% to 12.4% over the same period. This increased margin appears to
be a combination of cheaper raw materials and the new more efficient processing operation particularly in 2015.
(This exhibit provides important details of AJ operations and financial history from which it is clear that this is a business
line which epitomises the corporate philosophy towards purchases, production and sales for the whole company. AJ is a
successful business line achieving steady growth.)
Exhibit 8 describes TT’s OJ operations and provides a three-year profit or loss for the OJ business line. The
history of the changes in the OJ operation explains why historical financial analysis of this business line is not
particularly effective. It is only in 2015 that the processing has stabilised and some sort of financial yardstick can
be established. (From the profit or loss summary the headline growth in OJ revenue can be seen to be very good: up by
some 27% from 2013 to 2015. Rather surprisingly, although OJ is making a good GP of over £4 million each year, the GP
margin is declining sharply – from 30% in 2013 to just 24% in 2015. Given that TT does not appear to have a very
sophisticated management accounting function, it may be that the OJ business line acts as a kind of “dustbin” for all
unallocated costs – hence its apparently weak trend in GP margin – this would be a control weakness.)
Exhibit 9 describes the TP operation and provides both an example of a small TP job together with the TP profit
or loss account since the inception of TP operations. The XY job is 5,000 bottles or £5,000 per month – a total
of just £60k for a full 12 months. The TP revenue for the year to 30 September 2015 is £6,195k – pro-rata this is
possibly well over 6 million bottles. There are notes explaining what is covered in each of the TP costs as well
as an explanation of the rudimentary cost allocation system for the TP (and other) juice operations. (This exhibit
states that at the outset some of the TP estimates were not very sophisticated. This implies that individual jobs could be
above or below “average” in terms of accurate estimates – so XY being just a small example should be treated with caution.
The overall averages for the year to 2015 (the first full TP year) might be a more useful guide to TP cost structures. Mark-
up and margins are discussed but it appears that many costs are allocated as a percentage of revenue – implying that this is

a key determinant in calculating TP contract terms. The average GP margin achieved in 2015 is 43% – or around 75%
mark-up on cost.)
Exhibit 10 provides information on the FT operation. This is almost an independent operation (apart from the
accounting for this activity) because the operational side is dealt with separately by FT agent Dax – whose fee is
20% of the negotiated sales price for the grapes. Details are provided of the Jat (India) and Kadar (Iran)
operations. There are similarities and differences. Jat’s grapes are delivered by ship from India in containers.
Kadar’s grapes are delivered by truck (50% bigger than a shipping container). Because of timing and quality
Kadar’s grapes command a 20% premium over Jat grapes. Financial details of the FT per shipment (for both a
Jat container and a Kadar truck) are given as well as the FT profit or loss for the three years to 30 September
2015. (The FT revenue has grown strongly from £5,376k in 2013 to £6,992k in 2015. GP margins have increased from just
over 10% to just under 14% in that time and the absolute GP in 2015 is nearly £1 million. This is a profitable self-contained
operation.)
Exhibit 11 provides information about TT’s operational and strategic review in October 2015. It identifies the
extent to which TT is susceptible to uncontrollable external threats: poor harvests, exchange rate changes,
political and other economic risks. (The information provided in this exhibit is important background information and
should have served as a starting point in any SWOT, PESTLE or Five Forces preparatory analysis which a candidate may
have undertaken – integrated with and augmented by other facts from the case and their own targeted research.)
Exhibit 12 concerns TP contract issues. It explains the advantages and disadvantages, the benefits and the
risks surrounding TP from both the point of view of the organisation seeking to use such a service as well as the
organisation providing a TP service. (This exhibit is a good summary of the operational concerns for those involved in
TP arrangements – it should assist any candidate who was previously unaware of TP.)
Exhibit 13 comprises an email from Myra Ashyana (MA) to the TT board and Andy Rode describing a number
of difficulties experienced by FT agent Dax in delivering the Kadar grape contract. The MA email identifies a
range of problems from questionable quality control over the Kadar grape BRIX certification through to problems
on the truck road journey across Europe. Despite the problems, the Kadar grape FT is a success. (This exhibit
lays out the everyday problems associated with international trade where it is not always easy to hold suppliers to account
and where a pragmatic and practical attitude by an agent appears to be essential for success. It contains much food for
thought.)
Exhibit 14 comprises a series of short and varied media articles concerning a number of topical issues.
 Exhibit 14a is an item from UK Medical Research providing information and a warning about the dangers of
drinking fruit juice “which has as much sugar as many classical sugary drinks”. The advice is to drink less
juice and/or dilute it or only consume it with food. (This article and others will obviously have a negative impact on
juice sales.)
 Exhibit 14b is information from the Food and Agricultural Organisation of the United Nations describing
“Good Agricultural Practices (The GAP code) the implementation of which should contribute to Sustainable
Agricultural and Rural Development. (Farmers adhering to the GAP code experience new market opportunities.)
 Exhibit 14c reports on the Russian ban on EU imports which has affected Polish growers in particular. (The
other side of this problem is that Polish apples, which are cheaper, are now available for sale throughout the EU/UK.)
 Exhibit 14d describes the issue of fruit fly infestation in imported fruit causing the destruction of other
produce which may be infected. (This article highlights one of the most significant risks for any fruit trader of
cross-infestation affecting its own carefully-controlled products.)
 Exhibit 14e describes a surge in search activity for new natural sources of mineral water which drinks
companies and organisations might be able to exploit in producing new products for the market. (The
company Spring Water of Hampshire (SWH) is one such organisation set up specifically to find new water sources. It
is financed by Citrus Juice Processors Limited.)

Information provided in the Exam Paper
The Exam Paper information contained nine pages of additional information by way of six exhibits. The new
documents provided to candidates were:
 Exhibit 15 – Email from Andy Rode to Lu Tobyn, 9 November 2016: True Taste Limited
 Exhibit 16 – True Taste: management accounts for the year to 30 September 2016
 Exhibit 17 – Email from Esme Hext to Andy Rode, 8 November 2016: operational and financial issues
 Exhibit 18a – Email from Kelan Teague and Paul Klakter to Andy Rode, 7 November 2016: new toll
processing proposal from Spring Water of Hampshire Limited (SWH)
 Exhibit 18b – Recent media articles
 Exhibit 19a – Email from Myra Ashyana to Andy Rode, 4 November 2016: Kadar fruit trading issues
 Exhibit 19b – Recent media articles.
Examination requirements
Please draft for my review a report addressed to the TT board. The report should comprise the following.
1. A review of TT’s revenue and gross profit by business line and overall operating profit for the year ended 30
September 2016 in comparison with the year ended 30 September 2015.
Your review should be based on the management accounts as set out in Exhibit 16. You should also take
into account the additional information contained in Esme Hext’s email (Exhibit 17). Subsequently you
should explain the impact of the trade receivables issue identified in the last item on Esme’s email, both on
operating profit for the year ended 30 September 2016 and on future cash flow.
2. An evaluation of the proposal for a new toll processing contract, as detailed in Exhibit 18a, and with
reference to the related media articles in Exhibit 18b.
Using the revenue and operational information in Exhibit 18a you should prepare, for each alternative, a
one-year profit or loss account for the toll processing business line. You should refer to TT’s typical toll
processing contract details (Exhibit 9) and the segmental analysis for the year ended 30 September 2016
(Exhibit 16). You should also discuss the adequacy of the assumptions used in your calculations and
assess the impact of each of the alternatives on TT’s business operations and cash flow. Advise TT whether
it should accept this contract and, if so, under which alternative. Your advice should take into account any
potential business trust and ethical considerations, including those arising from Exhibit 18b.
3. An evaluation of the proposal for airfreighting grapes from Iran (Exhibit 19a), taking into account the issues
identified in Exhibit 19b.
You should evaluate the financial, operational and strategic issues, including any potential business trust
and ethical issues arising from the Kadar operation managed by Dax. You should also assess the overall
implications for TT’s fruit trading operations. You should provide appropriate calculations to support your
evaluation.
On the instruction page, candidates are told that the report should be balanced across the three detailed requirements and
must also include an executive summary. The time allocation suggested to candidates was:

Drafting the report 2 hours

Analysis of Exam Paper (EP) in other Exhibits (15-19)
With a total of nine pages of information to read in the Exam Paper, time should have been spent reading
quickly through all the new material (Exhibits 15-19b), to assess the range of information contained in those
exhibits. It would then have been essential to read Exhibit 15 carefully to understand the requirements before
starting a detailed read of the four pages of financial information and other EP information.
 Using the new financial information, candidates should assess the 2016 results using previous information
(prior year and other financial information from the AI) and reflect on any preparatory analysis already
carried out. The exact financial analysis comprises an analysis of “TT’s revenue and gross profit by business
line and overall operating profit” – comparisons should be made with the equivalent 2015 results.
There is also the need to consider the 2016 operational and financial information in Exhibit 17 especially
concerning the trade receivables issue and its impact “on [2016] operating profit …and on future cash flow”.
 Evaluating the new toll processing (TP) proposal for SWH meant considering the information as provided by
SWH and responded to by TT (Exhibit 18a) and the segmental analysis in the 2016 management accounts
(Exhibit 16). It also meant referring to the TP information already provided in Exhibit 9 in the AI (see
analysis and commentary above). By combining the information, it would be possible to prepare a profit or
loss for delivering each alternative of the SWH proposal. Candidates had to “discuss the adequacy of the
assumptions” – and “the impact of each alternative on TT’s business operations and cash flow”. This involved a
critical commercial review of the information provided – particularly in operational terms for such a large and
potentially disruptive project – and considering how the cash flow would occur. There was also the business
trust and ethical dimension to be considered, including Exhibit 18b.
 The third requirement entailed a financial, operational and strategic evaluation (including any ethical or business
trust issues) of the Kadar grape operation being changed to an airfreight operation as indicated in Exhibit
19a and b. This new supply operation would possibly solve a number of the issues already identified in
Exhibit 13 and re-emphasised in the Exam Paper. (It would be important for candidates to have performed some
calculations relating to both the financial and operational information.)
With appropriate planning, candidates should have been able to complete these three main tasks, and write an
executive summary, within the time available to produce a well-balanced report.
Analysis of Exam Paper (EP) information in other exhibits (Exhibits 16-19b)
From reading the other new exhibits candidates should have established the following.
Exhibit 16 comprises three pages showing the management accounts for the year to 30 September 2016
together with accompanying notes. These notes show details of: segmental analysis including cost of sales and
gross profit per business line; non-current assets; inventories; trade and other receivables; and trade and other
payables. The 2016 set of accounts are in a similar format to the 2015 information presented in the AI (Exhibit
5) and should not have posed any problem for candidates to assimilate. (This should have been a highly predictable
exhibit – although the actual figures would not have been known in advance. Analysis of the actual results to 30 September
2016 would have been anticipated and detailed analysis of the AI figures, particularly the segmental analysis for each
business line, would have been normal and essential preparatory work. It is important to note that this analysis must be
conducted initially on the figures as presented in Exhibit 16 – unadjusted.)
Exhibit 17 is an email from Esme Hext (EH) to Andy Rode (AR) providing additional financial and operational
information concerning the main business lines for the year ended 30 September 2016 which needed to be tied
together with the detailed financial statement analysis performed by the candidates, to provide a coherent
commentary. This exhibit also contains the information that one of the TP customers “may have serious difficulty
paying the amount that it owes” [£800k at 30 September 2016] but that “no adjustment has yet been made in
the accounts”. (All of this information had to be included or acted upon in answering this requirement. The numerical
performance analysis should have concentrated on the big changes in 2016 by comparison with 2015. As well as
determining the accounts receivable adjustment, candidates had to be aware that there would be a future reduced cash
inflow effect from accounts receivable in the coming months.)
Exhibit 18a comprises one page of information on the new TP proposal from SWH. The fee is £12 million for an
initial one-year contract. Operationally, TT would have to process 16 million plastic bottles for SWH. There
would also be an increased logistics responsibility for TT, and SWH wants an extended (90-day) credit period
from TT. Two possible alternatives are suggested by TT to allow it to deliver this large contract. The first
involves the reduction of all other TP work by 70% (down to 30%) of its current (2016) level. The second
involves TT running a second shift – which would increase all TP production personnel costs by 100%. Further
information relating to this project is included in Exhibit 18b. (TP projects and results have been described in detail in

the AI and candidates were expected to be able to assimilate this new information easily. The initial calculations for the two
alternatives were straightforward – in both the AI and EP, the TP business line identifies only four costs, of which two – TP
costs (20%) and contract costs (10%) – are linked precisely in percentages terms to the TP revenue. As a result, it was
expected that candidates’ calculations would involve changes to only two elements of the linked information (and one of
those – logistics – would increase to 25% of the proposal revenue of £12m, under either alternative). The main financial
issues to consider were the numerical and servicing assumptions provided by SWH, and the responses and operational
alternatives suggested by TT. Candidates also had to “take into account any potential business trust or ethical
considerations, including those arising from Exhibit 18b”.)
Exhibit 18b comprises two short media articles: one relating to waste disposal irregularities by one of the
suppliers to Citrus Juice Processors Limited (CJP) – the company financing SWH – in which CJP appears to
absolve itself from any concerns over this matter. The second article raises the question of the legitimacy of any
new source of spring water (such as that implied as having been discovered by SWH). (From the AI, candidates
would have been aware of publicised concerns over the provenance of new sources of spring water and they would also be
aware of TT’s own, much valued, reputation.)
Exhibit 19a, is an email from Myra Ashyana (MA) to Andy Rode providing details of the continuing logistics
problems of transporting Kadar’s grapes from Iran by truck and summarising an alternative airfreight solution –
with information supplied by Dax. There is both numerical and descriptive information in this mixture of facts and
aspirations throughout this exhibit which has to be carefully analysed and appraised. (Candidates have been
requested to consider this potential arrangement in financial, operational and strategic terms. The logistical difficulties had
been identified in the AI and this airfreight proposal offers a possible solution. However, the assessment must be balanced
and the information, which is effectively supplied by Dax – who are clearly an interested party to any future arrangement –
should not be accepted without detailed consideration. Airfreight would be a complete departure from the existing
operations – all parties would probably have a lot to learn.)
Exhibit 19b comprises two media articles similar to those in Exhibit 14 in the AI. The first outlines the issues
surrounding the transport of perishable goods by airfreight. The second summarises the problem of importers
circumventing the GAP and BRIX tests by applying high levels of pesticide after these tests have been
conducted in order to preserve fruit on any delayed journeys. (The content of these articles develops the issues
introduced elsewhere in either the AI or EP and should have served to raise awareness (or remind candidates) of these
matters. Candidates should evaluate what is provided in the context of the known operational/logistics problems and the
suggested changes for the future transport of Kadar’s grapes from Iran.)
The above information provided in the EP follows on from the financial and commercial story told in the AI but it
indicates a change in emphasis for the business. The headline story is that TT’s overall revenue has increased
only marginally in the year but there has been considerable change between the business lines in terms of
decline and growth. TT has been heavily affected by customer awareness of sugar content in soft drinks and
this has hit OJ activity and revenue hard. TP has increased significantly – either as a result of planned
expansion of this activity and/or because the drop in OJ activity has released spare capacity which has allowed
the expansion. FT revenue has also increased significantly. Meanwhile, AJ activity and revenue have merely
continued their steady pace. Similar headline analysis of the GP overall indicates a significant drop from nearly
£9 million to £7 million – coupled with only a marginal change in selling and administrative expenses, this has
meant that operating profit has plunged by £2 million to £896k. Two of the business lines, AJ and TP, have
maintained their GP margins (for different reasons) at 12.5% and 43% respectively. (There is a need for judicious
and selective financial analysis of the cost of sales for OJ and FT to identify what has caused those changes. This does not
need to be too detailed – identifying the material changes – and applying sound professional judgement is required in this
analysis.)
The story, which is established in the financial statements, is developed in the scenarios for Requirements 2
and 3. In Requirement 2 candidates have to assess, using structured financial data analysis, a new TP proposal
(a growth area of the business). There is a need to apply judgement in assessing the assumptions concerning
the SWH proposal. Requirement 3 needs a structured financial, operational and strategic review of the supply of
Kadar grapes – FT is another growth area for TT. Information provided in the EP and some information already
supplied in the AI concerning the issues must be used. Both Requirement 2 and Requirement 3 included the
consideration of business trust and ethics.
The individual requirements describe the process of analysis which should be followed in developing the report.
For Requirement 1 the financial statement analysis of the management accounts for TT for the year to 30
September 2016 had to be focused on the main elements as requested. This financial analysis should have

been a straightforward exercise numerically looking for the key changes – based largely on assessing Note 1
(segmental analysis) of the 2016 management accounts. This mirrored a similar analytical summary in the AI
(Exhibit 6). It also required using and developing the information in Exhibit 17 to provide a more detailed
commentary and evaluation based on the numerical analysis. (The issue that a customer “may have difficulty paying
the amount it currently owes us” [over £800k at 30 September 2016] had to be considered against the critically important
operating profit figure of £896k. The absence of the future cash flow relating to this customer – with its impact on the
future bank overdraft [limit of £2m], which at 30 September 2016 stands at £1,296k – was also critical and needed to be
discussed.)
Requirement 2 required some very basic financial data analysis to calculate the profit or loss account for both
suggested alternatives for the SWH toll processing proposal, together with an assessment of the cash flow
impact. The calculations should have been followed by an evaluation of the assumptions. The most important
factor was the sheer size of the SWH proposal – in operational terms it appears to be almost twice the size of
the total 2016 TP operation. In suggested revenue terms (£0.75 per bottle), on its own it would be almost 140%
of total current TP revenue (or 30% of TT’s overall total revenue). In equivalent revenue terms (compared to
other TP contracts which indicate a possible £1 per bottle), these figures and proportions would be much higher.
Candidates should also have been aware that the problem with accounts receivable in Requirement 1
concerned a TP customer. TT needs to be cautious but it does need new contracts. (There is much to be
considered and evaluated but the calculations are straightforward. Professional judgement – particularly on the operational
decision – was essential: in a commercial situation, would any business really give up 70% of its existing customers and
what impact would that have for those customers and on TT goodwill? It is possible that any continuing dramatic decline in
the OJ activity would release sufficient capacity to allow TT to deliver this SWH contract. A sensible evaluation and a
sensible decision had to be made.)
Requirement 3 required the evaluation of the possible change to the supply of Kadar grapes from Iran. The
change to airfreight has been proposed by Dax – this agent has also supplied most of the information. Dax
clearly has a vested interest in the outcome, even at a 20% fee – before considering their suggested increase to
a 25% fee. Candidates should have used the numerical information provided to assess the new scenario in
context. Fruit Trading has been expanding and contributed over £1 million in gross profit in 2016 – and Kadar
grapes are accounting for approximately 50% of that figure. It is essential to TT to ensure that these operations
– properly run and delivered – are maintained at a time of decline in other business lines. Candidates should
have considered the implications for TT as a whole and that also meant identifying and evaluating the business
trust and ethical issues required a logical and integrated review of AI and EP information.
Grades were awarded under five topics: Executive summary; Review of TT’s financial performance; Evaluation of
SWH’s toll processing proposal; Evaluation of airfreight proposal; Overall paper. For each topic, under each of the
four Professional Skills, there were a number of ‘boxes’ representing specific areas in which the skill was to be
demonstrated. At each box, one of five available grades was awarded: CC (Clearly Competent); SC (Sufficiently
Competent); IC (Insufficiently Competent); ID (Insufficiently Demonstrated); NA (Not Addressed). The number of
boxes per topic and skill (below) reflects (i) an even balance between the three main requirements and (ii) more
weighting towards SP&S and AJ, as indicated in the Exam Paper rubric. It is consistent with recent exams.

Professional skills
Assimilating and using information
In each requirement candidates had to make extensive use of information from both the AI and EP in order to
build their answers. The majority of candidates demonstrated good A&UI skills in Requirement 1, but these skills
were not as evident in the other two Requirements. In Requirement 2, only about 50% of candidates
summarised the basic position of the two alternatives and gave the headline context of the significance of the
size of SWH contract using a comparative yardstick (eg £12m is 140% of TP revenue). Candidates were similarly
weak in defining the business context for TP and its increasing importance for TT as a whole. In Requirement 3
the selection and use of appropriate numerical information was generally only adequate – and for many
students it is an area of weakness. Presenting a succinct summary of the financial or numerical context for a
scenario ought to be a straightforward process for all candidates – which any client might reasonably expect.
The wider context business issues require that candidates summarise the relevant key factors for that business
line within the context either of TT or the wider world – this inevitably means a brief statement of the relevance
and strength of that business line (in this instance, FT) as presented in the EP financial statements. The
plausibility of the new information can then be addressed.
In all the tutor reports sent to ICAEW after the Case Study exam there were excellent summaries of different
aspects of the business as presented in each of the three requirements – it would be a considerable asset to a
candidate if he or she were capable of producing a similar summary.
As one tutor firm succinctly observed in its report “candidates are required to react to the information provided in the
Exam Paper and demonstrate their own understanding of the situation in hand”. The examiners concur.
Structuring problems and solutions
The majority of candidates demonstrated good skills in structuring problems and solutions. This is because most
candidates, especially the successful ones, followed the structure and steps indicated in the requirements and
performed the analysis which they were requested to do. SP&S is the key component in each section of the
report and the assessment criteria follow the requirement instructions in each section: financial analysis of the
statement of profit and loss and the accounts receivable adjustment under Requirement 1; the evaluation of the
two alternatives of the TP proposal from SWH together with a review of the assumptions given, and a reflection
on the cash flow implications together with an analysis of operational and possible business trust issues in
Requirement 2; the evaluation and assessment of the logistics for the supply of Kadar grapes from Iran in
financial, operational and strategic terms (including any business trust and ethical issues) in Requirement 3.
Stronger candidates worked through each of the steps in a logical and methodical way, ensuring that they dealt
with the points requested in adequate detail. Scripts of weaker candidates were less focused and often included
excessive or irrelevant detail, or omitted some analysis. This could be seen to apply in all sections but as always
in the financial analysis section, weak candidates appeared to spend too much time on unnecessary analysis –
“remaining within their comfort zone”, as one tuition provider acutely observed. However, the accounts receivable
issue in Requirement 1 was not such a comfort zone – barely half of the candidates achieved a passing grade
for their SP&S work on this. Requirement 2 was affected by the ability of candidates to read and apply
themselves to what they were asked to do – in effect two four-line calculations and a commentary on the ethical
and business trust implications – the scripts of weaker candidates were mathematically error-strewn (such as
subtracting numbers which should have been added together): these made disheartening reading. In
Requirement 3, a substantial number of the candidates used appropriate numerical analysis but weaker
candidates continue to ignore this aspect in their work. The business trust and ethical component was also
weak. (Inevitably any weakness in SP&S does affect the subsequent sections of AJ and C&R. However this does not mean
that a strength in SP&S will always carry into AJ and C&R.)
Applying judgement
Most strong candidates applied good judgement built on the analysis which they had conducted. In particular, in
Requirement 1 this included an appropriate evaluation of the analysis of revenue, gross profit and accounts
receivable. In Requirement 2 there was good evaluation of the assumptions which were provided and the
operational impact of the SWH contract, and a good evaluation of the business trust issues. In Requirement 3
there was a similar clear evaluation of financial, operational and strategic issues and ethical concerns.

In general, weaker candidates failed to demonstrate good skills in AJ. They failed to develop their analysis by
not evaluating assumptions or questioning the critical factors in the appropriate depth. This failure to formulate
and communicate good judgement in the report usually correlates with a failure overall.
Conclusions and recommendations
Good candidates provided logical, clear conclusions – under a heading – which followed on from their previous
analysis and judgement in that section. Good candidates also provided sound commercial recommendations,
Weaker candidates tended not to provide as many conclusions and those that were provided were brief and
rarely developed. Weaker candidates rarely offered focussed recommendations, but instead made a series of
generalised, uncommercial or somewhat scattered recommendations which received very little reward such as
“TT should lobby the UK Government for a change in their publicity about sugary drinks”.
Executive summary (ES)
Almost all candidates wrote an executive summary – which indicated they had timed their work appropriately.
Good executive summaries were appropriately aimed at the target audience – the True Taste board – and
covered the three aspects of the report concisely, highlighting the most important factors in each section. This
included for example: identifying the significant changes in 2016 revenue in the various business lines; the
importance of the sheer size of the SWH proposal in operational terms for TT; the key capacity and operational
issues and the role of Dax in Kadar’s FT. Good scripts presented each section as both a précis of original
analysis and as a summary of the context and the outcome of the work conducted in the report. Good scripts
contained clear numerical information in the ES extracted from the body of the report. These scripts included the
essential points from the judgements in the main body of the report together with clear conclusions and
recommendations for their readers.
Many weak candidates had an ES that was poor in terms of focus on the key issues or factors. These
candidates failed to present the relevant facts or figures concerning the items considered to be important from
the report (these are indicated in the previous paragraph). As always, there is the problem that attempting to
summarise a weak section of the main report is bound to lead to a weak part of the ES. For some weaker
candidates, there was also evidence of poor planning and time management but they were a small minority.
Requirement 1: True Taste financial analysis
The financial statement analysis requirement was well answered by the vast majority of candidates, with
appropriate use of an appendix (see below). However, the potential accounts receivable issue was inadequately
addressed by a significant proportion of candidates. (Some had perhaps read the line from Esme Hext stating “no
adjustment has yet been made in the management accounts” and decided that their own simplest policy was also to do
likewise and so made no attempt at any adjustment based on this information. Others displayed no awareness of the concept
of prudence for the accounts receivable or the commercial reality of the future cash flow impact of this issue.)
The opening paragraph of this requirement provided a clear pathway for structuring the financial statement
analysis comprising “TT’s revenue and gross profit (GP) by business line and overall operating profit (OP).” (emphasis
added). Most candidates were clearly prepared for this type of analysis and although the question was fully
answered, it was all too frequently a case of them over-analysing the information in both their appendix and
report. As one tutor firm observed, “Faced with a wealth of information regarding the cost of sales relating to each
division there will inevitably be some candidates who will fail to resist the temptation to provide an analysis of every single
number. Candidates who attempt this approach run the risk of becoming consumed by this requirement”. Unfortunately,
this was true. A good number of candidates were unable to resist the temptation and performed a detailed line-
by-line analysis of the cost of sales anyway (which was not required) when what was required was to step back
slightly as they performed each layer of analysis – in order to consider what would be the relevant next step. As
an example, the analysis of revenue by business line would have identified the changed sales mix. This showed
only a marginal change in AJ revenue (similarly with its overall GP) from 2015 – so it would only have required a
few lines in the report. OJ was the biggest change in terms of revenue and GP. Its fall was significant (or
disastrous or any other appropriate qualitative term) and it was this that was driving TT’s results – and it needed a
fuller commentary. (In a similar way, TP’s and FT’s revenues had increased but GP margins were either the same or
almost identical to 2015 (in addition a number of costs were linked to revenue) – thus it was only the revenue (and sales
mix) that drove the commentary; there was no need for a detailed line-by-line analysis of every cost for these business
lines.)

The request to analyse the overall OP was to ensure that attention was brought to its significant fall. Given that
S&A expenses were almost identical to 2015, the decline was entirely due to the drop in GP. However, its drop
really became crucial when the doubt concerning the customer balance of £880k had to be considered – turning
PBT into a loss (surely worth a small mention to a client!). (Ignoring this accounts receivable issue meant missing out
on two boxes of points on the Marking Key.) But even spotting its impact could lead to bizarrely humorous
comments from candidates: “the loss of this customer will improve liquidity within the business as trade receivables
would have been 61 days at the year-end (in line with the 60-day credit period given to the TP customers) rather than the 68
days which currently exists and so is placing strain on the cash flow of TT.” Would a client really appreciate that
analysis? The discussion about this issue’s impact on future cash flow was often very tentative. This section
frequently provided a good differentiation between the standards of candidates’ reports.
Requirement 2: Evaluation of new toll processing proposal from SWH
This requirement assessed candidates’ ability to evaluate the two alternatives suggested by TT for delivering
this TP proposal from SWH. The absolute size of this proposed TP contract was frequently never mentioned in
candidates’ reports. (Using the XY contract figures which indicate a possible TT fee of £1 per item processed then in
2016 TT had processed approximately 8.5 million items. The SWH proposal is for 16 million items. The proposed fee
(understated?) is 140% of current TP revenue or 30% of all TT revenue. This is a really huge contract for TT.) There was
noticeable lack of awareness by candidates of the context of this proposal. That aside, from the outset some
candidates made very heavy weather of the calculations. As one tutor firm stated, “There was nothing within this
calculation that was inherently difficult but there will have been some occasions when candidates felt unsure about which
numbers or assumptions to apply”. However, many candidates could not cope with reducing existing work by 70%
for Alternative 1, and others could not add the 2016 TP revenue of £8,551k to the proposed £12 million fee for
Alternative 2. Other mundane mathematical errors existed in abundance depending on a candidate’s starting
point – but lassitude prevailed and the Marking Key and appendix indicate the range accepted. (For a TP
proposal of this size, it would have been appropriate to work with the percentages for costs derived as overall averages
from all TP contracts for a year – rather than basing an evaluation on one small contract in 2015.)
Candidates also had to “discuss the adequacy of the assumptions … and assess the impact on TT’s business operations
and cash flow”. Given the wholesale operational changes proposed in both of the two alternatives, there was no
shortage of major assumptions and issues to consider. Good candidates, having performed correct calculations,
then evaluated all assumptions, and considered the negative effect of the SWH TP proposal on cash flow before
arriving at a considered conclusion. As well as having difficulties with the calculations, weak candidates failed to
perform adequate critical analysis of the assumptions and the operational changes. This meant that they failed
to apply appropriate judgement in this requirement. An example of a blanket caveat was “These costs are difficult
to identify and TT has little experience costing for jobs like this so how can they predict – it could increase”. This is a
very weak comment which no client would want to read.
Good candidates demonstrated their skills in most aspects of this section of their report, and scored good
marks. Weaker candidates struggled with all aspects and tended not address this requirement logically. As one
tutor astutely stated, “Candidates who diligently followed the instructions given and were undaunted by the subjectivity
of the calculations will perform well. However, this is likely to be the requirement which has the most polarised results”.
Requirement 3: Evaluation of Kadar grape airfreight proposal
Requirement 3 was an evaluation and assessment of the change from truck transport to airfreight for Kadar
grapes from Iran – this change being considered as a result of ongoing logistics problems for this contract.
Candidates had to “evaluate the financial, operational and strategic issues, including any potential business trust and
ethical issues arising from the Kadar operation managed by Dax”. Numerical and financial data were given and a
majority of candidates made sensible use of this information with a large number providing a short separate set
of workings. Airfreight was a new concept and, as one tutor firm suggested “this therefore created the desired
situation where candidates are required to react to the information provided in the Exam Paper and demonstrate their own
understanding of the situation in hand” – however, creating “the desired situation” does not necessarily lead to the
requisite demonstration by candidates of their understanding of that situation. Good candidates made
appropriate use of all relevant information in the context of Kadar grape supply. Weak students did not use the
financial information accurately. There was much confusion on the size of containers and trucks (1.5 times larger)
and from which location they came. Increasing the number of trucks by 40% (without any critical evaluation of
this significant shift) to arrive at a new increased volume proved to be a testing calculation, as was the 20%
premium on Kadar grape – which was often misapplied. Weaker candidates did not identify the critical business
trust or ethical issues, instead wrongly picking up on some of the details such as “Check appropriate controls are
in place with airfreight company to control risk of air pollution.”

Good students demonstrated sufficient professional scepticism over all the facts supplied by Dax – either
directly or the reported discussions with Kadar – correctly identifying the vested interest that Dax had in the FT
contracts. They also linked their analysis and judgement to the earlier information in the AI. Weaker candidates
did not make those links and simply accepted what Dax were suggesting and only questioned their proposed
increased fee from 20% to 25% by such comments as “this is too big” without any linkage to total revenue or the
FT contribution to TT gross profit.
This section was one where some quick, focused planning helped to structure a good answer – stronger
candidates demonstrated that effectively.
Appendices and overall paper
All answers contained appendices and the majority of candidates made good use of the numerical work from
their appendices in their reports. Most appendices for Requirement 1 were clear and relevant, as well as being
properly labelled. There was (as always) evidence of excessive financial analysis in the appendix for
Requirement 1 and some candidates clearly could not adapt or vary their standard pre-prepared schedules in
the light of the actual requirement. This meant that instead of using the segmental analysis provided in Note 1
as a framework they reverted to a pre-prepared different schedule. In a number of cases, there was the over-
analysis of cost of sales considering every item in each business line regardless of materiality or whether the
overall GP for that line had remained roughly the same – which should have obviated the need for further
analysis; this must waste a lot of a candidate’s valuable time.
The appendices relating to Requirement 2 were more variable and some were unusually messy and hard to
follow. Good appendices followed the structure which the information suggested and were a logical assembly of
the financial information for both alternatives. However, a number were very brief and poorly labelled, indicating
an uncertainty and inability to properly communicate information with the calculations. Despite the template in
Exhibit 9, the appendix relating to Requirement 2 was more variable in standard and in the worst cases
indicated a failure to analyse, or possibly understand, the AI information carefully or completely. As a result, it
attracted little credit.
Many of scripts showed brief workings for Requirement 3 as a separate schedule. In the better scripts these
presented a clear numerical summary of a candidate’s analysis of the financial and numerical information –
which provided a reassuring indication of a candidate’s clarity of thought.
Most candidates produced a well-structured document and also wrote sufficiently clearly and legibly. Only a
small minority presented “hard /impossible to read” scripts. This was a pleasing improvement for the markers.
Despite that, it is worth repeating that if a script (or part of a script) cannot be read, it cannot be awarded any
marks for that part of the answer – and that is one of most common reasons for failing the Case Study exam.
The majority of scripts met the requirements and were appropriate for TT board use. A minority made
inappropriate statements which the TT board would not have considered acceptable. As always, the top scripts
provide impressive evidence of the necessary professional skills needed to be a successful ICAEW member
and, as such, these scripts were a great pleasure to read.

APPENDIX 1
Analysis of TT’s management accounts
2016
AJ OJ TP FT Total
£000s £000s £000s £000s £000s
Revenue 7,087 14,199 8,551 9,228 39,065
Total COS 6,199 12,745 4,874 8,177 31,995
Gross profit 888 1,454 3,677 1,051 7,070
Selling & admin 6,174

Interest (613)
PBT 283
Revenue absolute change

£000s 89 -3,375 2,356 2,236 1,306
Revenue % increase on 2015 1.3% -19.2% 38.0% 32.0% 3.5%
Sales mix 18.1% 36.3% 21.9% 23.6% 100.0%
Total COS as % of revenue 87.5% 89.8% 57.0% 88.6% 81.9%
Gross margin % 12.5% 10.2% 43.0% 11.4% 18.1%
Selling & admin 15.8%
Operating margin 2.3%
2015
AJ OJ TP FT Total
£000s £000s £000s £000s £000s
Gross revenue 6,998 17,574 6,195 6,992 37,759
Total COS 6,133 13,174 3,524 6,032 28,863
Gross profit 865 4,400 2,671 960 8,896
Selling & admin 5,976

Interest (585)
PBIT 2,335
Sales mix 18.5% 46.5% 16.4% 18.5% 100.0%
Total COS as % of sales 87.6% 75.0% 56.9% 86.3% 76.4%
GM% 12.4% 25.0% 43.1% 13.7% 23.6%
Selling & admin 15.8%
Operating margin 7.7%

APPENDIX 2
Analysis of SWH TP proposal
Alternative 1
SWH
using Other
2016 30%
£000s £000s
TP revenue 12,000 8,551
Add 30% of existing revenue 14,565 2,565
Production personnel (12.1%) 1,452 311
Logistics (25%) 3,000 383
Processing costs (20%) 2,400 512
Contract costs (10%) 1,200 257
8,052 1,463
Add the 30% of “other” costs 9,515
GP 5,051
GP% 34.7
Other
Alternative 2 SWH 100%
TP revenue 12,000
Add existing revenue 20,551 8,551
Production personnel (12.1 x 2) 2,904 2,072
Logistics (25%) 3,000 1,278
Processing costs (say 20%) 2,400 1,710

Contract costs (say 10%) 1,200 855
9,504 5,915
Add the 100% of the other costs 15,419
GP 5,132
GP% 25.0

Workings for answer for Requirement 3 Using 2015 Using 2015

With no
Proposed airfreight of FT from Iran per price With no price
shipment (2017) adjustment adjustment
Existing Proposed
Iran Iran Air
Truck Container
Note
£ £
Cost of fruit & packing per truck/container 4,020 1 2,680
Truck/ Airfreight container to UK final
destination 30,720 2 17,000
Cost of fruit to UK destination 34,740 19,680

£ £ £
Negotiated gross price as at 2015 51,700 3 34,467 34,467
Less Dax's commission: 20% / 25% (10,340) 4 (6,893) (8,617)
Net price 41,360 27,574 25,850
Less cost of fruit to destination (34,740) (19,680) (19,680)
Gross profit 6,620 5 7,894 6,170
GP% 12.8% 22.9% 17.9%
Shipments = 84 x 1.5 x 140% =176 containers 84 trucks 6 176 176
1,085,96
Potential Kadar GP / contribution 556,080 7 1,389,274 4
Notes
Using 2015 as a template with no adjustments
1) Truck = 1.5 times container
2) Total transport cost (given) – 50% air
3) Gross price based on 2015
4) Agent's commission (20% / 25% / size)
5) Gross profit = contribution still OK
6) Total shipments based on 140% volume = 176 containers

November 2016 - True Taste Ltd
First Marking
DATE CANDIDATE NO.
TIME MARKER NUMBER
CC
SC
IC
ID
NA
Total 6 10 10 10 4 40
TEAM CHECKER
LEADER SIGNATURE
Changes made? c
ID = Insufficiently Demonstrated 1w
IC = Insufficiently Competent 2w
SC = Sufficiently Competent 3w
CC = Clearly Competent 4w
Executive summary
Review of True Taste's financial performance Evaluation of SWH toll processing proposal
w Comment on total revenue AND GP/GP% (with figures) w States GP/GP% for Alt 1 AND Alt 2 (figures)
w Comment on stream revenue AND GP/GP% (with figures) w Evaluate adequacy of assumptions
w OP/OP%: significant decline / % decline / getting close to BE w Alt 1: comment on operational issues / timings (contracts)
w Mix: comment on change in revenue/GP (figure) w Alt 2: comment on operational issues / timings (staff)
w Need to address falling OJ sales / impact of sugar awareness w Significant contract (£12m) / WCapital implications
w Costs: increasing materials/logistics / review allocation w Concludes on way forward
w Bad debt prov'n: recognise 100% in 2016 / OP impact / OD impact w Concludes/recommends on ethical/business trust issue
w Recommendation re bad debt / cashflow w Other commercial recommendations

(talk to bank / talk to customer / legal advice / put on stop)
Evaluation of airfreight proposal
w Identifies revenue/GP/GP% (figure)
w Significant part of FT/TT
w Evaluate cost assumptions
w Identifies key operational/strategic issues

(capacity / quality / WCapital / airfreight benefits & risks)
NA ID IC SC CC
w Reliance on Dax
w Concludes on way forward
w Concludes/recommends on ethical/business trust issue
w Other commercial recommendations
NA ID IC SC CC
CC
SC
IC
ID
NA
Total 6
REQUIREMENT 1 - Review of True Taste's financial performance
Uses AI / EP information (report / appendix) Financial analysis: revenue (report)
w Total revenue: up £1,306k AND up 3.5% w AJ: up £89k / 1.3% AND stable
w Total GP: down £1,826k AND down 20.5% w OJ: down £3,375k / 19.2% AND significant fall
w Total OP: down £2,024k AND down 69.3% w TP: up £2,356k / 38.0% AND significant increase
w GP%: 18.1% v 23.6% OR w FT: up £2,236k / 32.0% AND significant increase

OP%: 2.3% v 7.7%
w Revenue mix: (2016 v 2015 comparison)

OJ 36.3% v 46.5% / down 10.2% OR
TP 21.9% v 16.4% / up 5.5% OR
FT 23.6% v 18.5% / up 5.1%
Na iD Ic Sc Cc NA ID IC SC CC
Identifies business issues and wider context Financial analysis: GP/OP (report)
w Brexit: currency movements / trade issues w AJ: up £23k / 2.7% OR stable 12.5% v 12.4%
w Awareness of sugar content / sugar tax on soft drinks w OJ: down £2,946k / 67.0% OR down to 10.2% v 25.0%
w Supermarkets: accepted 10% price increase / powerful w TP: up £1,006k / 37.7% OR stable 43.0% v 43.1%
w Industry: 2% decline in soft drink sales in 2014 and 2015 w FT: up £91k / 9.5% OR down to 11.4% v 13.7%
w OD limit £2m w Selling admin exp: up £198k / 3.3% AND in line with revenue
w Own research with source

-
NA ID IC SC CC
Analysis of trade receivable issue (report)
w 100% impairment (£800k)
Na iD Ic Sc Cc
w Reduces OP to £96k / OP% to 0.25% / very close to BE
w Will turn PBT into loss
w Cashflow impact: none in 2016 / impact going forward
w Significant: 9.4% total TP revenue / 11% of TT trade receivables
NA ID IC SC CC
w Total revenue growth trend down (v 25% in 2015) w Revenue: comment on total AND by stream (figures)
w OJ: down despite marketing campaign w GP/GP%: comment on total AND by stream (figures)
w TP uses spare capacity / started in 2014 w OP/OP%: significant decline / getting close to BE
w FT: volume increase (as well as price) w Comments on impact of bad debt (loss/cashflow/OD)
w Small total revenue increase masks large stream variation
w Mix: AJ smallest % / OJ largest % / TP FT growing %
Evaluation of GP/OP Makes recommendations
w Costs rising faster than revenue w TP: focus on growing/high-margin stream
w Materials cost: reason eg oranges up / apples down w OJ: investigate lower-sugar alternatives
w Logistics cost: reason eg activity mix / fuel price / Iran w Further analysis of stream costs needed
w GP%: affected by OJ GP% fall / change in revenue mix w Review cost allocations / use ABC
w OP/OP%: fallen in line with GP/GP% w Other recommendations
w OP: significant decline / getting close to BE point
NA ID IC SC CC
Evaluation/recommendations: trade receivable issue
w May cause OD breach
w Talk to bank about working capital needs NA ID IC SC CC
w Issue of continuing trade / maybe more than £800k prov'n

CC
SC
w Ensure no further goods processed/despatched
IC
ID
w Contact customer to try to resolve issue / legal advice NA
Total 10
w Review credit control procedures
NA ID IC SC CC
REQUIREMENT 2 - Evaluation of SWH toll processing proposal
Uses AI / EP information (report) Calculation of Alternative 1 (report / appendix)
w Alternative 1: means cancelling 70% existing contracts w Revenue: £14,565k (£12m + £2,565k)
w Alternative 2: means extra shifts / more staff w Costs: range £9.0m - £11.0m
w £12m is 140% of 2016 TP revenue / >30% total revenue w Calculates GP (own fig)
w Contract is for one year w Calculates GP% (own fig)
Describes business issues and wider context Calculation of Alternative 2 (report / appendix)
w Industry: 16% growth in flavoured water drinks in 2015 w Revenue: £20,551k (£12m + £8,551k)
w TP increasingly important w Costs: range £15.0m - £16.0m
w 2016 decline in OJ has created spare capacity w Calculates GP (own fig)
w TP GP% 43% / TT GP% 18.1% w Calculates GP% (own fig)
w Year end OD £1,296k / OD limit £2m

-
NA ID IC SC CC
Comments on ethical and business trust issues
w Source of SWH water open to question
NA ID IC SC CC w Low sugar levels claim by SWH
w Citrus Juice Processors: response to their supply chain issue
w Use of plastic bottles may not be environmentally friendly
w Alt 1: difficult to cancel established contracts / possible penalties
w Alt 2: potential impact on staff welfare
NA ID IC SC CC
Evaluates all assumptions Draws conclusions (under a heading)
w £12m: negotiable / minimum / £0.75 v £1 per bottle w Significant contract (£12m)
w 16m bottles: volume not guaranteed / may be seasonal w GP/GP% for Alt 1 AND Alt 2 (figures)
w Logistics: 25% looks high/low (with reason) w Concludes on operational/cashflow impact
w Personnel: 100% looks high/low (with reason) w Concludes on ethical/business trust issues
w Compares calculated GP% to TT / TP OR Alt 1 v Alt 2 w Concludes on way forward
w Changes in assumptions will affect profit/margin
Evaluates operational and cashflow impact Makes recommendations
w High volume contract / economies of scale w Review any market research / backup for costs
w Risk of over-reliance on SWH w Negotiate contract price
w Timing: unknown start date / need time to organise w Negotiate other T&C (eg credit terms)
w Alt 1: deselection criteria / customers may not return w Consider capacity / start dates / operational issues
w Alt 2: new staffing costs eg training / recruitment w Discuss increased WCapital requirement with bank
w Cashflow: impact of extra 30 days credit / pressure on OD w Due diligence on SWH
NA ID IC SC CC
w Other recommendations
Evaluates ethical/business trust - recommendations
w Investigate circumstances of spring 'discovery'
w Investigate evidence for low-sugar claims

NA ID IC SC CC
w Perform supplier audits / risk of damage by association
w Discuss glass/recycled/recyclable plastic with SWH CC

SC
IC
w Alt 1: disgruntled customers may damage reputation
ID
NA
w Alt 2: consult with workforce about shift working
Total 10
NA ID IC SC CC
REQUIREMENT 3 - Evaluation of airfreight proposal
Uses AI / EP information (report/workings) Financial assumptions and issues
w Revenue: £34,467 / £34,320 w Own figure for total revenue/GP
w Agent's commission: 20% / 25% w Own figure for GP%
w Cost of fruit: £2,640 - £2,688 w Fruit: based on 2015 prices
w Cost of logistics: £17,000 w Logistics: estimate eg containers per flight / packaging
w Number of containers: 176 w Forecast volume increase of 40%
w Grapes to be sold at 20% premium (negotiated by Dax)
Describes business issues and wider context Operational and strategic assumptions and issues
w Fruit trading increasingly significant (up 32%) w Dax responsible for all operational matters
w BRIX / GAP quality certification w Quality issues: delays / contamination
w Forex / currency issues / airfreight in US$ w Lack of treasury experience
w Overland transport: disruption / delay / inc costs w Small locally-managed airfreight company (eg capacity)
w Own research with source w Reduces reliance on Jat / increases reliance on Kadar
-
NA ID IC SC CC
Business trust and ethical issues
w Assumptions provided by Dax
NA ID IC SC CC
w Kadar's use of local agency for quality control
w Certification doubts / questionable BRIX documents
w Alborz Air are not known to TT
w Costs include 'facilitation' fees / cash payments
w Environmental impact of airfreighting v trucks
NA ID IC SC CC
Evaluation of financial assumptions and issues Draws conclusions (under a heading)
w Significant part of FT/TT w Concludes on revenue/GP (figure)
w Compares own GP% to FT 11.4% / TT 18.1% w Concludes on operational/strategic issue
w Fruit: looks low eg actual 2016 20% increase w Conclude on ethical/business trust issue
w Logistics: comparability / completeness of costs w Concludes on way forward
w 40% seems optimistic eg harvests, capacity, demand
w Dax 25% fee: consider reasonableness / steep increase
Evaluation of operational and strategic issues Makes recommendations
w Reliance on Dax w Market research on price/volume of sales
w Quality affects reputation / supermarkets may reject grapes w Further back-up needed for costs
w Increased activity will need funding / working capital w Negotiate T&C (eg Dax fee%)
w Airfreight: benefits/risks eg speed, security, cold storage w Consider alternative agent to Dax
w Link with Strategic Review issues w Consider new fruit suppliers / products
w Other recommendations
NA ID IC SC CC
Evaluation of ethical issues / recommendations
w Dax are not independent / own agenda
w Renew due diligence on Kadar NA ID IC SC CC
w Ensure Kadar implement quality control procedures
CC
w Need due diligence on Alborz Air SC
IC
w Investigate 'facilitation' fees / not acceptable to TT ID
NA
w Damage reputation for sustainability Total 10
NA ID IC SC CC
w Well presented table of £s AND %s w Sufficient appropriate headings
w Overall analysis: revenue AND GP/GP% AND OP/OP% w Appropriate use of paragraphs / sentences
w Stream analysis: revenue AND GP/GP% w Legible
w Calculates revenue mix w Correctly numbered pages
w Well presented calculations w Relevant disclaimer AND report from PH
w Numbers clearly labelled w Formal language for the board
w Calculates Alternative 1 w Tactful / ethical comments
w Calculates Alternative 2 w Reasonable spelling / grammar
CC
SC
IC
ID
NA
Total 4
In the commentary below extracts from the script are shown in quotation marks and a different
font: spelling, grammar, sentence construction and punctuation from the original script have
been retained. The commentary follows the order and numbering of the script with references to
the topics in the marking key. It should be read in conjunction with the review of the Second
Illustrative Script and also the full Examiners’ Report for this session.
This script passed the exam. It is marginally below average length but as always this depends
on the actual handwriting – which in this particular script was fully readable with very few
crossings-out. This candidate achieved 25 competent grades (Clearly Competent (CC) and
Sufficiently Competent (SC)) balanced across the whole report. Good passing grades were
obtained in each of the three Requirements. In terms of professional skills (maximum 30) the
grades were as follows: in 5 out of 6 grade boxes for Assimilating and Using Information (A&UI);
in 7 out of 9 for Structuring Problems and Solutions (SP&S); in 6 out of 9 for Applying
Judgement (AJ); and in 2 out of 6 for Conclusions and Recommendations (C&R). This
candidate achieved a sufficient number of competent grades in the three Requirements:
Requirement 1 (review of True Taste’s financial performance); Requirement 2 (evaluation of
SWH Toll Processing (TP) proposal); and Requirement 3 (evaluation of air freight proposal).
In the original script the 14 pages of the main body of the report are balanced between the three
Requirements – with Requirement 1 and Requirement 2 being almost equal in length – and,
together with the appropriate appendices for both requirements, demonstrate clear planning.
This report starts with an appropriate front page title and terms of reference section – the report
is from Porterfields Hunter (PH). The executive summary (ES), which follows, has a clear
structure and is split fairly evenly between the three topics over the three pages.
The summary of the financial analysis of the TT management accounts contains some
appropriate numerical analysis covering revenue, GP and OP but rather surprisingly does not
mention the disastrous drop in OJ. The reference to the trade receivables issue is vague
because it does not deal specifically with future cash flow. It is a logical and succinct summary
of TT’s financial performance but the conclusions and recommendations are light.
The section dealing with the new SWH TP proposal contains the appropriate numerical
information for both alternatives but it does not evaluate the operational issues sufficiently or
question the key assumptions. The sentence “The calculation is primarily based on capacity
restriction but this cannot be predicted accurately for 2017, so we should be sceptical over these
calculations” does not communicate anything precisely. However, the working capital implications
are clearly identified and the conclusions and recommendations are sufficient.
In the evaluation of the airfreight issue, the candidate identifies some critical numerical factors
but does not indicate the overall important size of this contract.
The ES covered all three areas appropriately and used some numbers in all sections without
always identifying the key financial points or the operational magnitude of the issues.
To score better grades on this section, the candidate could have:
 identified the key issue of the significant decline in OJ activity, revenue and GP numerically;
 commented on the huge operational impact that the SWH TP proposal would have;
 commented on the reliance on Dax in the FT operation.

TT financial analysis [Requirement 1]
The financial statement analysis in this section is accompanied by a good Appendix 1 (see
detailed commentary below). This appendix supports the comparative analysis of the items
requested in the statement of profit or loss in both percentage and absolute terms. As well as
being based on a good appendix this script also integrates information from the AI with the EP
information to provide excellent relevant context in this section (and throughout the report).
This section of the report starts by providing an analysis of overall revenue followed by a
business line revenue analysis. It is a well-constructed section with clear references to the
qualitative changes in the individual business lines and the changes in sales mix: “Toll
processing and fruit trading increased sales mix – higher by 5.5% and 5.1% respectively – giving a total
proportion of 21.9% and 23.6% respectively”.
The analysis of GP/OP is similarly accurate and focused at the right level: it does not delve into
unnecessary detailed cost of sales analysis, but provides a good overview of issues. There is
also a clear summary of the issues affecting the OP and in particular S&A: “Overall operating
profit has decreased significantly by £2,024k …Selling and administrative expenses increased by 3.3%
which was a £198k increase. This is around the same as the increase in revenue so appears reasonable.
Therefore, this profitability has decreased primarily due to gross profit margin falling.”
The candidate is perhaps less focused on the analysis of the trade receivables issue but still
identifies the key cash flow aspect: “The cash flow in the future may well be affected. It may not
receive this cash and be operating at £800k deficit in its usual cash position. This would cause TT to
breach their £2m overdraft limit and cause liquidity issues.”
The report has good judgement throughout this section but the conclusions do not follow the
overall revenue and business stream analysis with appropriate numbers. The recommendations
are rather weak, being either generalised (“identify new supplies of grapes”) or vague (“review
pricing of products to increase revenue”). Apart from these elements, this was a strong section of
the report.
To score better grades on Requirement 1, the candidate could have:
 provided the appropriate figures in the conclusions;
 provided recommendations identifying that the focus should be on growing the high-margin
business lines (eg TP).
Evaluation of the new SWH TP proposal [Requirement 2]
In A&UI the candidate does not provide a clear indication of the overall magnitude of the
potential revenue from this one-year contract against any current financial yardstick, or a clear
summary of the key operational aspects which each alternative would require. The financial
data analysis in this section is accompanied by Appendix 2, which provides some correct
information for the calculations but contains a number of basic errors (the revenue for
Alternative 1 and the GP for Alternative 2) which cause the calculations to fall outside the range
indicated in the Marking Key.
However, overall, the analysis of the two alternatives is sufficient to obtain adequate grades in
SP&S. In AJ, the evaluation of assumptions is good, with the candidate picking up on the
analytical details such as “The final revenue figure of £12m works out at around £0.75 per bottle which
is significantly less than what TT is usually used to” and “the proposal states a 25% surcharge on logistic
costs. This may seem too small when the customers are nationwide and so logistic costs may be
significantly more expensive”. However, the evaluation of the operational and cash flow impact is
not really adequate, given the potentially disruptive nature and materiality of this contract.

There are some relevant points identified in the analysis of ethical and business trust by
implication such as: “TT being associated with illegal activities will not look good for TT’s reputation
and as a result they should ensure SWH’s water source is legal”. However, there is only a scattered
analysis of the business methods or behaviour of either SWH or Citrus Juice Processors.
The conclusions in this section are good including the perspective “However, the calculation is
based upon assumptions about capacity but this may well change as it ultimately depends on orange juice
demand in 2017”. Although the ethical and business trust recommendations are adequate (under
AJ), the other recommendations are too thin.
 identified the size of this contract in terms of revenue against current TP or overall revenue;
 identified the huge change in TT operations needed to deliver a contract for 16 million items
in one year;
 reflected on the appropriateness of sensitivity analysis (an unnecessary calculation in the

appendix) and its evaluation given that the two Alternatives provide a range of answers;
 Assessed the operational issues: capacity and start date as well as increased working
capital requirements with the bank.
Evaluation of airfreight proposal [Requirement 3]
The candidate has provided a very effective and accurate calculation relating to this topic as a
separate working (see below) and as a result scores very well in A&UI. Similarly, the
identification of business issues and wider context throughout the script is good.
However, despite the earlier good analysis, little is carried into evaluation – with the result that
the candidate is weak on the evaluation of financial assumptions and there is an absence of
logical, critical criteria in this section.
There is some good analysis of the business trust and ethical issues in respect of facilitation
fees which also carries into AJ: “Unfortunately, going by airfreight does not eliminate the use of
security charges and facilitation payments. These payments may be seen to be bribes and as per the UK
bribery act 2010 is illegal. Illegal forms of business are severely looked down upon and negative public
image may occur.”
Apart from at the outset and in the working, the candidate uses very few figures in the body of
the report. However, the conclusions covered most of the main issues but despite previous
good analysis the recommendations were not sufficient.
 evaluated the numerical information provided in the EP with the AI and other EP information
for reasonableness;
 analysed and evaluated the business trust and ethical concerns more thoroughly;
 made the recommendations more appropriate: confirming costs; considering another agent.
Appendices
Appendix 1
This relates to the financial statement analysis (Requirement 1) and provides a columnar
analysis of the key figures from TT’s statement of profit or loss for 2016 compared with 2015
The analysis of movements between the years is made in both absolute and percentage terms

and throughout this is a model of clarity and brevity – which shows a tightly focused and an
excellent analytical process. The only area of weakness was that the candidate spent time
considering trade receivables days instead of considering the impact of any write-off on OP and
future cash flow – a small flaw in an otherwise top quality schedule of analysis.
Appendix 2
This appendix relates to the two alternatives for the new SWH TP proposal. Unfortunately, this
is a candidate who made a basic error by using 70% of existing contracts rather reducing those
contracts by 70%. Some other mathematical errors occur in Alternative 1 and then are
compounded by using errors from Alternative 1 in the calculation for Alternative 2 (these errors
mean that both cost calculations are outside the range permitted in the Marking Key – this is
penalised in the report itself). Although the numbers are flexed, this was unnecessary because
the two Alternatives already provide the opportunity for reflective consideration of the range of
possible figures. Despite the errors, this appendix was sufficiently competent.
Workings for R3 (appendix)
This short set of relevant and accurate financial workings gave this candidate a clear basis for
the information discussed in the report. From this strong starting point the candidate achieved
top grades in A&UI in this section of the report.
Overall paper
This script was well structured and very easy to read. It followed a logical format in answering
the detailed requirements. There were a few lapses in style – candidates should try to imagine
they are addressing a real client’s board to avoid these lapses – but overall the report was fully
appropriate for the TT board. The report had appropriate brevity, was balanced in length, with
good instances of commercial awareness in the report. Judgement varied throughout but was
well above the cohort average. The candidate obtained competent grades across all
Requirements and this reflected the balanced nature of the report and the good standard of the
script throughout.

To: The board of True Taste Limited
Prepared by: Porterfields Hunter
Date: 9th November 2016
Title: Financial review and strategic opportunities
Disclaimer:
This report has been prepared for the Board and should not be distributed to any other parties without
prior written consent. No liability can be accepted in the event of such distribution.
1 Executive Summary
1.1 Evaluation of 2016 performance
This year revenue has increased by £1,306k or 3.5% increase. This is due to increased capacity in toll
operations and higher sales volume in fruit trading due to greater supply.
Gross profits have significantly fallen by £1,826k representing a 20.5% decrease. Its profitability has
dropped by 5.5% to 18.1%. The primary driver is the higher fruit costs due to currency fluctuations.
Operating profit has also fallen significantly by £2,024k which is a 69.3% decrease. Operating profitability
has fallen by 4.5% to 2.3%. This is primarily due to lower gross profitability and marketing.
Trade receivables increased marginally by £133k or 1.9%. Credit control has improved but the
outstanding balance of £800k may cause future liquidity issues.
Conclusion and recommendations:
Overall TT going forward should control costs more and try to find new ways to sustain demand.
Recommendations:
- Performed detail cost review
- Negotiate outstanding balance with customer.
1.2 Evaluation of toll processing proposal
Financially, alternative 1 is more attractive as the gross profit margin is higher at 40.5% compared to
alternative 2’s 39.1% profitability. The gross profit of alternative 1 is £7,276k which is less than alternative
2 of £8,036k but profitability is more important, as it shows efficiency.
The calculation is primarily based on capacity restriction but this cannot be predicted accurately for 2017,
so we should be sceptical over these calculations.
There is a large concern with cash flow as SWH are demanding excessive credit days which would likely
cause overdraft limit to be breached.
Ethically, TT should ensure SWH are not performing illegal drilling as TT should distance themselves
from illegal activities that may contaminate water.
Conclusion and recommendation
Going forward, TT should not accept the proposal yet but to get further assurance over the ethicality of
operations and credit limit.
Recommendations:
- Negotiate with SWH a more appropriate credit limit.
- Discuss with SWH whether illegal drilling has been used.

1.3 Evaluation of airfreight proposal
The airfreight proposal is highly lucrative with a gross profit margin of 17.9%, gross profit per container of
£6,170k and total gross profit of £1,088k. This is considerably better than previous profitability of 12.8%.
The proposal unfortunately exposes TT to a high level of foreign exchange risk and this can fluctuate
profits to become negative and be very uncontrollably costly for TT.
Airfreight is not ethically responsible way of distribution as there are high levels of air pollution from this.
This may adversely affect public image of TT’s claim they are a socially responsible organisation that
respects the environment.
Conclusion and recommendation
Going forward, TT should accept the proposal to reap financial rewards but should also act to correct any
ethical problems of environment by contributing some sustainability initiatives.
Recommendation:
- Discuss with Dax about the use of bribery and TT’s stance on the matter.
- Engage in sustainability with AA
- Hedge foreign exchange risk
2 Evaluation of 2016 performance
Please see all calculations in Appendix 1.
2.1 Revenue
Overall revenue has increased by £1,306k equivalent to 3.5% increase from last year. This growth
exceeds the annual sales decline of 2% showing good performance in the industry. However, the revenue
growth is significantly below last year’s growth of 25.6%.
For apple juice, revenue has increased by £89k which is equal to a 1.3% marginal increase. Apple juice
has maintained its market perhaps as a result of its new website and also word of mouth continuing.
Orange juice has seen a significant decline of £3,375k which is equal to a 19.2% decrease in revenue.
This has primarily been attributed to consumers becoming increasingly aware of potential health
problems caused by excessive sugars. In fact scientific experts have stated that sugar intake should be
halved (BBC), this may have further pushed demand down.
Toll processing revenues have seen a significant increase of £2,356k (38.0% increase). This is explained
due to the excess capacity from orange juice downturn being utilised. This is good use of capacity as toll
processing has the largest profitability. However, some may argue that this increases TT’s conflict of
interest within the industry.
Fruit trading has seen a £2,236k increase in revenue which is a 32.0% increase. Revenue of fruit trading
depends on supply of fruit and this year TT imported 8 more containers of Jat grapes and 24 more
truckloads of Kadar grapes. This extra volume has boosted sales volume and revenue.
In terms of revenue mix, despite the downturn in orange juice demand, it remains the highest revenue
stream. Toll processing and fruit trading increased sales mix – higher by 5.5% and 5.1% respectively –
giving a total proportion of 21.9% and 23.6% respectively.
2.2 Gross profit
Overall gross profit has decreased significantly by £1,826k which is a 20.5% decrease. This is
disappointing as gross profit saw a 35.5% increase last year. In terms of gross profit margin overall it has
fallen by 5.5% to 18.1% from 23.6%.
Apple juice has seen a gross profit of £888k, which is £23k higher or 2.7% increase. Gross profitability
has marginally increased by 0.1% this year giving a gross profit margin of 12.5%. This may be expected
as apple juice is their original core business and it is unsurprising to see it stabilise.

Orange juice has seen a drop in gross profit of £2,946k (67.0% decrease). The profitability has dropped
by 14.8% to 10.2%. The decrease in gross profit can be explained by orange juice drop in demand. Its
downturn in profitability may be explained by the Spanish suppliers commanding higher prices as it was
stated that TT were expecting this last year. Further to this, lower volume may have decreased
economics of scale. Notably gross profit has dropped below the £4m mark for the first time and
profitability has continued to drop below 30%.
Toll processing has increased gross profit by £1,006k, or 37.7%. Gross profit margin has decreased by
0.1% to 43.0%. This is marginal. They have maintained a steady profitability as toll processing fees are
always a mark-up on costs.
Fruit trading has £91k higher gross profits equivalent to a 9.5% increase. Profitability however has
dropped by 2.3% to 11.4%. This drop is likely due to increased fruit prices as a result of local growing
conditions and global harvest factors being adverse as well as currency fluctuations causing suppliers to
increase prices. Further uncertainty in the economy will cause this to continue. The increased logistical
costs will have damaged the profitability as well as journeys take longer.
2.3 Operating profit
Overall operating profit has decreased significantly by £2,024k which is 69.3% decrease. Operating profit
margin has dropped by 5.4% to 2.3%. This is a large drop in profitability.
Selling and administrative expenses increased by 3.3% which was a £198k increase. This is around the
same as the increase in revenue so appears reasonable. Therefore this profitability has decreased
primarily due to gross profit margin falling.
TT has stated that they expected selling and administrative expenses to remain around the 2015 levels
but has increased slightly perhaps due to an increased marketing campaign that Esme mentioned.
2.4 Trade Receivables Issue
Trade receivables have increased marginally by £133k or 1.9%. Despite the £800k outstanding balance it
appears TT have controlled trade receivables quite well.
We can see that despite the increase in balance, trade receivables days have dropped by 1 day showing
stronger credit management this year. This year trade receivables days stands at 68.2 days.
The £800k is significantly 11.0% of the trade receivables balance. Therefore is a large contributing factor
to increased receivables.
The operating profit currently remains unaffected as an accruals basis is used for operating profit but if
the receivable is written off then it would decrease it by £800k.
The cash flow in the future may well be affected. It may not receive this cash and be operating at £800k
deficit in its usual cash position, This would cause TT to breach their £2m overdraft limit and cause
liquidity issues.
Importantly, this lack of cash means a lack of investment opportunity for TT.
2.5 Conclusion
To conclude, revenue has overall increased by £1,306k which is a 3.5% increase. This has mainly been
driven by increased toll processing operations and higher supply of fruit trading.
Gross profits have significantly decreased by £1,826k which is a 20.5% decrease. Gross profit margin
has fallen by 5.5% to 18.1%. This has primarily been due to lower sales volume and also increasing fruit
costs due to currency fluctuations.
Operating profit has decreased significantly by £2,024k representing a 69.3% decrease with its
profitability dropping by 5.4% to 2.3%. The primary cause of this is the knock on effect of lower gross
profit margins and also higher selling and administrative expense due to marketing.
Trade receivables has increased marginally by £133k or 1.9%, but credit control has improved. The
£800k outstanding balance is significant and may cause future cash flow liquidity problems.

Overall, demand has performed well this year but TT have struggled to control their costs as a result of
external factors.
2.6 Recommendations
 Review pricing of products to increase revenue

 Perform detailed cost review
 Identify new suppliers of grapes
 Negotiate with customer about outstanding balance
 Negotiate with bank for further liquidity
3 Evaluation of new toll processing proposal
3.1 Financial impact
As in the calculations in appendix 2, alternative 1 produces a gross profit for the year of £7,276k whilst
alternative 2 produces a gross profit of £8,036k. On the face of it, it may appear that on an absolute basis
alternative 2 is better as it produces a higher profit.
However, looking at gross profit margin, alternative 1 has a gross profit margin of 40.5%, whilst
alternative 2 is 39.1%. On this basis alternative 1 is better.
Notably the taking on of this proposal decreases the gross profit margin of toll processing which is usually
at 43.0%. This means that these contracts are less efficient but do produce higher profits of £3,599k more
(97.9%) increase under alternative 1 or £4,359k more (118.5%) under alternative 2.
On a risk perspective, if alternative 1’s cost increases by 67.9% then no gross profit will be made. If
alternative 2’s costs increase by 64.2%, then no profit will be made. This makes alternative 1 more risky.
3.2 Assumptions
All these calculations are based on 2016 capacity, it may well occur that orange juice further decreases
their demand allowing for a greater level of capacity and no opportunity cost which would increase profit
levels.
It may not be possible to simply double production personnel costs as overtime cannot be excessive and
TT may have to hire new staff who may be less efficient. The associated training costs may also increase
costs. This would change the gross profits expected from the proposal.
The final revenue figure of £12m works out at around £0.75 per bottle which is significantly less than what
TT is usually used to as the typical XY contract is usually at £1 per bottle. This is significantly lower mark
up than expected.
The proposal states a 25% surcharge on logistic costs. This may seem too small when the customers are
nationwide and so logistic costs may be significantly more expensive. This would change gross profit.
Further to this, TT’s machinery may not be suited to mineral water as it typically does juice. This may
cause problems in production and interference with their complex timetables. This would increase costs
decreasing gross profit.
3.3 Business Operations and Cash Flow
By accepting this proposal it appears TT would be working at full capacity and this may adversely impact
the quality of the service causing customer complaints and disputes.
By introducing a 90 day credit term, this would severely impact TT’s cash flow position. With TT already in
overdraft, this would push them closer to the £2m overdraft limit. With £12m being 6 times the overdraft
limit, TT should consider when they can gain access to short term funding before accepting the proposal.
Another operational issue is that it is ultimately performing work for a competitor. This may cause conflict
of interest to occur and may not be good for the sustainability of TT’s growth.

Under alternative 1, reducing other toll processing work by 30% may be met with unhappiness by
previous loyal customers. They may not react well, and cause a loss of goodwill.
3.4 Business Trust and Ethical Issues
The new product has low sugar levels and producing this may be seen to be ethically responsible as TT
are producing healthy drinks to promote the health of the community and population. This will help
enhance reputation.
Waste has become a very topical topic as seen in the waste dispute article. Companies should be held
liable for their waste and as part of a supply chain management, TT should look to confirm with SWH how
their waste is managed and ensure it is appropriate before proceeding.
It appears that there has been a large increase in the level of illegal drilling for the water. As this is illegal,
TT being associated with illegal activities will not look good for TT’s reputation and as a result they should
ensure SWH’s water source is legal.
Water from certain sources cannot be labelled as ‘natural spring water’ given that toll processing usually
includes packaging the item, then TT should ensure that the labelling does not mislead any consumers as
this will reflect badly on TT.
Health is an important aspect as consumers become more and more concerned about health. If the water
is contaminated by illegal drilling then TT may be seen to process contaminated water and this may also
contaminate other products. Any use of contaminated water will be looked down upon by the public and
TT would be seen to be ethically irresponsible.
3.5 Conclusion
Calculations show alternative 1 produces a lower overall profit but profitability compared to alternative 2.
In this case, higher gross profit margin makes alternative 1 more attractive. Alternative 1 has gross profit
of £7,276k and profitability of 40.5%. Alternative 2 has £8,036k and 39.1% respectively.
However, the calculation is based upon assumptions about capacity but this may well change as it
ultimately depends on orange juice demand in 2017.
In terms of operations and cash flow, the 90 days credit limit is excessive and will likely cause TT to
breach their overdraft limit.
Ethically there has been much concern over the illegal drilling of water. TT should be associated with any
of this illegal activity and should seek clarification from SWH.
Overall, we would recommend TT not to accept the proposal until ethical issues and credit limit is
discussed.
3.6 Recommendations
- Discuss with SWH their source of water and determine if it is from legal sources.
- Discuss whether there is any mislabelling with SWH.
- Perform regular cash forecasts to project whether £2m overdraft limit will be breached.
- Negotiate with SWH about the pricing and the excessive credit of 90 days.
4. Evaluation of airfreight proposal
Please see all calculations in appendix 3
4.1 Benefits
Financially each container will produce £6,170k of gross profit. Producing a total profit of £1,088,388 for
all the containers transported. Looking at the profitability of each container compared to trucks before the
profitability is 5.1% higher compared to the use of trucks. New profitability is 17.9% compared to old of
12.8%. This makes air transport much more efficient and financially viable.
Strategically, it would be wise to increase fruit trading operations as it would further diversify operations
away from orange juice as orange juice’s demand is beginning to fade as a result of more health
conscious consumers. This would allow TT to be more sustainable in the future.

Operationally, airfreight is much more reliable as it would no longer be affected by internal unrest in Iran
and Turkey. The recent military coup attempt in Turkey (Telegraph) shows the continued problems this
may have. Fixing this would allow more stable revenue and cash generation to fix cash flow problems.
In an operational perspective, air freight journeys are to be more rapid and as a result freshness and
quality of fruit can be preserved enhancing TT’s reputation. Further, this means that less pesticides have
to be used ensuring a healthier fruit that supermarkets are less likely to reject. As noted from European
Times article about UK supermarkets rejecting fresh fruit imports.
4.2 Risks
Financially, 50% of total costs would now be in a foreign currency and this increases TT’s exposure to
foreign exchange risks. The total cost would be likely to fluctuate and cause gross profits to change
depending on the market. Introducing external risks is not favourable on the financial aspect of TT.
Extensive security checks are still an operational risk for TT, as it appears from the ‘The real cost of
airfreight’ article explaining that delays may still be possible, which may adversely impact the quality of
grapes as they may perish before arrival.
Concentrating further supply in one particular grape grower: Kadar may not be seen as being very
diversified. This is risky as if Kadar was adversely affected then a large amount of fruit trading would be
affected. Such a large reliance should not be placed purely on Kadar.
Fruit trading operations are not the core competency of TT. This makes TT less able to use expertise or
enhance the fruit juice brand of TT. It increases reliance on Dax and they are able to achieve higher fees
which is concerning. Having one company that TT are over reliant on is very risky especially where this is
not a prime core competency.
4.3 Ethical Issues
Ethically, air freight has the highest pollution of all forms of transport. Using the airfreight may cause
excessive amounts of air pollution that the public looks down upon. This will adversely affect the public
image of TT if consumers found out about the use of airfreight when trucks were possible. This would
contradict claims of being socially responsible and respective of the environment.
Unfortunately, going by airfreight does not eliminate the use of security charges and facilitation payments.
These payments may be seen to be bribes and as per the UK bribery act 2010 is illegal. Illegal forms of
business are severely looked down upon and negative public image may occur. Other suppliers as a
result may not wish to deal with TT.
It appears there may be potential of GAP and BRIX incorrect certification. Some suppliers have been
falsifying pesticide amounts by spraying these after the relevant certification. This may cause unsafe
products to be given to supermarkets. If this occurs, then it would be very bad on TT to be selling unsafe
fruits and this may cause supermarkets to avoid TT.
Further to this, it appears under airfreight security, security can be too relaxed and such causes the fruit
to be potentially interfered with and contaminated. Selling fruits that have been interfered through bad
security would reflect badly on TT as they are selling potentially unsafe fruit.
4.4 Conclusions
To conclude, the airfreight proposal is very attractive producing £6,170k of gross profit per container. A
total profit of £1,088k and a 5.1% higher gross profit margin of 17.9%. This makes airfreight much more
efficient and attractive.
However, this proposal exposes TT to large amounts of foreign exchange risk. Half of the logistical and
distribution costs will be in foreign currency, which is significant and will cause profits to fluctuate. This is
especially relevant as the EU referendum has caused significant trade uncertainty in UK (BBC).
Ethically airfreight is highly polluting and air pollution is moving up in the public’s attention. This may
reflect badly for TT if consumers knew about this and decrease sales and profit. This contradicts TT’s
claim that they are socially responsible.

Overall, TT should go ahead with the proposal due to the attractive financial benefits but should ensure
they are contributing ethically to combat air pollution such as creating other environmental initiatives.
4.5 Recommendations:
 Investigate ways to hedge foreign exchange risk

 Negotiate with Dax about agent fee
 Discuss with Dax the use of bribery and TT’s stance on this
 Engage in further sustainability initiatives
 Independently test pesticide level of fruits
 Stress to Dax the importance of security of the containers
 Negotiate with AA a low cost.
Appendix 1
Revenue 2016 2015 Change

£000s £000s £000s %
Apple Juice 7,087 6,998 89 1.3%
Orange Juice 14,199 17,574 (3,375) (19.2%)
Toll Processing 8,551 6,195 2,356 38.0%
Fruit Trading 9,228 6,992 2,236 32.0%
Total Revenue 39,065 37,759 1,306 3.5%
Revenue mix
2016 2015 Change
Apple Juice 18.1% 18.5% (0.4%)
Orange Juice 36.3% 46.5% (10.2%)
Toll Processing 21.9% 16.4% 5.5%
Fruit Trading 23.6% 18.5% 5.1%
Gross profit 2016 2015 Change

£000s £000s £000s %
Apple Juice 888 865 23 2.7%
Orange Juice 1,454 4,400 (2,946) (67.0%)
Toll Processing 3,677 2,671 1,006 37.7%
Fruit Trading 1,051 960 91 9.5%
Total gross profit 7,070 8,896 (1,826) (20.5%)
Gross Profit Margin

2016 2015 Change
Apple Juice 12.5% 12.4% 0.1%
Orange Juice 10.2% 25.0% (14.8%)
Toll Processing 43.0% 43.1% (0.1%)
Fruit Trading 11.4% 13.7% (2.3%)
Total gross profit margin 18.1% 23.6% (5.5%)
Operating profit 2016 2015 Change

£000s £000s £000s %
Overall 896 2,920 (2,024) (69.3%)
Operating profit margin 2016 2015 Change

Overall 2.3% 7.7% (5.4%)
Trade Receivables days 2016 2015

Overall 68.2 days 69.2 days
Trade Receivables 2016 2015 Change

£000s £000s £000s %
Overall 7,295 7,162 133 1.9%

Appendix 2
Alternative 1:
£000s
Revenue (1-0.3) x 8,551 + 12,000 17,986

Production personnel costs (1,036)
Logistics 1,278 + 0.25 x 12,000 (4,278)
Juice processing costs 0.2 x 17,986 (3,597)
Toll contract costs 0.1 x (17,986) (1,799)
Gross profit 7,276
Alternative 2:
£000s
Revenue 8,551 + 12,000 20,551

Production personnel costs 1,036 x 2 (2,072)
Logistics (4,278)
Juice processing costs 0.2 x 20,551 (4,110)
Toll contract costs 0.1 x 20,551 (2,055)
Gross profit 8,036
Alternative 1:
Gross profit margin 40.5%
Alternative 2:
Sensitivity Analysis:
7,276
= 67.9% alternative 1
1,036 + 4,278 + 3,597 + 1,799
8,036
= 64.2% alternative 2
2,072 + 4,278 + 4,110 + 2,055
Appendix 3
£
Negotiated gross price 51,700 ÷ 1.5 34,467
Less: Agent commission @25% (8,617)
Net price
Less: Cost of fruit 4,020 ÷ 1.5 (2,680)
Less: Logistic and distribution (17,000)
Gross profit 6,170
Volume = (84 x 1.5) x 1.4

= 176.4 containers
Total gross profit 1,088,388

Old gross profit margin 21.8%

In the commentary below extracts from the script are shown in quotation marks and a different font:
spelling, grammar, sentence construction and punctuation from the original script have been retained.
The commentary follows the order and numbering of the script with references to the topics in the
marking key. It should be read in conjunction with the review of the First Illustrative Script and also the
full Examiners’ Report for this session.
This script failed the exam. It is marginally above average length (but as always this depends on the
actual handwriting. This script was fully readable with a small number of crossings-out. The candidate
achieved 16 competent grades (Clearly Competent (CC) and Sufficiently Competent (SC)) across the
whole report. In terms of professional skills (maximum 30) the grades were as follows: in 2 out of 6
grade boxes for Assimilating and Using Information (A&UI); in 4 out of 9 for Structuring Problems and
Solutions (SP&S); in 2 out of 9 for Applying Judgement (AJ); and in 2 out of 6 for Conclusions and
Recommendations (C&R). This candidate achieved a sufficient number of competent grades in only
one Requirement: Requirement 1 (review of True Taste’s financial performance). This candidate
failed two Requirements: Requirement 2 (evaluation of SWH Toll Processing (TP) proposal); and
Requirement 3 (evaluation of airfreight proposal).
The original 15 pages of the main body of the report are spread between the three Requirements as
follows: Requirement 1 – six pages; Requirement 2 – four pages; Requirement 3 – five pages. There
are appendices or workings for all three requirements and clear evidence of some planning.
This report starts with an appropriate front page title and terms of reference section – the report is
from Porterfields Hunter (PH). The executive summary (ES), which follows, has a clear structure and
is split fairly evenly between the three topics.
The summary of the financial analysis of the TT management accounts contains some but not
sufficient numerical analysis covering revenue and GP. However, it fails to identify the critical fall in
OP, which would be further impacted by the trade receivable issue. Instead, it picks up a rather
peripheral issue – “providing TT can reduce fixed asset investment the cash position will improve however if
not, TT are at risk of breaching overdraft limit” – which does not follow logically from anything else in the
summary. The candidate also fails to summarise the changing sales mix. The conclusions are light
and the recommendations lack focus for TT.
The section dealing with the new SWH TP proposal contains the appropriate numerical information for
both alternatives but it does not evaluate the key operational issues affecting each alternative
sufficiently. However, the candidate identifies the way forward and what is seen as the key risk: “the
cashflow risk on this contract is too high for TT currently as close to £2m overdraft and so proposal should be
rejected.” The script also includes “There are also a number of ethical considerations including the unknown
origin or quality of the water.” This is a clearly competent section of the ES.
In the evaluation of the airfreight issue, the candidate identifies the revenue and GP but does not
indicate the overall important size of this contract. There is a positive conclusion on the Dax airfreight
proposal and an ongoing awareness of the ethical issues but no specific critical review of the reliance
on Dax.
The ES covers all three areas and does not appear to be rushed – which indicates reasonable time
management. The candidate has used some numbers in all sections without always identifying the
key financial points or the operational magnitude of the issues.

 identified the significant change in sales mix, GP decline and the critical decline in OP;
 emphasised the impact of the trade receivables issue on OP and future cash flow;
 commented on the SWH TP proposal impact on operations under each alternative;
 commented on the reliance on Dax in the FT operation.
TT financial analysis [Requirement 1]
The financial statement analysis in this section is accompanied by a comprehensive Appendix 1 (see
detailed commentary below). This detailed appendix supports the comparative analysis of the items
requested in the statement of profit or loss in both percentage and absolute terms.
This section of the report starts by providing a good analysis of total revenue; GP and OP and the
related percentage and absolute changes in numerical terms. The candidate also identifies almost all
of the business issues and wider context in this section. However, the qualitative analysis for each
business line is weak: apart from “Orange juice revenue decreased by £3375k (19.2%) following changes in
customers demand as concerns over sugar content rise. This decline is significantly below the 2% fall seen in
the industry overall”, there are no other emphatic words describing the business line revenue changes
being provided.
Most of the business line GP analysis and some of the GP evaluation were good because the
candidate blended the numerical analysis from the appendix with the financial story from the AI and
EP: “The fall is primarily due to the fall in OJ gross profit which fell by £2946k (67%) with margin falling from
25% to 10.2% … This is a direct result of increased fruit costs as suppliers pass on the effects of the devalued
sterling. Given TT’s reliance on one supplier in Spain this was particularly notable.” The report has some
other areas of good judgement – relating to the evaluation of revenue analysis
The candidate’s analysis of the trade receivables issue is somewhat unclear: “Writing off the debt
would severely threaten the cash position of TT and an increased focus on other trade receivables collection
would be key to ensure TT had sufficient reserves to continue.” (It is difficult to see what TT would have
gleaned from such a sentence – if the customer is not able to pay, it is that which threatens future cash flow, not
the writing off of the debt. – as an added issue the term “reserves” is misused)
The conclusions and recommendations which are made concerning revenue, GP (etc) are disjointed
and repetitive and do not really pull this whole section of the report together. As an exam technique,
this C&R format is not recommended. The recommendations are also too generalised to be accepted
by TT: “Look for new diversified business opportunities to safeguard against future falls in juice revenue”.
However, overall the review of TT’s financial performance was an acceptable section of the report.
To score better grades on Requirement 1, the candidate could have provided:
 a more qualitative analysis of the changes in the business line revenue analysis;
 a better analysis of the trade receivables issue and its impact on future cash flow;
 a more cohesive set of conclusions;
 more commercially focused and better defined recommendations.
Evaluation of the new SWH TP proposal [Requirement 2]
In A&UI the candidate provides a summary of the key operational changes required to deliver each
alternative but fails to identify the size of the project in revenue terms. Under business issues and

wider context, only the year-end overdraft and overdraft limit are identified. Despite these gaps in
context, this candidate provides some sufficiently competent sections under SP&S using numbers
from Appendix 2 – however, these calculations contain errors (the personnel costs for both
alternatives), which cause the calculations to fall outside the acceptable range of costs/GP as
indicated in the Marking Key..
There are also some good points made in the ethical and business trust section: “It is not clear on the
origin of the water SWH has found but if it is found by illegal drilling or is contaminated this would affect TT’s
reputation by association.”
In AJ, the evaluation of the assumptions is not sufficiently competent, with the candidate only picking
up scattered points instead of working logically through and questioning each of the assumptions in
turn. However, the candidate does pick up on some of these issues “Logistics have been calculated as a
percent of revenue however these costs will not be fixed and so it is unclear if this allocation will be sufficient
especially as delivery country-wide” but overall this AJ section, including the evaluation of
ethical/business trust issues and related recommendations, is weak.
The conclusions in this section are vague “The SWH contract offers TT the opportunity to gain experience
of the diluted juice market”, which means that few points can be awarded. However, the
recommendations section is particularly concise and strong, including “Do not accept contract in current
state but look to improve and consider once terms are more reasonable”.
 identified the trend of growth in flavoured water drinks;
 identified the size of this contract in terms of volume against current TP level of activity;
 considered the assumptions in the delivery of each alternative in more detail;
 provided more precise conclusions linked to the analysis and evaluation conducted.
Evaluation of airfreight proposal [Requirement 3]
The candidate has provided a detailed calculation relating to this topic as a separate working (see
below), which provides the basis for some numerical context in A&UI. Unfortunately, the workings are
not sufficiently well labelled or totally accurate and it is difficult to follow. The identification of business
issues and wider context was weak in this section.
There is some good SP&S analysis in the report based on the candidate numbers but the operational
and strategic review is not sufficiently competent nor is the business trust and ethical section.
Because of this weak analysis, little is carried into evaluation – with the result that the candidate did
not score well on the evaluation of financial assumptions, and performed badly on both the
operational and strategic as well as the ethical sections.
The candidate performs well in Conclusions by concluding on: the revenue and GP; the operational
and strategic issues; and the way forward. This is good exam technique but the Recommendations
section is weak.
This candidate uses some figures in the body of the report but does not always apply careful
consideration to this process.
 evaluated own numerical calculations for reasonableness and reconsidered;
 analysed and evaluated the business trust and ethical concerns and Dax’s role more thoroughly;

 made the recommendations more appropriate to TT – such as market research and more
considered cost analysis.
Appendices
Appendix 1
This relates to the financial statement analysis (Requirement 1) and uses the segmental analysis
(Note 1 in the TT Management Accounts) to provide a detailed analysis of all the figures for 2016 and
then 2015. The analysis of movements in absolute and percentage terms is shown separately. The
analysis is comprehensible and correct (clearly competent) but it is obviously wasteful in terms of
detail and therefore time. No selection has been made to indicate importance or relevance of items
and although it is clearly written it must have taken precious time to create. There is no reference to
the Trade Receivables issue in this appendix.
Appendix 2
This appendix relates to the two alternatives for the new SWH TP proposal. This candidate performs
a reasonable calculation but makes a mistake in the calculation of Personnel costs in Alternative 1
(which has no explanation or label) – which is then simply compounded by doubling that figure in
Alternative 2 (again without explanation or label). This is a pity because in all other respects these are
logical calculations. As a result, both cost calculations are outside the range permitted and this is
penalised in the report itself. The lack of appropriate labelling is penalised in the appendix but it was
sufficiently competent.
Workings for R3 (appendix)
This short set of financial workings gave this candidate the basis for the information discussed in the
report. Although it was possible to follow mathematically what the candidate had calculated, the
labelling was not clear and some of the logic for the calculations was flawed. As a result, the
candidate did not achieve a passing grade in A&UI in this section of the report.
Overall paper
This was a properly structured answer which was easy to read. It followed a logical format in
answering the detailed requirements. There were a few lapses in style and tact – candidates should
try to imagine they are addressing a real client’s board to avoid these lapses – but overall the report
was appropriate for the TT board. Apart from in Requirement 1, AJ was weak in this script. The
candidate’s performance declined across the script but whether that was a function of comfort level in
each requirement or exam technique it is difficult to identify.
As a separate issue, the report had a large number of single-sentence paragraphs, which gives the
script a somewhat staccato tone. It also had conclusions and recommendations within each sub-
section of each section of the report – this is a poor technique. The report would have benefited from
being written in a more fluid style with a series of sentences gathered into paragraphs to group the
candidate’s thinking on a topic together. That grouping may have also helped the candidate’s
analytical and evaluative process.

REPORT
To: The Board of Directors, True Taste Ltd
Prepared by: Porterfields Hunter
Subject: Analysis of True Taste’s performance and evaluation of the strategic issues facing the company.
Terms of reference
This report has been prepared for the use of the True Taste board and should not be distributed to, or relied
upon, by any third parties without prior written consent.
No liability can be accepted in such an event.
Abbreviations used throughout the report:
TT – True Taste Ltd

AJ – apple juice
OJ – orange juice
FT – fruit trading
TP – toll processing
Executive Summary
Review of TT’s performance
Overall revenue increased by £1306k (3.5%)
Apple juice revenue grew by £89k (1.3%) which is strong performance given the significant fall noted in other
juice drinks.
Orange juice revenue fell by £3357k (19.2%) due to changing consumer tastes away from sugary fruit juices.
Trade processing revenue grew by £2365k (38%) due to increased available capacity following reduced OJ
production.
FT revenue grew by £2236 (32%) due to higher volumes sold as consumer look to fresh fruit rather than juice.
Gross profit overall fell by £1826k (20.5%) primarily due to the fall in OJ gross profit which fell by £2946 (67%)
following increased fruit prices from a devalued sterling.
Apple juice and trade processing gross profit increased in line with revenues achieving consistent profit margins
of 12% and 43% respectively.
FT gross profit rose by £9k (9.5%) but gross profit margin fell to 11.4% due to increasing logistics costs and
devalued sterling.
Cashflow is an increasing concern for TT with an overdraft of £1.2m close to the £2m limit.
The 800k bad debt identified demonstrates the importance TT now need to place on cashflow providing TT can
reduce fixed asset investment the cash position will improve however if not, TT are at risk of breaching overdraft
limit.
Revenue growth of £1,806k (3.5%) is a good performance considering the move of consumers away from
sugary drinks.

Gross profit fall of £1826k (20.5%) with margin falling to 18% is due to suppliers ability to pass on the costs with
no resistance from TT.
TT need to remain focused on cashflow to ensure ability to continue in the future.
Recommendations
Look to expand supplier base
Look for new TP customers to replace lost OJ production
Review options to reduce logistics costs in FT
Reduce future investment in fixed assets to recover cash in 2017.
Consider dealing in foreign currency to reduce costs
Evaluation of SWH proposal
The profit that would be achieved under alternative 1 is £5776k (39.7% margin)
There are a number of assumptions used including the fact TT would be able to terminate 70% of existing TP
contracts and TT would be able to run a second shift without any issues in staffing or machinery complications.
It also assumes revenue of 75p a bottle whereas the company has historically offered £1 a bottle, and TT would
be responsible for all logistics which have been set at a fixed price.
The cashflow risk on this contract is too high for TT currently as close to £2m overdraft and so proposal should
be rejected.
There are also a number of ethical considerations including the unknown origin or quality of the water.
Reject the proposal on its current terms. It is not a viable option due to the cashflow issues and threats to TT’s
reputation.
Perform due diligence on H2B and SWH.
Negotiate to obtain higher revenue per bottle and improved credit terms.
Consideration of airfreighting grapes
If TT were to begin airfreighting Kadar’s supply the profit achieved on the business line would be £2088k with a
gross profit margin of 34.3%
The increased margin is a key consideration as increased logistics cost drive down margins (11% achieved in
2016)
Airfreighting would also ease frequency of border checks and in turn lower risk of damaged goods.
Strategically TT becomes more reliant on Kadar as a result however the increased supply will take advantage of
growing customer demand for fresh fruit, rather than sugary fruit juice and allows TT to expand further into this
market.
There are ongoing issues with false documentation facilitation payments and increased use of pesticides from
use of trucks.

Conclusion and recommendations
Accept the proposal with Dax to use air freight
Review conditions, security and controls at the proposed airports to ensure compliance with GAP and BRIX.
Reiterate to suppliers TT’s policy on bribery and falsified documentation.
Review of TT’s performance for year to 30 September 2016
Revenue
Overall revenue increased by £1306k (3.5%)
Trade processing revenue increased by £2356k (38%) due to a number of new customers taken on to utilise
capacity following a decrease in OJ production.
Orange juice revenue decreased by £3375k (19.2%) following changed in customers demand as concerns over
sugar content rise. This decline is significantly below the 2% fall seen in the industry overall in 2015 and
suggests the marketing efforts did not sufficiently address the concerns in consumers.
Industry wide there was an 8% increase in bottled water sales (British Soft Drinks Association) in 2016 which
may be driving sales away from fruit juices.
Apple juice revenue increased by £89k (1.3%) which demonstrates customers have not moved away from all
fruit juices and so growth in this market is possible if managed well.
Fruit trading income has increased following increased volumes from harvest in 2016 resulting in increased
income of £2236k (32%). The increased demand has matched supply and is likely due to a change in
consumers priorities away from high sugar juices towards raw fresh fruit.
The incoming sugar tax is not likely to affect TT in the coming years as fruit juice will be exempt and so TT may
see a resurgence once this is introduced as fruit juices may become a cheaper option for consumers.
Conclusion
Revenue increase of £1360k (3.5%) is disappointing due to the growth seen in 2015 of 25% however this is
above industry fall of 2%.
The key lines ensuring the success are TP and FT. These demonstrate TTs success in effectively diversifying.
Recommendations
Look for new diversified business opportunities to safeguard against future falls in juice revenue
Review pricing strategy once sugar tax is implemented to win competitive advantage
Consider similar promotions for OJ as AJ to match success.
Gross profit
Overall gross profit fell by £1826k (20.5%) with margin falling from 33% to 18%.
The fall is primarily due to the fall in OJ gross profit which fell by £2946k (67%) with margin falling from 25% to
10.2%
This is a direct result of increased fruit costs as suppliers pass on the effects of the devalued sterling. Given
TT’s reliance on one supplier in Spain this was particularly notable.
On the other hand TP gross profit rose by £1006k (17.7%) in line with revenue maintaining a margin of 43%.
This is because TP works on a mark-up basis however should remain committed to key costings to ensure this
continues. This is the highest gross margin business line.

AJ gross profit increased by £23k (2.7%) in line with revenue, maintaining a profit margin of 12% as costs
become consistent as product enters maturity.
FT gross profit rose by £91k (9.5%) but margins fell from 13.7% to 11.4% due to increasing logistic costs which
cannot be passed onto supermarkets. TT need to explore how to reduce these to recover profits in the future
through opportunities such as airfreight.
Conclusions
Gross profit has fallen by £1826k reflecting a poor year in cost control. This is largely out of the control of TT
however evidences the company’s reliance on a select few suppliers meaning they are not in a strong
bargaining position.
Recommendations
Look to diversify supplier base
Consider dealing in a select few foreign currencies to try and reduce cost of imports.
Look for ways to reduce logistic costs in FT line.
Operating profit
Operating profit has fallen by £2024k (69.3%) with margin falling from 7.7% to 2.3%.
This is largely the result of the OJ business line which reduced profit significantly and TT spent a large amount
of costs on marketing for OJ which proved unsuccessful.
TT may see the results of the campaign appear in 2017 however it looks relatively unsuccessful to date and so
greater focus is required in future to ensure campaigns address the key issues of consumers.
Conclusion
Overall TT has performed poorly, largely due to OJ’s falling gross profit and unsuccessful expensive marketing
campaign.
Recommendations
Perform better reviews of campaigns before launch to directed appropriately.
Consider expansion into new business lines with more opportunities for growth.
Trade receivables Issue
There is potential bad debt of £800,000 – if written off TT would achieve an operating profit of £96k.
Additionally TT are currently at £1296k into the overdraft facility which has a maximum of £2m
Writing off the debt would severely threaten the cash position of TT and an increased focus on other trade
receivables collection would be key to ensure TT had sufficient reserves to continue.
If all other factors remain constant for 2017, TT would exceed its overdraft balance. However there was large
fixed asset expenditure in the year – if TT hold back on investment in 2017, cash will improve.
Conclusion
Cashflow is a key risk for TT as without cash staff will not work and operations would cease.
If the £800k is not going to be received this should be written off resulting in an adjusted operating profit of £96k.

Recommendations
Engage with customer to establish if any amount can be recovered.
Review credit check controls to ensure all customers are able to pay.
Review future plans for fixed asset investment and consider reducing to recover cash position.
Evaluation of SWH proposal
Financial impact
Under alternative 1 TT would generate profit on TP business line of £5776k with gross profit margin of 39.7%
Under this alternative revenue with SWH would represent 82% of total TP revenue.
Under alternative 2, TT would generate £8036k of profit with gross profit margin 39.1% and the SWH contract
would represent 58% of total revenue.
Assumptions used
Under alternative 2, TT moves to a second shift, doubling staff costs, However it is not clear if TT will have
spare capacity from running this and if so may be of benefit to other business lines.
Logistics have been calculated as a percent of revenue however these costs will not be fixed and so it is unclear
if this allocation will be sufficient, especially as delivering country-wide.
Alternative I assumes TT will be in a place to terminate 70% of existing TP contracts There may be legal issues
surrounding this.
The costings assume revenue of 75p per bottle however most contracts charged £1. It is unclear why revenue
has been reduced.
Business operational considerations
If TT were to take alternative 1 this would create poor customer relations as TT has a duty of care to existing
customers.
If TT were to introduce a second shift there may be a delay to start time as staff would need to be recruited and
trained.
Additionally, the machinery would be run for twice as long. No increase in maintenance costs have been
included and there is increased risk or downtime.
As a result of increased production TT will have increased wastage. As seen in Italy this must be appropriately
managed or could seriously affect TT’s reputation and ability to operate in the future.
There has been significant investment in fixed assets in the year. This may be evidence of the machinery being
unable to cope with increased capacity levels.
TT have also not been given a contract start date. If too soon TT may not have sufficient resources to carry out.
Cashflow considerations
SWH have proposed 90 day payment terms. In 2016 TT saw trade payable days increase to 68 days and are
currently running close to £2m overdraft limit.
There are high logistics costs with this contract which will expect payment in less than 90 days. Therefore
working capital cycle will be reduced. Currently TT cannot afford this.

Ethical Considerations
TT has a duty of care to existing TP customers so cannot terminate 70% of contracts for 1 new customer.
It is not clear on the origin of the water SWH has found but if it is found by illegal drilling or is contaminated this
would affect TT’s reputation by association.
SWH is proposing thisas a daily drink for children. It is not clear how low the sugar content is but if it is not in
line with NHS guidelines this would affect TT’s reputation by association.
The SWH contract offers TT the opportunity to gain experience of the diluted juice market.
The margins generated are below current margins achieved in TP but above those in OJ which appears to be a
failing business line.
There are a number of ethical issues and uncertainties on this contract along with a high risk of cash flow issues
and so TT should not accept the offer in its current state.
Recommendations
Perform due diligence on the water source and on SWH
Negotiate to obtain higher revenue and better credit terms.
Perform analysis of the capacity available in current machinery
Do not accept contract in current state but look to improve and consider once terms are more reasonable.
Consideration of airfreighting grapes
Financial implications
Analysis has been performed in Appendix 3 which shows that under the proposal from DAX using Alborz Air
(AA) TT would obtain profit in 2017 on the Kadar grapes of £2088k, with gross profit margin of 34.3%
This is a significant increase on the gross profit margin achieved in 2016 which was around 3.8% due to
excessive logistics costs, incurred in 2016.
Airfreighting will reduce logistics costs by around £969k whilst increasing volumes by 40%.
However in order to achieve these cost savings Dax has proposed an increase of agents fees from 20% to 25%,
which results in a raw expense cost increase of £651K (including increased volumes).
Operational considerations
The increased volume of 40% over a longer season means TT obtains a more reliable revenue source over the
year.
The quicker delivery times through flying will enable TT to respond quicker to supermarkets demands.
However, it is key to note that the containers will still be subject to checks and security and so delays may not
be fully avoided, but will be significantly reduced.
Currently by truck delivery the long delivery times are encouraging higher use of preservatives to ensure the
fruit stays fresh for longer. In 2016 there would have also been instances whereby fruit would be discarded
following excessive checks which damage quality.
Airfreighting will reduce the risk of fruit going off as delivery time is cut and as passes through fewer borders the
risk of damaged goods is also lower.

A key point to consider is the UN sanction of no more than £20m imports from Iran. The current levels do not
exceed this but it should be constantly reviewed.
Strategic Considerations
In 2015 TT identified the need to shore–up the grape supply line.
By further engaging Kadar, increased reliance is placed on this supplier and therefore risk of failed supply has
not been mitigated.
Additionally consumers are sensitive over the origins of produce. If Iran is considered an undesirable origin
demand will fall significantly and TT’s revenue adversely affected.
Consumers are moving away from sugary drinks and experts are advising to eat more fruit as part of getting
your 5 a day.
As such the raw fruit market is likely to enter a period of growth and so through increasing volumes imported, TT
is well placed to take advantage of this growth.
The international trade suggests some airports are inappropriate to handle the deliveries TT would require.
Before acceptance TT should further review this as the airports to be used.
Business trust and ethical considerations
Dax has highlighted issues concerning falsified documentation on Kadar imports previously.
If this was proven, Kadar would be unable to sell produce into the UK and TT would lose key supplier.
Controls were brought in 2015 and it is critical Dax monitors these as part of work with Kadar.
The European Times reported that pesticides are being added to trucks after accreditation to improve shelf life.
TT needs to review current supply controls to ensure none of their suppliers are involves in this practice.
However, if TT were to begin airfreighting with shorter delivery times this practice would be unnecessary and
therefore there would be less risk of occurrence.
TT have a duty of care to the supermarkets to ensure all supplies are of high quality and comply with all
legislative requirements
Airfreighting does bring up negative opinions regarding global warming however it could be argued beneficial as
TT currently use large amounts of fuel driving across Europe, leaving engines running at each border check.
Profit on the proposed airfreighting would be £2088k with gross profit margin of 34.3%
This is significantly higher than the gross profit margin of the fruit trading business line of 11.4% and appears a
good business opportunity to recover margins, as other lines are worsening results.
Airfreighting would decrease delivery times and reduce need for chemicals to improve shelf life and should
therefore accept the proposal.
The increased reliance on Kadar poses some issues as does not diversify risk however this will ensure greater
supply period.
Recommendations
Review controls in place at Kadar to ensure issues over documentation have been resolved.
Look into obtaining an additional supplier.
Review controls in place at airports to be used to ensure sufficient checks and safeguards are in place.

Accept airfreighting proposal.
Appendix 1
2016 £’000
Business line AJ OJ TP FT Total
Revenue 7087 14199 8551 9228 39065

Revenue mix % 18.1% 36.3% 21.9% 23.6%
Personnel costs 383 1607 1036 - 3026
Fruit/juice 1012 4036 - 847 5895
Packaging 3217 3522 - - 6739
Logistics 1041 2077 1278 5484 9880
Juice processing 546 1503 1705 - 3754
Agents fee - - - 1846 1846
Toll contract costs - - 855 - 855
6199 12745 4874 8177 31995
Gross profit 888 1454 3677 1051 7070

Gross profit margin 12.5% 10.2% 43% 11.4% 18.1%
Sales and admin costs 6174

Operating profit margin 2.3%
2015 £’000
AJ OJ TP FT Total
Revenue 6998 17574 6195 6992 37759

18.5% 46.5% 16.4% 18.5%
Personnel 385 1765 779 - 2929
Fruit/juice 1074 3341 - 568 4983
Packaging 3193 4350 - - 7543
Logistics 973 1817 824 4065 7679
Juice processing 508 1901 1301 - 3710
Agents fees - - - 1399 1399
Toll contract - - 620 - 620
6133 13174 3524 6032 28863
Gross profit 865 4400 2671 960 8896

Gross profit 12.4% 25.0% 43.2% 13.7% 23.6%
margin
Sales + admin 5976

Operating profit 7.7%
margin

Movement 2016 to 2015 £’000
AJ OJ TP FT Total
Revenue 89 1.3 (3375) 19.2% 2356 38% 2236 32% 1306 3.5%
%
Total cost of sales 66 1% (429) 3.3% 1350 38% 2145 35.6% 3132 10.9%
Gross profit /margin 23 2.7 (2946) 67% 1006 37.7% 91 9.5% (1826) 20.5%
%
Sales + admin 198 3.3%
Operating profit (2024)

Operating profit margin 69.3%
Appendix 2 – Toll processing profit or loss 1 year
Alternative 1: £1000
Revenue 14565
(8551 x 0.3 + 12000)
Production personnel costs 1036

Materials: fruit/juice -
Materials: packaging -
Logistics (1278 x 0.3 + 12m x 0.25) 3383
Toll contract costs (10% x 14565) 1457
Processing juice costs (20% x 14565) 2913
Gross profit 5776
Alternative 2:
Revenue (8551 + 12000) 20551
Production personnel costs (1036 x 2) 2072

Juice processing costs (20% x 20551) 4110
Logistics costs (1278 + 25% x 12000) 4278
Toll contract costs (10% x 20551) 2055
Gross profit 8036
Appendix 3
£’000
Kadar P + L
2016 Forecast under AA
Revenue*
(51700 x 84) 4343
(51700 x 84 x 1.4) 6080
Logistics**
(30720 x 84 x 115%)
(17000 x 84 x 1.4) 1999
Agent fee 869

(20% x 4343)
(26% x 6080) 1520
Fruit cost ***

(4020 x 84) 338
(4020 x 84 x 1.4) 473
Gross profit 168 2088

3.9% 34.3%
*assumes gross revenue achieved per truck in 2016 was £51700 as was in 2015.
Forecast figure is based on this figure
**assumes logistics costs of 30720 * 15% as seen in 2015 increased by 2016 effects
*** assumes £4020 cost as seen in 2015

(4 HOURS)
CASE STUDY
CANDIDATE NUMBER
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from the case material, included in your answer will not be marked by the examiners.
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ICAEW/CS/J17
Copyright @ ICAEW 2017. All rights reserved. 234065

July 2017 Case Study: Piccolo Limited
List of exhibits
1 About you (Charlie Sims), your employer (Ingleby Grant ICAEW Chartered
Accountants) and your client (Piccolo Limited)
2 Kitchenware in the UK: an overview
3 The UK kitchenware industry: key issues
4 Piccolo: Company overview
5 Piccolo: Management accounts for the three years ended 31 May 2016
6 Piccolo: Review of the business to 31 May 2016
7 Piccolo: Business operations
8 Piccolo: The Hospitality market and customers
9 Piccolo: The Retail market and customers
10 Piccolo: Supply chain
11 Piccolo: Logistics, inventory storage and distribution
12 Piccolo: Board briefing
13 Media coverage
14 Email dated 19 July 2017 from Olivia Harrington to you
15 Email dated 19 July 2017 from Sabrina Kroos to Olivia Harrington: Matters reflected in
the draft management accounts, and fake product issue
16 Piccolo: Draft management accounts for the year ended 31 May 2017
17 Email dated 19 July 2017 from Gautam Singh to Olivia Harrington: Celebrity chef
arrangements
18 Media coverage
19 Email dated 18 July 2017 from Clive Oaks to Olivia Harrington: Dougal Hotels
20 Media coverage
BLANK PAGE
Piccolo Limited: Case Study requirement
You are Charlie Sims, a final-year trainee ICAEW Chartered Accountant working in the
business advisory department of Ingleby Grant, a firm of ICAEW Chartered Accountants with
offices throughout the UK. You are based in the Birmingham office, where you report to one of
the partners, Olivia Harrington. Among your clients is Piccolo Limited (Piccolo), a local
company that sells tableware, cookware and utensils to companies in the Retail and
Hospitality sectors throughout the UK.
Requirement
You are required to prepare a draft report for the Piccolo board, as set out in the email dated
19 July 2017 from Olivia Harrington to you (Exhibit 14). Your report should comprise the

Marks allocation

90%
100%
BLANK PAGE
EXHIBIT 14
EMAIL
From: Olivia Harrington
To: Charlie Sims
Subject: Piccolo
Date: 19 July 2017
There have been a number of recent matters arising at Piccolo, on which the board has
requested our advice. I am attaching the following:
 An email from Sabrina Kroos about matters reflected in Piccolo’s draft management
accounts and about a fake product issue (Exhibit 15)
 Piccolo’s draft management accounts for the year ended 31 May 2017 (Exhibit 16)
 An email from Gautam Singh about celebrity chef arrangements (Exhibit 17), together with
related media coverage (Exhibit 18)
 An email from Clive Oaks about Dougal Hotels (Exhibit 19), together with related media
coverage (Exhibit 20).
I would like you to draft for my review a report to the Piccolo board. This should comprise the
following.
1. An analysis of Piccolo’s revenue, gross profit and operating loss for the year ended
31 May 2017 by comparison with the previous year.
Your analysis should cover the company overall and the two business lines, Hospitality
and Retail. It should be based on the draft management accounts including relevant
notes (Exhibit 16), together with the matters described in Exhibit 15. You should also
advise Piccolo on the action that it should take on the fake product issue (Exhibit 15),
referring to any ethical or business trust considerations.
2. An evaluation of Piccolo’s celebrity chef arrangements (Exhibit 17).
Using the data provided, you should calculate Piccolo’s projected return on external
advertising spend in relation to each of the two alternative sets of celebrity chef
arrangements for each of the years ending 31 May 2019 and 2020. You should comment
on the adequacy of the assumptions. You should also evaluate the financial and non-
financial risks and opportunities for each set of arrangements, including any ethical or
business trust issues, and come to a reasoned recommendation. You should refer, as
appropriate, to the contents of Exhibit 18.
3. An evaluation of the proposal in relation to Piccolo’s existing customer, Dougal Hotels,

following its acquisition (Exhibit 19).
Your evaluation should cover the financial, operational and strategic issues relating to the
proposal outlined in Exhibit 19, as well as any ethical or business trust issues arising for
Piccolo. You should refer, as appropriate, to the contents of Exhibit 20. You should also
evaluate the implications of the proposal for the whole of Piccolo’s business. Please
include supporting calculations.
I look forward to receiving your draft report.
BLANK PAGE
EXHIBIT 15
EMAIL
From: Sabrina Kroos
To: Olivia Harrington
Subject: Matters reflected in the draft management accounts, and fake product issue
Date: 19 July 2017
Matters reflected in the draft management accounts
The evidence is that, over the year to 31 May 2017, there has been a 5% revenue downturn
(worse than our pessimistic estimates) in the overall UK kitchenware market. In addition, the
fall in value of sterling has led to an average 10% increase in our purchase costs, which we
have mostly been unable to pass on to customers.
Early in the year, we had problems with RDN, especially in relation to deliveries from our Italian
manufacturer Ravino (breakages, incomplete orders). These led to three small Retail customers
cancelling their contracts with us in August 2016. The problems were subsequently resolved
through improved training of RDN staff. The overall Delivery Rate for the year was 88.0%.
We reluctantly made some administration and support staff redundancies on 1 March 2017, in
view of the falling sales that we were experiencing. Redundancy costs amounted to £280,000.
Additional information about the two business lines is given below.
 Hospitality
Revenue Gross profit
£000 £000
Dougal Hotels 929 466
Ringford 1,537 545
Quincy Restaurants 738 370
3,204 1,381
Other 5,067 2,058
8,271 3,439
 Retail
We finished market testing of our new tableware (Classic), which included unbudgeted
product innovation and design expenditure of £240,000 in the year. It was finally launched,
for a trial period of six months, on 1 December 2016 and generated revenue of £450,000.
Retail revenue was split by product category as follows: Piccolo Tableware, £18,800,000;
Piccolo Cookware, £8,000,000; Piccolo Utensils, £2,365,000.
Fake product issue
In late May 2017, complaints began to appear on social media, and then in the wider media,
that the updated version of the PE7 non-stick pan was not cooking properly in certain
conditions and was causing food poisoning. Around 150 people who bought a PE7 at a single
branch of one of our smaller Retail customers reported this fault. The 150 PE7s have now
been sent to us and we have identified that they are fakes: another company appears to have
used the PE7 logo but with a slightly different font. So far, we have not heard or seen any
similar complaint from people who have bought a PE7 at other branches of this retailer or at
any other retailer. We need to decide what action to take on this issue.
BLANK PAGE
EXHIBIT 16
Piccolo: Draft management accounts for the year ended 31 May 2017
Statement of profit or loss for the year ended 31 May 2017

Note £000
Revenue 1 37,436
Changes in inventories 91
Purchases of goods for resale (25,322)
Gross profit 1 12,205
Other costs 2 (12,568)
Operating loss (363)
Loss before taxation (338)
Taxation 68
Loss for the year (270)
Statement of financial position as at 31 May 2017

Note £000
Non-current assets: Property, plant and equipment 3 357
Current assets
Inventories 8,027
Cash at bank and in hand 2,183
17,954
Total assets 18,311
Shareholders’ equity
Called up share capital 500
12,212
Current liabilities
Statement of cash flows for the year ended 31 May 2017
£000
Loss before taxation (338)
Adjust for:
Depreciation of property, plant and equipment 144
Loss on sale of property, plant and equipment 2
Net finance income (25)
Operating cash flow before changes in working capital (217)
Change in trade and other receivables 119
Change in trade and other payables 440
Cash generated from underlying operations 251
Income tax paid (639)
Net cash from operating activities (388)
Net interest received 25
Purchase of property, plant and equipment (280)

Cash and cash equivalents at beginning of the year 2,826
Cash and cash equivalents at the end of the year 2,183
Note 1: Segmental analysis

£000
Revenue
Hospitality 8,271
Retail 29,165
37,436
Gross profit
Hospitality 3,439
Retail 8,766
12,205
Note 2: Other costs

£000
Sales and distribution 3,713
Product innovation and design 2,057
Advertising and marketing 3,751
Administration and support 3,047
12,568
Leasehold Furniture, Motor TOTAL

improvements fittings and vehicles
equipment
£000 £000 £000 £000
Cost
At 1 June 2016 168 1,128 135 1,431
Additions 181 99 - 280
Disposals - (4) (26) (30)
At 31 May 2017 349 1,223 109 1,681
Depreciation
At 1 June 2016 142 961 105 1,208
Disposals - (3) (25) (28)
Charge for the year 37 100 7 144
At 31 May 2017 179 1,058 87 1,324
Carrying amount
At 31 May 2017 170 165 22 357

£000
Prepayments and other receivables 1,337
Income tax receivable 68
7,744

£000
Accruals and other payables 1,451
6,099
EXHIBIT 17
EMAIL
From: Gautam Singh
Subject: Celebrity chef arrangements
Date: 19 July 2017
We have now begun to prepare for Piccolo’s 25th anniversary, which starts on 1 June 2018.
We plan to launch our advertising campaign soon after that date, with a ‘fun’ message and
with the sale of some limited edition retro items at selected retailers.
In this connection, we are reviewing the arrangements with Lucy Tyler. Her contract expires on
31 May 2018, and we must decide whether to renew it or to replace her with another celebrity
chef with effect from 1 June 2018. All our rivals have celebrity chefs endorsing their products,
so (in my view) not having one is not an option.
Lucy has headed our advertising since 2013 and has become strongly associated with all three
Piccolo product categories. She is aware that we are likely to be stepping up our advertising for
the anniversary, and has been making certain demands for her contract renewal. In the light of
this situation, I have been speaking to Eric Franks as a possible new celebrity chef for Piccolo.
The table below summarises the fees that Lucy and Eric have each asked for:
Lucy Tyler Eric Franks

Year ending 31 May 2019 20% increase over fee for the £1.0 million if revenue is £40.0
year ending 31 May 2018; no million or more
separate success fee
Year ending 31 May 2020 20% increase over fee for the £1.0 million, plus £0.25 million
year ending 31 May 2019; no success fee if revenue is 10%
separate success fee higher than in previous year
Lucy’s fee for the year ending 31 May 2018 is £0.8 million, with no success fee element. I have
budgeted revenue as follows for the three years to 31 May 2020, reflecting the impact that I
expect each celebrity to have:
Lucy Tyler Eric Franks

Year ending 31 May 2018 £39.0 million n/a
Year ending 31 May 2019 £42.0 million £40.0 million
Year ending 31 May 2020 £45.0 million £42.0 million
If we choose Eric, we will have to change advertising agency as Thor has said that it will not
work with him. The proposed new agency will charge £0.6 million for the first year, but has not
set a figure for the second year. Thor’s fixed fee rises to £1.1 million on 1 June 2018.
The Piccolo board is divided on this matter. In my view, Lucy has been instrumental in our
success and, if we stop using her, it will send out a negative signal – and cause significant
disruption. However, the other directors claim that our advertising has become “tired and
predictable”, that a new media presence is exactly what we need to mark the anniversary
and that Eric is the right person for this.
We need to make a decision, based both on our projected return on external advertising
spend and on the associated financial and non-financial risks and opportunities. The contract
with whichever celebrity we appoint will be reviewed after two years.
EXHIBIT 18
MEDIA COVERAGE
Story of the week (Social media watch, 15 July 2017)
Last week, celebrity Lucy Tyler – the face and voice of Piccolo – was secretly filmed by an
undercover journalist at her home using products from one of Piccolo’s main competitors
(with the logo clearly showing). This film is available on the internet and has already received
around 1 million hits.
Foodie Franks hungry for media spotlight (Food industry news, 17 July 2017)
Celebrity chef Eric Franks is seeking a contract with one of the major cookware companies.
Despite the well-publicised closure of his restaurants, Eric is a highly sought-after personality
because of his good looks and engaging sense of humour, which appeal particularly to
viewers aged 21-30.
In addition, after running the London Marathon dressed as a spatula, Eric is confident that he
now has an enhanced public profile that he can exploit. Amefa, Kitchencraft and Piccolo are
among the companies that Eric is known to be talking to.
Celebrity endorsements – are they worth it? (Marketing Maths, June 2017)
Celebrity endorsements may not be worth the glossy paper and high-resolution screens that
they appear on.
That is the main finding from a recent investigation by a highly-respected independent

researcher, Bernice Brookman. Using an analysis tool that she developed herself, Bernice
studied five high-profile celebrity endorsements, across a range of products from sportswear
to detergents. Among other findings, Brookman established that:
 in four out of the five cases, the money being spent by companies was totally out of
proportion to any return being achieved;
 the choice of advertising medium was not the most suitable for the likely target audience;
 a similar effect could be achieved by having a “regular” consumer as the figurehead for a
campaign (such as is currently the case with “typical” families being used to promote
some healthy food products), or even by having topical animated characters.
EXHIBIT 19
EMAIL
From: Clive Oaks
Subject: Dougal Hotels
Date: 18 July 2017
You may have seen yesterday’s news that one of our largest and longest-established
Hospitality customers, Dougal Hotels, is being acquired by the private equity firm Wadham
(Exhibit 20). A new logo and brand have already been developed, but the Dougal name is
to be retained. This could be both an opportunity and a threat for Piccolo.
Outline proposal
Under the deal, all Dougal hotels will be fully refurbished and aligned to the new image. All
tableware and cookware used in the kitchens and restaurants will be disposed of and replaced
by totally new tableware (bearing the updated logo) and cookware. With regard to all the
discarded items, I am aware that one of Wadham’s directors has connections with a network of
UK schools, which can make good use of them.
In my initial conversation with Ross Dougal (who will remain the company’s CEO), he told me
that he is discussing all existing contracts and other commercial arrangements with Wadham
as part of the acquisition plans. However, he has had an undertaking from Wadham that the
supply of the new kitchen and restaurant items will be offered in the first instance to Piccolo –
on Wadham’s terms. These are likely to entail tough negotiations on prices, payment periods,
product guarantees and discounts for purchases above minimum quantities. A gross margin of
30% to Piccolo was mentioned. We would expect to earn revenue of £3 million from the initial
supply, with further revenue subsequently from product replacements and Dougal’s expansion.
Menu changes
Wadham also proposes to extend Dougal’s menus, which are currently based entirely on
British and European food, by introducing other international dishes. Specifically, there will be
an ‘Indian curry night’ every Tuesday and Thai options available throughout the week. These
will require Dougal to buy brand-new cookware and selected new tableware. Wadham
intends to make the changes across Dougal’s whole portfolio, as it considers that demand for
the new types of meal will be the same at each hotel, wherever located in the UK (ie,
regardless of taste differences between regions). Piccolo’s initial revenue from the new
products would be about £2,000 per hotel.
We do not have any Thai or Indian cookware items in our current product ranges, so we will
have to discuss the options with our existing manufacturers – or identify a suitable other
manufacturer such as Zoto. I estimate the design process (whether conducted with an existing
manufacturer or a new one such as Zoto) to last three months and to cost £0.1 million.
Summary
I believe that if we can supply the new products to Dougal, at an acceptable margin, this will be
an excellent transaction for us, especially in view of Dougal’s planned expansion. However, we
need to consider carefully all aspects of the proposal.
EXHIBIT 20
MEDIA COVERAGE
Dougal in private equity acquisition (Hospitality Business Daily website, 17 July 2017)
The industry’s best-kept secret is now out in the open. The private equity firm Wadham is to
acquire the struggling chain Dougal Hotels for an undisclosed sum. It is expected that the
deal will take effect from 1 December 2017.
Dougal has long been known in the industry as an attractive acquisition target. The company
has not recovered from the effects of the recession and has been unable to compete with the
new budget hotels, such as Ringford, that have emerged in past few years.
Wadham’s plans include:
 a complete rebranding;
 refurbishment of all 225 of Dougal’s existing hotels;
 expansion of the chain to 300 hotels in the UK by 31 May 2019; and
 establishing the Dougal name in Canada (Wadham recently acquired a failing chain of 20
Canadian hotels, which it will convert to the Dougal brand).
Based on past experience, Wadham’s ownership may be brief. Its strategy with investments
in failing businesses is to hold them for three years and then exit by selling them at a profit to
new owners. Wadham’s ruthless management style, which in several well-publicised cases
has led to disputes with key suppliers, also raises questions over this transaction.
Rising star (Your Table magazine, 18 July 2017)
Upcoming UK cookware manufacturer Zoto recently announced its results for the year ended
31 March 2017, which show strong revenue growth. It attributes this to the rising demand for
international cookware, especially Thai and Indian products. Zoto makes these for a growing
number of restaurants up and down the country. It typically works with smaller kitchenware
companies (those in the £10 – 20 million revenue range).
However, such products are generally not part of the portfolios of the larger, more prestigious
UK kitchenware companies. These companies tend to view Thai and Indian cookware as not
being cost-effective to manufacture or supply and as not being aligned to their market profile.
They have perhaps also been slow to recognise the growing demand for it – a demand
fuelled by a steady cultural broadening of UK eating habits and the new television mini-series
‘Curry in a Hurry’. There is likely to be a first mover advantage for any cookware company
that can exploit these trends successfully.
Zoto is now seeking to extend its Hospitality sector presence into hotels and conference
centres. It was recently a prominent sponsor at one of the UK hotel industry’s trade shows,
held at the International Convention Centre in Birmingham.
Contents
Page
Introduction 2
Exam requirements 8
Requirement 1: Review of Piccolo’s financial performance 12
Requirement 2: Evaluation of Piccolo’s celebrity chef arrangements 14
Requirement 3: Evaluation of Dougal Hotels takeover 15
Part 4: Appendices
Appendix 1: Financial statement analysis: Piccolo’s financial performance 17
Appendix 2: Financial data analysis: Calculation of return on external advertising 19
Working for Requirement 3: Dougal Hotels revenue and gross profit 19
Part 5: Marking key

Introduction
Attached to this report are two appendices plus a working with examples of the sort of financial analysis that
candidates did, or might have done. The two illustrative scripts offer further insights into this area.
The pass rate was 76.6%, compared with 74.7% in July 2016 and 74.9% in November 2016. This small rise
can be attributed to an improved proficiency with numerical work at Requirement 3. Successful candidates
showcased their higher skills and used the four hours effectively. They produced methodical, well-balanced,
relevant scripts that answered each component of each requirement and contained high-quality financial
analysis; sound judgement; commercial recommendations; and succinct, focused executive summaries. They
were able to assimilate the case material into a report, demonstrating business awareness and appropriate
professional scepticism. They had clearly prepared well, making the necessary effort to master the Advance
Information for themselves and to hone their exam technique.
The subject of the case is Piccolo Limited, a company selling tableware, cookware and utensils to companies
in the Retail and Hospitality sectors in the UK. Revenue for the year ended 31 May 2016 was £41.7 million.
The candidate is in the role of Charlie Sims, a final-year trainee ICAEW Chartered Accountant working in the
business advisory department of Ingleby Grant and reporting to one of the partners, Olivia Harrington.
1. An analysis of Piccolo’s revenue, gross profit and operating loss for the year ended 31 May 2017 by
comparison with the previous year, together with the evaluation of a fake product issue.
2. An evaluation of Piccolo’s celebrity chef arrangements.
3. An evaluation of the proposal in relation to Piccolo’s existing customer, Dougal Hotels, following its
acquisition.
As always, each requirement contained several parts: candidates had to identify these and then tackle them in
an orderly manner.
 At Requirement 1, the tasks to be performed by candidates involved financial statement analysis and the
discussion of a non-financial issue arising.
 At Requirement 2, they had to undertake calculations, assess the adequacy of assumptions and discuss
the ‘financial and non-financial risks and opportunities’.
 At Requirement 3, they had to evaluate the financial, operational and strategic issues relating to the proposal,
including ‘supporting calculations’, and evaluate the implications for the whole of Piccolo’s business.
For all three requirements, they also had to address ethical and business trust issues.
Candidates who failed included those managing their time badly, which led to unbalanced scripts (incomplete
Requirement 3; rushed executive summary). As always, the three main sections of the report were equal in
importance: candidates overrunning on one risked missing the opportunity to gain passing grades in others. They
would have benefited from planning at the outset how best to structure each part. The Examiners reiterate their
advice to candidates to tackle the requirements in the order set. For the Piccolo case, this would have enabled
them to use the output from their financial analysis at R1 as context for evaluating the revenue projections at
Requirement 2 and the relative merits of the proposal at Requirement 3.
The most common cause of failure lay with the skill of Applying Judgement. The lower end of the cohort was
characterised by an inability, across all three requirements, to extend what was often good analysis work into
reasoned evaluation.

Assimilating and using information (A&UI): Candidates provided clear evidence of being competent under this
heading at Requirements 1 and 2, with good integration of AI and EP information. At Requirement 3, many
looked at the Dougal proposal in isolation rather than recognising the context (Dougal’s difficulties and their
continuing impact on Piccolo).
Structuring problems and solutions (SP&S): Many demonstrated excellent analytical skills across their scripts,
particularly in their number-work. The lowest marks were for operational and strategic issues at Requirement
3, where candidates struggled to appreciate the size of the proposed contract and its impact on Piccolo’s
business processes.
Applying judgement (AJ): This was again the poorest skill, across all three requirements. A significant majority
of candidates failed to develop what was often satisfactory analysis work. Weaker candidates missed points
by not explaining the impact, not questioning data, or not deconstructing how they arrived at their conclusions
and recommendations. For Requirement 1, many could not articulate the reasons for, and implications of,
changes in costs; or step back and consider the bigger picture of the statement of profit or loss. For
Requirement 2, they failed to consider the wider risks and opportunities attaching to each celebrity or to work
out the actions to be taken in respect of the ethical issues identified. For Requirement 3, they failed to evaluate
adequately the issues that they had identified or to apply appropriate professional scepticism to the scenario.
Conclusions and recommendations (C&R): For each C&R box, over half of candidates gained a passing grade.
The main shortcomings were: not seeing the operating loss as a problem at Requirement 1; not stating the %
returns or concluding on the assumptions at Requirement 2; and not addressing the financial impact on the
overall business at Requirement 3.
Requirement 1 was, in one tutor’s words, “conventional” in testing financial statement analysis skills. Candidates
should have been well prepared for a review of the 2017 management accounts. The challenge was to assimilate
the additional financial and non-financial data at Exhibit 15 into a coherent narrative on Piccolo’s performance by
working through the information systematically. Many covered the principal items in the accounts with correct
calculations and developed their work into more in-depth analysis. The fake product issue proved to be a
differentiator: weaker candidates did not evaluate it well, often identifying only the reputational impact.
Requirement 2 was generally well answered. The vast majority of calculations were correct, indicating that
candidates had familiarised themselves with the ratio as described in Exhibit 7. Having done their calculations,
they were expected to go on and look at the key assumptions and comment with due professional scepticism on
each. The basic evaluation was in fact well done. Ethical and business trust issues were well identified but then
not developed: many did not get beyond the advice to discuss the internet film with Lucy. Most advised Piccolo
to retain Lucy. Few questioned in any detail the alternative of not having any celebrity endorsement at all.
Requirement 3 yielded the lowest scores of the three requirements. Candidates did poorly on operational
and strategic issues – where discussion of the new Thai and Indian products was often unfocused – and on
the evaluation of ethical and business trust issues. However, responding to the now-established need for
figures in Requirement 3, a gratifyingly high number of candidates did include some computations. Better
candidates displayed a strong awareness of the AI and the wider context, benefiting from having the
previous material on Dougal at their fingertips.
In summary, Piccolo was a topical case dealing with current business issues in a changing economic
environment. Tutors commented that “the content of the exam requirements was clear and not unexpected.
There was plenty of information in the EP for candidates to use in their discussions and they were not asked to
do anything unfair or outside their capabilities” and that it “suitably extended the AI and overall provided a
balanced assessment of the Case Study learning objectives”. The Examiners concur with these assessments.

The case relates to Piccolo Limited, a kitchenware company based in Birmingham. Piccolo sells tableware,
cookware and utensils to UK companies in two sectors: Retail (around 80% of revenue) and Hospitality (20%).
All sales are in £ sterling. Total revenue for the year ended 31 May 2016 was £41.7 million (an increase of
5.6% on 2015), generating gross profit and operating profit of £16.3 million and £3.2 million respectively (both
virtually unchanged from 2015). Some years ago, Piccolo outsourced all manufacturing; it now has a portfolio
of four suppliers, both UK and overseas. It uses a single company (RDN) for distribution and a single external
advertising agency (Thor), which works closely with a celebrity chef who endorses its products (Lucy Tyler).
The candidate is in the role of Charlie Sims, a final-year trainee ICAEW Chartered Accountant in the business
advisory department of Ingleby Grant, reporting to a partner in the Birmingham office, Olivia Harrington.
series of exhibits relating to Piccolo and the industry in which it operates, comprising:
1 About you (Charlie Sims), your employer (Ingleby Grant ICAEW Chartered Accountants) and your client
(Piccolo Limited)
2 Kitchenware in the UK: an overview
3 The UK kitchenware industry: key issues
4 Piccolo: Company overview
5 Piccolo: Management accounts for the three years ended 31 May 2016
6 Piccolo: Review of the business to 31 May 2016
7 Piccolo: Business operations
8 Piccolo: The Hospitality market and customers
9 Piccolo: The Retail market and customers
10 Piccolo: Supply chain
11 Piccolo: Logistics, inventory storage and distribution
12 Piccolo: Board briefing
13 Media coverage
of Piccolo and the industry, using facts and figures from across the material. Candidates should be aware of
the main contents so that they can easily locate key topics in the exam hall. Key points are summarised below.
(Additional examiner commentary is given in a different font, with emphasis on links between exhibits.)
Exhibit 1 sets the context and summarises Charlie’s work. Exhibit 2 overviews the UK kitchenware industry.
It provides a definition of kitchenware – comprising three product categories: tableware, cookware and utensils
(consistent with Piccolo’s own product categories – see later); presents statistical data on market trends; describes
the influence of celebrity chefs and of television programmes devoted to cookery, together with the growth in
popularity of international foods; identifies some of the leading companies and brands; and highlights the key
sales drivers, including the growth in online sales and product replacement.
Exhibit 3 builds on this by exploring some of the key industry issues. It sets out the different business models
through which kitchenware companies operate (types of customer, sales channels, production arrangements,
geography), and discusses pricing, diversification, product quality, performance and design, brand management
and supply chain management.
(These topics all give the broader backdrop against which Piccolo can be viewed. The exhibits between them provide context
for the case and create a ‘level playing-field’ so that candidates do not have to carry out extensive research of their own.)
Exhibit 4 documents Piccolo’s history, key personnel, current position and some important features.
 Piccolo was founded in 1993, manufacturing kitchenware and initially selling it to London department stores,
then also to upmarket restaurants and hotels.
 By 2007, Piccolo had lost its strategic direction. It was taken over, outsourcing all production, rationalising
its products and repositioning itself as a premium supplier of top-quality kitchenware.
 It is now a design, sales and marketing operation with a clear market position and reputation for its products.
 Its Birmingham base comprises the head office, storage areas, plus product innovation and design facilities.
 There are five directors, who meet quarterly to discuss strategic, financial and operational issues.

 Celebrity chef Lucy Tyler is ‘the face and voice of Piccolo’ on its advertising. Under her contract (renewable
on 31 May 2018), Piccolo pays her an annual fee plus a success fee if revenue reaches an agreed target.
 Hospitality revenue fluctuates more than Retail revenue, as it depends on replacement cycles and
numbers of new customers. Gross margins in Hospitality are higher than in Retail.
 Products are in three categories: tableware, cookware, utensils (the same as the industry breakdown). Utensils
are not sold to Hospitality customers. Shares of total revenue have been constant in the past two years.
 Piccolo’s key suppliers are its manufacturers and the distribution company RDN.
(This sets the scene for the next two exhibits, as well as linking ahead to later exhibits.)
Analysis of Exhibit 5 (May 2017 management accounts, with comparatives for 2015 and 2016) and Exhibit 6
(business review), would reveal the following for 2016. (Note: The analysis below is a synthesis of these two exhibits,
together with some additional calculations based on their contents. It should be readily apparent that the two documents are to
be reviewed in conjunction with each other; looking at either of them in isolation would tell only part of the financial story.)
Statement of profit or loss: revenue
 After rising by 5.8% in 2015, total revenue grew by a similar amount (5.6%) in 2016.
 Retail was up by 8.9%, more than offsetting a fall of 5.1% in Hospitality. Both had risen in 2015. (Retail is
consistently by far the larger business line, up from 76.4% to 78.8% of revenue.)
 The fall in Hospitality was partly caused by key customer Dougal delaying a replacement scheduled for
January 2016 at 50 hotels; and partly by a fall in the number of new customers acquired.
 The increase in Retail was in line with Piccolo’s strategic objectives. It reflected further growth from
customer Gullen and a good response to the latest advertising campaign featuring Lucy Tyler.
Statement of profit or loss: gross profit, other costs, operating profit
 Gross margin fell to 39.1% (2016: 40.9%; 2015: 39.9%), owing to higher costs at two key manufacturers.
 Some of these cost increases were passed on to Retail customers, but not to smaller Hospitality customers:
some were in financial difficulties and Piccolo might choose to stop dealing with them.
 As a result, gross margin is down in Hospitality (52.7% to 49.2%) but less sharply in Retail (37.2% to 36.4%).
(Retail therefore now accounts for 73.4% of overall gross profit (2015: 69.6%).)
 Piccolo has controlled other costs carefully, resulting in little overall change over the past two years:
o Sales and distribution costs have fallen slightly as a percentage of revenue, from 10.0% to 9.7%.
o Product innovation and design expenditure has risen slightly in 2016.
o Advertising and marketing includes a contractual success fee of £0.15m to Lucy Tyler.
o Administration and support costs have remained constant.
 In absolute terms, gross profit (£16.3 million) and operating profit (£3.2 million) are little changed from 2015.
 Examples of product innovation include:
o Successful launch of the PE7 non-stick pan in 2015, with further variations added during 2016.
o Potentially significant ongoing market testing of a new tableware range, Classic.
 Capital expenditure has been low as existing assets continue to work well, though many are fully depreciated.
 However, Piccolo will need to buy IT equipment and facilities in 2018/19 to expand its design capability.
 The increase in inventories reflects the general growth in trade, higher underlying production costs and delays
(currently being investigated) in getting products to customers near year-end.
 The increase in trade receivables is due to the struggling Hospitality customers, who are taking more credit.
 Trade payables have remained constant as a percentage of purchases, reflecting adherence to credit terms.
 Cash is up from £1.8 million to £2.8 million, as a result of changes in inventories and trade receivables.
As always, time spent prior to the exam on the management accounts and commentary would have been invaluable. The
review at Exhibit 6 provides a range of information over the period and guidance with interpreting the accounts. It was
intended to indicate to candidates the key figures that they would be expected to understand. It set the context in which they
could then analyse the results by customer set out in the following exhibits.
Exhibit 7 expands on the key features of Piccolo’s business operations. It also includes a summary of the two
business lines, tabulating revenue by customer for each of the past three years (ie, the period covered by the
management accounts). This summary is to be read in conjunction with the customer synopses provided at

Exhibits 8/9. Some of the main factors are as follows:
 Products:
 Retail: cookware and tableware are sold as boxed sets or large single orders, utensils as large orders.
The average price of a utensil is much lower than that for an item of tableware or cookware.
 Hospitality: sales mostly in large quantities, not boxed sets; small-scale replacements are also offered.
 Production and distribution:
 Finished goods are treated as Piccolo’s inventory until transferred to customers, then treated as revenue.
 For Retail customers, the size and frequency of orders are extrapolated from recent sales patterns.
 Competitors
 Piccolo operates in a market and environment with a range of business models.
 Competitors include Amefa, Churchill China, Joseph Joseph, Lakeland and Kitchencraft.
 More recently, a number of other companies have emerged, primarily working with Retail customers.
These include several that specialise in utensils, as well as PanOply, a cookware specialist.
 Seasonality
 Around 40% of Piccolo’s annual Retail sales occur in October-December.
 There is no regular pattern for Hospitality.
 Product innovation and design
 Piccolo works with manufacturers on new product design. It often licenses technology from third parties.
 It also works with Hospitality customers, using their house styles to create bespoke products.
 Piccolo has high expectations for its new tableware (Classic), due to be launched on 1 September 2016.
 A new product can take from one month to two years to develop, and cost from £10k to much more.
 Advertising and marketing
 Piccolo spends around 10% of its revenue on advertising and marketing.
 Piccolo currently uses a single agency (Thor) for its external advertising and market research work.
 It pays Thor a fixed fee, which rose from £800k to £900k on 1 June 2016 (to be held for 2 years), plus
additional amounts ranging from £100k to £250k per year.
 Piccolo measures ‘return on external advertising expenditure’ by dividing increase in total revenue for
the year by total external advertising expenditure (fees to Lucy Tyler and Thor). The target is 120%.
The two business lines
The two business lines each have three main customers, plus a large number of smaller customers accounting
in both cases for more than half of total annual revenue. Exhibits 8/9 describe the key features of each.
Hospitality
 The main regular customers are two hotel chains (Dougal and Ringford) and a restaurant chain (Quincy).
o Piccolo has been exclusive supplier to Dougal since 2008, when it upgraded the eating facilities at
all 159 hotels (there are now 225). The initial deal was worth £2.6 million to Piccolo.
o The ‘value’ chain Ringford, formed in 2013, now has 270 UK hotels and plans to buy 40 properties
from a struggling conference centre chain in 2017.
o Quincy opened its first UK outlet in 2012. It now has over 300, and plans to open more.
 Ringford shows steady revenue growth in the period from 2014 to 2016 but Dougal and Quincy have both
experienced fluctuations. ‘Other’ revenue, which was stable in 2015, fell by nearly 6% in 2016.
 The margins earned from these customers have been steady: Dougal – 60%; Ringford – 40%; Quincy – 50%.
(The variations in these figures are noteworthy in the context of the weighted average margin of around 50% for this
business stream. The margin for ‘other’ customers can be derived – down from 54% in 2015 to 49% in 2016.)
 Piccolo’s revenue depends on the wider economy (disposable income, tourism); investment by restaurant
and hotel owners in new sites; customer refurbishments; and corporate activity.
 It also derives a high proportion of revenue from replacement sales to existing customers. Customers typically
undertake a full replacement every five years. (This gives a broad basis on which recurrence of revenue may arise.)
Ad hoc replacements also occur as a result of breakages – Piccolo holds inventory to cover these.
 Piccolo has long-standing, mostly non-contractual, relationships with many customers, each served by an
account manager.
 Piccolo has a tariff of prices for each product but these are generally only starting-points for negotiation
with each customer, along with payment terms.

Retail
 Piccolo supplies its products to a wide range of retailers across the UK . Its three main customers are:
o Longfield, a large kitchenware specialist that in December 2016 will ‘pilot’ a product tracking tool
being developed by Piccolo.
o Kaster, a European supermarket chain that from September 2016 will start selling products of a new
cookware specialist, PanOply. PanOply’s products are perceived to be lower quality than Piccolo’s.
o Gullen, a leading department store, whose contract is due for review on 1 June 2018.
 All three have shown good revenue growth since 2014, notably Gullen, which has expanded the number of
Piccolo products that it stocks and its store numbers. ‘Other’ revenue has also risen steadily in this period.
(No margin information is given for Retail customers.)
 Unlike with Hospitality customers, the arrangements involve a steady supply of products, and so Retail
customers sign formal contracts with Piccolo. Each has an account manager.
 If a batch of products is found to be of poor quality, Piccolo may have to investigate and even issue a recall.
Piccolo has not made a recall since 2009 but has a process in place to deal promptly with one.
 The tariff is different from that for Hospitality, but again it is only a starting-point for negotiation. Prices are
set according to the expected pattern of sales and variety of products included in the customer’s order.
(These are critical exhibits, building on the introductory material at Exhibit 4 and accounts plus commentary at Exhibits 5/6.)
Exhibit 10 describes Piccolo’s supply chain, with vignettes of its four manufacturers: Delite and Auty (both UK),
Ravino (Italy) and Rolson (Canada). All prices are determined, and subsequent payments made, in £ sterling.
Piccolo has a service level agreement with each manufacturer, and it monitors compliance with quality standards
and environmental and ethical policies. Piccolo has collaborated on product innovation with both Ravino (Classic,
a new tableware range, scheduled for launch on 1 September 2016, potentially generating £0.1 million revenue
per month – see Exhibit 7 above) and Rolson (the PE7 non-stick pan, launched in 2015 – see Exhibit 6 above).
(This exhibit sheds further light on the cost side of the statement of profit or loss. The references to two specific products –
the only ones mentioned in the AI – should alert candidates to their significance to the company.)
Exhibit 11 expands on Piccolo’s arrangements with its exclusive distribution company, RDN, whose contract is
renewable on 31 May 2018. A key feature is the 90% annual performance target (‘Delivery Rate’), the percentage
of deliveries to customers achieved to deadline. If RDN misses this, for each 0.1 percentage point by which it falls
short, it pays Piccolo £10k: this is deducted from payments due and reflected in the draft management accounts.
(This exhibit highlights the importance of RDN to the success of Piccolo’s overall business operations. The penalty clause –
the basis for which could be open to question – emphasises the seriousness with which the RDN relationship is viewed.)
Exhibit 12 is a board briefing prepared by Sabrina Kroos, Finance and IT Director. In the context of an uncertain
economy, it sets out the key (market and operational) risks facing Piccolo and five strategic goals for the two
years to 31 May 2018. To reflect the economic uncertainty, it also includes two 2017 budgets: high (optimistic –
revenue £45 million, gross profit £18 million, operating profit £4 million) and low (pessimistic – respectively £38
million, £12.5 million, £4 million). The assumptions underpinning these budgets are outlined.
(As with any Case Study, information about the company’s strategy and future plans should be digested carefully as it will
inevitably be a reference-point in the exam. Candidates should have made sure that they understood the two sets of outline
budget figures provided in the context of previous results, the stated assumptions and their own wider understanding of
Piccolo and its market environment from the earlier exhibits.)
The AI concludes with a series of media articles (Exhibits 13(a)-(e)). The first provides some industry growth
forecasts. This is followed by shorter items touching on a range of topics addressed earlier in the AI: celebrity
chefs (Exhibits 2, 4 and 7); potential product recalls, health hazards and non-stick pans (Exhibits 3, 6 and 9);
and production quality.
(As always with articles in the AI, these shed more light – and a different perspective – on issues mentioned elsewhere.)
Overall, in the words of one tutor (enthusiastically entering into the culinary spirit): “Candidates who digested
the full range of issues available in the AI would have all of the ingredients necessary to face the challenges
that were served up to them in the EP”. Another noted that it “left open a large number of possible scenarios
by providing an equal amount of information on various different areas” and that “a rich set of information on
suppliers and customers … helps to build up a detailed ‘fictional’ world which is more engaging for students”.

14 Email dated 19 July 2017 from Olivia Harrington to you

15 Email dated 19 July 2017 from Sabrina Kroos to Olivia Harrington: Matters reflected in the draft
management accounts, and fake product issue
16 Piccolo: Draft management accounts for the year ended 31 May 2017
17 Email dated 19 July 2017 from Gautam Singh to Olivia Harrington: Celebrity chef arrangements
18 Media coverage
19 Email dated 18 July 2017 from Clive Oaks to Olivia Harrington: Dougal Hotels
20 Media coverage
Exam requirements
I would like you to draft for my review a report to the Piccolo board. This should comprise the following.
1. An analysis of Piccolo’s revenue, gross profit and operating loss for the year ended 31 May 2017 by
comparison with the previous year.
Your analysis should cover the company overall and the two business lines, Hospitality and Retail. It
should be based on the draft management accounts including relevant notes (Exhibit 16), together with
the matters described in Exhibit 15. You should also advise Piccolo on the action that it should take on
the fake product issue (Exhibit 15), referring to any ethical or business trust considerations.
2. An evaluation of Piccolo’s celebrity chef arrangements (Exhibit 17).
Using the data provided, you should calculate Piccolo’s projected return on external advertising spend
in relation to each of the two alternative sets of celebrity chef arrangements for each of the years
ending 31 May 2019 and 2020. You should comment on the adequacy of the assumptions. You should
also evaluate the financial and non-financial risks and opportunities for each set of arrangements,
including any ethical or business trust issues, and come to a reasoned recommendation. You should
refer, as appropriate, to the contents of Exhibit 18.
3. An evaluation of the proposal in relation to Piccolo’s existing customer, Dougal Hotels, following its
acquisition (Exhibit 19).
Your evaluation should cover the financial, operational and strategic issues relating to the proposal outlined
in Exhibit 19, as well as any ethical or business trust issues arising for Piccolo. You should refer, as
appropriate, to the contents of Exhibit 20. You should also evaluate the implications of the proposal for the
whole of Piccolo’s business. Please include supporting calculations.
For Requirement 1, they should then have begun a more detailed review of Exhibit 15, enabling them to
assess Piccolo’s 2017 results (Exhibit 16) in light of their analysis of 2016 (including the review at Exhibit 6)
carried out in preparation for the exam. For Requirement 2, it was essential to read Exhibits 17 and 18
carefully to identify all critical estimates and other issues to be discussed. Finally, for Requirement 3,
candidates had to relate Exhibits 19/20 to relevant material within the AI – notably Piccolo’s history with
Dougal Hotels, its strategic goals and its manufacturer relationships.
 After steady growth in 2016, revenue and growth profit both declined, and were lower than the ‘pessimistic’
budget. Despite savings in other costs, Piccolo was now reporting an operating loss.

 The decisions about celebrity chef arrangements and about the Dougal Hotels opportunity both depended
on a range of factors, both financial and non-financial.
Candidates should have recognised that, for the first part of Requirement 1, they were to concentrate on
revenue, gross profit and operating loss. They should have realised the importance of making relevant use of
the additional information provided at Exhibit 15 and how this linked to foregoing material in the AI.
Comparing the 2017 management accounts and ‘matters reflected in the draft management accounts’ (Exhibit
15) against the original 2016 management accounts (Exhibit 5) and business review (Exhibit 6) would then
reveal that:
 After steady growth in the past two years, total revenue is down £4,277k (10.3%): Hospitality by £566k/6.4% and
Retail by £3,711k/11.3% – in the context of continued economic uncertainty. Mix is broadly unchanged.
 Total revenue is also below the pessimistic budget. Hospitality has exceeded the budget by 18.2% but Retail
is 5.9% below it. (These outcomes cast doubt on the budget-setting model and Piccolo’s overall direction of growth.)
 The fall in Hospitality arises mainly from one of the large customers, Dougal, but more significantly in ‘Other’.
 Retail revenue shows a fall in all three product categories, with the largest % fall in Utensils – not in line with
the plan to grow its share to 15% over two years. In addition, the new product, Classic, has fallen short of its
sales forecasts, and there were some customer defections at the start of the year.
 Overall cost of sales is very little changed – meaning that, with the decline in revenue, GP is down by
25.2% and the margin has fallen to 32.6% – fractionally below the lower budget figure of 32.9%.
 The margin decline is across both business lines – for Hospitality it has fallen from 49.1% to 42.6%; for
Retail, from 36.4% to 30.1%.
 The two largest Hospitality customers, Dougal and Ringford, as well as ‘Other’, reveal sharp margin
declines – reflecting a continuation of the financial difficulties being experienced in 2016.
 The fall in Retail margins is mainly explained by Piccolo’s inability to pass on higher manufacturer costs.
 Other costs have reduced in total, by £588k (4.5%) – with savings in three categories, partly offset by a
small rise in the fourth (Administration and support).
 There have been operational issues with RDN, creating a penalty of £200k to Piccolo for failure to meet the
Delivery Rate target. Sales and distribution costs as a % of revenue have risen from 9.7% to 9.9% – suggesting that
the problems may be ongoing.
 This reduction is not sufficient to prevent an operating loss, of £363k, versus lower budget estimate of £500k profit.
 There are issues with fake PE7 non-stick pans.
(Candidates will have expected to analyse the 2017 management accounts, and to integrate these with additional data about
customers and products as these were all well signposted in the AI.)
For Requirement 2, Exhibit 17 is an email from Gautam Singh (Marketing Director). It explains that in light of
Piccolo’s forthcoming 25th anniversary and the expiry of Lucy Tyler’s contract in May 2018 – both events flagged in
the AI – as well as discussions with Eric Franks – who is also mentioned in the AI – there is a chance to review the
company’s celebrity chef arrangements. Both Lucy and Eric have specified their fee demands, which are based
on different revenue growth scenarios. Gautam has prepared his own revenue forecasts, which differ for the two
celebrities. Piccolo needs to make a decision, based both on the projected return on external advertising spend –
the ratio identified at Exhibit 7 – and on the associated financial and non-financial risks and opportunities.
Exhibit 18 comprises a series of three press articles, one relating to an internet film showing Lucy using a
competitor’s products; the second revealing that Eric has been raising his public profile to enhance his prospects
of gaining a contract with one of the major cookware companies (including Piccolo); and the third fundamentally
questioning the value of celebrity endorsements.
(This exhibit gave candidates a clear set of data with which to work for the three parts of the requirement: calculation;
assessment of assumptions; and discussion of risks and opportunities (including ethical and business trust issues). An
initial read should have revealed that: a logical approach was needed for the calculation, using the criteria at Exhibit 7;
there were numerous assumptions to query; and there were a number of issues affecting the choice to be made. As well as
the calculation, many of the points raised should have rung bells from the rest of the case material, notably: Lucy’s
current contract and history (Exhibit 4); Piccolo’s actual financial performance and reliability of past budgets (Exhibits
5/6/12/15/16); Piccolo’s overall advertising arrangements and its relationship with Thor (Exhibit 7); and Eric’s business
problems (Exhibit 13b).)

Exhibit 19 provides candidates with the following information in respect of Requirement 3:
 Dougal Hotels is being acquired by the private equity firm Wadham. A new logo and brand have already
been developed, but the Dougal name will stay.
 All tableware and cookware will be disposed of and replaced by totally new items. Wadham has promised
Ross Dougal (CEO) that the supply of these will be offered initially to Piccolo – on Wadham’s terms.
 A gross margin of 30% to Piccolo was mentioned. Piccolo would expect to earn revenue of £3 million from
the initial supply, with further revenue subsequently from product replacements and Dougal’s expansion.
 Wadham also proposes to extend Dougal’s menus at all its hotels. This will require it to buy brand-new
Indian and Thai cookware and tableware. Initial revenue from these would be about £2k per hotel.
 As Piccolo does not have these items in its current ranges, they will have to be sourced from an existing or
new manufacturer (eg, Zoto – the up-and-coming cookware manufacturer mentioned in the AI). The design
process would last three months and cost £0.1 million.
Exhibit 20 comprises two press articles. The first gives more detail on Wadham, including: deal date (1
December 2017); its proposed expansion of Dougal, both in the UK (from 225 to 300 hotels) and into Canada;
its history of seeking exits after three years; and its ‘ruthless management style’. The second enlarges on Zoto
and specifically the fact that its recent strong results are attributable to the rising demand for international
cookware, especially Thai and Indian products. It is now seeking to extend its Hospitality sector presence into
hotels and conference centres.
(With proper preparatory work on the AI, candidates should have been ready for a requirement of this type. The challenge
lay in integrating the new information with that previously seen, particularly in Exhibits 8 and 12, and planning the
structure of their answers so as to cover all the three options, including supporting calculations.)
The EP develops a number of features of Piccolo’s business from the AI, each needing a different technique
for advising the board. Exhibit 14 sets out the route to be followed in writing the report:
 Requirement 1 entails a clear focus on financial statement analysis, covering all the items specified.
element of professional scepticism, and the need to address some broader issues.
familiarity with Piccolo’s strategy and the wider scenario is needed.
As one tutor stated: “This was an exam which provided a fair test of candidate’s professional skills and
knowledge of the information presented in the AI. The exam contained a range of issues which had all been
previously introduced in the AI. However … time management and careful planning will be pivotal to
candidates succeeding.”
Grades were awarded under five topics: Executive summary; Review of Piccolo’s financial performance; Evaluation
of Piccolo’s celebrity chef arrangements; Evaluation of Dougal Hotels takeover; Overall paper. For each topic,
under each of the four Professional Skills, there were a number of ‘boxes’ representing specific areas in which the
skill was to be demonstrated. At each box, one of five available grades was awarded: CC (Clearly Competent); SC
(Sufficiently Competent); IC (Insufficiently Competent); ID (Insufficiently Demonstrated); NA (Not Attempted). The
number of boxes per topic and skill (below) reflects (i) an even balance between the three main requirements and
(ii) more weighting towards SP&S and AJ, as indicated in the Exam Paper rubric. It is consistent with recent exams.

 Review of Piccolo’s financial performance 2 3 3 2 10
 Evaluation of Piccolo’s celebrity chef arrangements 2 3 3 2 10
 Evaluation of Dougal Hotels takeover 2 3 3 2 10
7 11 10 8 36
40

In each of the three main requirements, there were two skills boxes available under A&UI, the first for use of
the case information and the second for referring to Piccolo’s business issues and the wider context.
The top box at Requirement 1 was very well done, with very few instances this time of calculations being in
the appendix but not then discussed in the body of the report. A majority of passing grades was also earned
for Requirement 2. Marks were much lower at Requirement 3, with many candidates looking at the Dougal
proposal in isolation rather than recognising the context (Dougal’s difficulties and their impact on Piccolo).
For the second box, the themes to be identified for each requirement had to be contextualised and integrated
into the report with a meaningful link to their impact on Piccolo. In Requirement 1, the business issues were
covered well, with most candidates again achieving a passing grade. The first bullet enabled them to parade
their knowledge of the pervasive issue of Brexit, and they did not disappoint. Requirement 2 was less well
done, with candidates often failing to pick up on the significance of the 25th anniversary or the uncertain
effectiveness of celebrity endorsements. For Requirement 3, the most common points were those relating to
the company’s strategy – a link with which candidates have often struggled in the past – and Zoto.
Better candidates used their own research effectively (eg, economic data; news reports on celebrity chefs).
Weaker ones introduced a topical issue that they had identified in their preparation but whose relevance to
Piccolo they failed to demonstrate.
Candidates generally displayed excellent SP&S skills, with a majority of passing grades being earned in most
boxes. This is largely because they followed the instructions:
 Requirement 1: Financial analysis on revenue, gross profit and operating loss

 Requirement 2: Calculating return on external advertising expenditure; ethics and business trust issues
 Requirement 3: Consideration of financial, operational, strategic issues; ethics and business trust issues
The lowest marks were for operational and strategic issues at Requirement 3, where candidates struggled to
appreciate the size of the proposed contract and its impact on Piccolo’s business processes.
Further detail can be found in the section on each main requirement below.
AJ was again the poorest skill across all three requirements. A significant majority of candidates failed to
develop what was often satisfactory analysis work. The best scripts contained reasonable, balanced and
appropriate judgements built on analysis and demonstrating a logical flow of decision-making and real
understanding of the case. Weaker candidates miss points by not explaining impact, not questioning data, or
otherwise not deconstructing how they arrived at their conclusions and recommendations.
At both Requirements 1 and 2, candidates did well in the first box, but for the other two boxes, fewer than half
achieved any passing grades (mostly) SC. For Requirement 1, many extended their work on the headline
figures from the management accounts into a more detailed evaluation covering the figures for products and
customers provided at Exhibit 15. However, they were unable to articulate the reasons for, and implications
of, changes in costs or to step back and consider the bigger picture of the statement of profit or loss. For
Requirement 2, they evaluated the underlying assumptions well but failed to consider the wider risks and
opportunities attaching to each of the celebrities or to work out the actions to be taken in respect of the ethical
issues identified.
For Requirement 3, all three boxes yielded low scores. The majority of candidates simply failed to evaluate
adequately the issues that they had identified or to apply appropriate professional scepticism to the scenario.
Many also ignored the requirement to assess the impact of the proposal on Piccolo’s overall business.

For each of the C&R boxes, more than half of candidates gained a passing grade. As often, conclusions were
generally better than recommendations.
In respect of conclusions, candidates did not appear to see the operating loss as a problem at Requirement 1.
For Requirement 2, weaker ones did not state the % returns or conclude on the assumptions and in
Requirement 3 they did not address the financial impact on the overall business.
Recommendations for Requirement 1 on the marking key were mainly in relation to the fake product issue,
and many candidates were able to score well for these. For Requirements 2 and 3, advice typically involved
generic suggestions to negotiate, perform due diligence and market research.
Executive summary
Overall, marks for the executive summary and the number of passing grades were fairly consistent between the
three columns on the marking key, with Requirement 3 being slightly worse than Requirements 1 and 2. A
pleasing feature was that a majority of candidates made at least one recommendation at each requirement.
The marking key offered considerable flexibility. For example, candidates could have commented on the change
in any individual cost category or individual customer at Requirement 1, and recommended or concluded on any
business trust or ethical issue at Requirement 2 or Requirement 3.
For Requirement 1, the top box was generally well answered. Over half of candidates gained all points except the
crucial observation that Piccolo’s loss-making position was unsustainable. Rather than commenting on the
seriousness of the operating loss, candidates often simply stated the absolute and % movement from the previous
year’s profit (a small number just gave the % changes). Many included too much financial data, rather than just
picking out the highlights – so their output could only generously be called ‘summaries’. In the bottom box, weaker
candidates did not cover the first two bullets or just covered one of them. They did not address any individual
operating costs and also just provided a recommendation on the fake PE7 rather than assessing its impact. The
most common recommendation was along the lines of: “Communicate product issue to customers and seek legal
advice”.
For Requirement 2, in the top box, weaker candidates did not give numbers for the % return for Lucy/Eric,
instead just stating whether or not they had met the 120% target. A few combined the two years, therefore not
answering the requirement and losing credit. Some candidates did not question the assumptions at all here;
for those who did, it was rare to see both revenue and costs addressed. In the bottom box, the most common
omission was in relation to ‘other risks/opportunities’: candidates tended to restate facts already provided to
them about the personalities rather than their own development of these facts. In concluding on the way
forward, most favoured Lucy, eg, “The preferred option is to continue advertising with Lucy given the financial
findings, her history of success with Piccolo and the established relationship”. Recommendations were usually
along the lines of “negotiate fees with Lucy and Eric”.
For Requirement 3, at the top box, most candidates stated their calculated revenue figure and linked the proposal
to Piccolo’s strategy. In general, candidates have improved over recent sittings at giving an idea of scale for
financial proposals and impact on the overall business, eg: “Revenue from the initial supply is estimated to be
£3m, being 36.3% of Hospitality’s revenue in 2017 …”. Many identified a key operational issue, usually capacity.
Better candidates discussed reducing overall margins or continued replacement revenue going forward. In the
bottom box, it was very rare to credit the scepticism point – but, as with Requirement 2, most achieved the other
three bullets, The most frequent recommendations were to “negotiate with Wadham” (a few wanted to negotiate
directly with Dougal) and “perform due diligence on Wadham”.
As always, the weakest and/or least well organised candidates ran out of time, leading to a very short
summary – or none at all. In some cases, parts were excluded altogether. Candidates must ensure that they
allocate sufficient time across the entire paper to avoid missing out on these (relatively straightforward) marks.
Requirement 1: Review of Piccolo’s financial performance
Requirement 1 was, in one tutor’s words, “a conventional analysis of the Income Statement down to Operating
Loss .... There was sufficient information in the EP on 2017 to supplement that provided in the AI for candidates
to develop their analysis.” Another tutor concurred, noting that candidates could “analyse an abundance of
individual areas of the company’s performance. As a result of this, all candidates should have had ample
opportunity to provide comprehensive analysis of each of the areas requested”. They were also asked to advise

Piccolo on the action that it should take as a result of some fake product sales. In this connection, another tutor
noted that “the requirement to assess ethical aspects [at Requirement 1] is unusual but not without precedent.”
Candidates should have been well prepared for a review of the 2017 management accounts. The challenge
was to assimilate the additional financial and non-financial data at Exhibit 15 into a coherent narrative on
Piccolo’s performance by working through the information systematically. The parenthesis at the start of Exhibit
5 (“worse than our pessimistic estimates”) should additionally have reminded candidates about Piccolo’s
budgets (Exhibit 12), offering a hint to compare actual results with these as part of their wider narrative.
Many did well in this section. They covered the principal items in the accounts and calculated them correctly –
though some struggled with rounding the OP%, calling it -0.1% instead of -1%; others, thrown by the very fact
that it was negative, simply left a space for 2017 in the table in their appendix.
On revenue, weaker candidates failed to provide qualitative comments and so missed the first two bullets
under SP&S. Others went to the opposite extreme and preceded every figure with the word “significantly” – a
noticeable and often inappropriate repetition. The other three bullets were often differentiators: it was rare for
all three to be credited. Revenue by customer was probably the most common, and those who commented on
this were then good at expanding and giving the reason for the movement under AJ. The first AJ box generally
yielded high marks, with many candidates comparing overall revenue to the general market and to budget, as
well as discussing ‘Classic’. Candidates spent more time on revenue than on operating costs/profit, possibly
as a result of time pressure and the need to move on to the other requirements.
In respect of gross profit, many candidates only gained the first two bullets for SP&S. Similarly, for AJ most
achieved the first two bullets and occasionally the third too – development was a little harder for Retail (by
product) than for Hospitality (by customer). For operating profit, SP&S should have been straightforward and
indeed many scored passing grades. Only a small number of candidates compared to budget. Weaker candidates
generally picked up only two costs to discuss (usually S&D, the largest movement; and A&S, the only one to go
up). However, it was rare to see good analysis of costs develop into judgement, eg: “A&S costs rose by £116k
(4.0%), from £2,931k to £3,047k. This is distorted by £280k staff redundancies: if they are excluded, it would be
down by around 5% in line with other costs. This seems reasonable as redundancy costs also mean that ongoing
salary costs for the last quarter will have been lower (and will continue to be lower after 31 May 2017).”
The heading of Exhibit 15 was significant – “Matters reflected in the draft management accounts”. In other
words, all the issues referred to had already been dealt with / adjusted in the figures presented at Exhibit 16.
In particular, this included the £200k penalty from RDN, as the wording deliberately echoed that in Exhibit 11.
Even if the amount were yet to be adjusted, Piccolo would still be reporting an operating loss (of £163k). Of
those candidates who computed the penalty, a few mistakenly treated it as an extra cost rather than a
deduction from costs.
In general, most candidates took at face value the paragraph about RDN at Exhibit 15 and moved on after
dealing with the penalty. They could have observed that S&D costs as a share of revenue had risen from
9.7% to 10.5% (with the penalty add-back). They could also have made recommendations, eg to reassess
the RDN relationship with its five-year contract due for renewal in 2018 or to review the basis of calculating
the Delivery Rate (no reference to order size or other variables).
The fake pan issue proved to be a differentiator. Weaker candidates did not evaluate it well, often identifying
only the reputational impact. Stronger candidates set the scenario better, which helped them to consider the
financial/accounting implications. Most candidates provided three recommendations on the fake pans and so
gained a passing grade on the second C&R box; one other recommendation, in relation to the main financial
analysis, would then have made this a CC rather than an SC.
Overall, recommendations were more commercial and more focused than has often been the case in the past.
A good example was this script: “Investigate poor performance of ‘Classic’ range; discuss price increases with
customers to improve margins; investigate why fewer new customers; discuss distribution issues with RDN to
improve; seek legal advice regarding fake PE7; find out which branch sold fake PE7 fakes and prevent further
sales; contact customers to make aware of fake PE7; review and amend budgets.” Conclusions were mostly
adequate. As in the executive summary, the all-important issue (Piccolo’s operating loss) escaped many radars.
In one tutor’s words, this was “a fair requirement with the typical time management challenges that often
accompany financial statement analysis. Candidates who carefully planned their answers and gave
consideration to the breadth and depth of their analysis should have scored well without creating undue time
pressure on other sections of their reports. Weaker candidates who let their ‘calculators run away with them’ will
have found it difficult to recover.”

Requirement 2: Evaluation of Piccolo’s celebrity chef arrangements
Requirement 2 produced good results at this session. There were in effect four elements:
 Ratio calculations
 Discussion of assumptions (professional scepticism)
 Evaluation of financial and non-financial risks and opportunities (including business trust and ethical issues)
 Reasoned recommendation.
As one tutor commented, “candidates should have already been acquainted with this calculation from the
information provided in the AI. Those who diligently followed the instructions that they were given in the EP
should have completed these calculations with relative ease”. Another commented that “the calculations were
straightforward, although some candidates may have been thrown by the lack of a budget for the new agency
charge in 2020”. The assumptions to be challenged, while relatively small in number, needed in-depth analysis.
Candidates scored consistently well across A&UI, SP&S and C&R; AJ was the weakest skill. The vast majority
of calculations were correct, indicating that candidates had familiarised themselves with the ratio as described
in Exhibit 9. As a result, they earned passing grades at the relevant places (SP&S boxes 1 and 2). Candidates
appear to have heeded the repeated message of the Examiners to work with the numbers given and only then
to discuss the underlying assumptions and possibly to consider flexing their figures. The occasional candidate
made odd assumptions, such as the one who did not calculate the return on advertising for Eric for 2019 and
just wrote “N/A – as no change in revenue”. Only a tiny minority did not attempt the ratios at all.
Having done their initial calculations, candidates were expected to go on and look at the key assumptions and
comment with due professional scepticism on each. The basic evaluation was in fact well done. Many rightly
concluded that the revenue growth projections were optimistic in view of Piccolo’s 2017 performance and/or
the market decline. Most went on to compare their figures for the two celebrities with one another and/or with
the 120% target. They also mentioned that changing assumptions would affect the return or discussed the
advertising fees being low, and so quite often achieved a passing grade in the top AJ box. Those who carried
out any sensitivity analysis or other supplementary calculations earned further credit on the back page of the
key.
Few were troubled by the fact that, under the proposal as presented, Eric would not earn any fees in 2019 if
revenue did not reach £40m, or gave a wider significance to the 25th anniversary and the one-off marketing
opportunity that it presented. It was possible to demonstrate a broad understanding of the scenario in a
succinct paragraph: “The figures for Thor are based solely on the fixed element of £1.1m (rising from £0.9m on
1 June 2018), but this is probably understated. Normal experience is for an additional amount of £100k to
£250k each year, and this could be higher in 2019 to reflect the extra work needed to promote Piccolo’s
anniversary. It is also not stated whether Thor’s fixed fee might increase for 2020.”
The second AJ box (evaluation of risks/opportunities) was poor: the most popular points were 2 and 3.
Candidates often viewed the situation as black or white: Eric is unknown so riskier, Lucy has a track record so
not as risky – for which they were rewarded under A&UI.
Ethical and business trust issues were well identified but they were then not developed: many did not get
beyond the advice to discuss the internet film with Lucy. In general, candidates did better with the Lucy issues
than the Eric ones – perhaps surprisingly as the AI background on Eric should have been a useful springboard
from which to debate his potential impact on Piccolo. Overall, the three media articles should have helped
candidates demonstrate their professional scepticism. Few questioned in any detail the alternative of using
neither Eric nor Lucy – in effect, not arbitrating between Gautam Singh’s assertion that “not having a celebrity
endorsement is not an option” and Bernice Brookman’s independent research.
Conclusions were generally well done. The majority advised Piccolo to retain Lucy: “As Lucy gives a higher
and consistent return on advertising, it is recommended to remain with Lucy over Eric Franks”, though others
took the opposite view: “As Lucy’s return is decreasing and Eric’s increasing, it could be that Eric is a better
investment in the future.” In both cases, candidates arguing on purely financial grounds were often too
dogmatic about the revenue projections, treating them as a certainty. A more considered preference for Eric
was along these lines: “Piccolo should choose Eric Franks to freshen up their marketing. He is cheaper when
combined with the new agency and will be more motivated with the success fee. He appears to be ‘fun’ and
fits in with the strategic direction Piccolo want to go. He is popular and receiving a lot of positive publicity.” A
minority sat on the fence: “Piccolo must not make a decision until further information can be confirmed
regarding Lucy’s incident and the new advertising agency assessed.”

Lists of recommendations were dominated by negotiations, due diligence and market research, which – if all
included – gained their authors a passing grade. Other sensible advice included the need for Piccolo to
develop “a more complex KPI to measure return on external advertising spend, such as one using
profitability”, but the linked AJ point (‘suboptimal decision based on arbitrary 120%’) was usually not made.
As one tutor commented, “Only those candidates who took time to structure their answer carefully will have
been able to provide concise coverage of all of the issues requested. If you look carefully at each individual bit
of this requirement, then there is nothing inherently difficult.”
Requirement 3: Evaluation of Dougal Hotels takeover
As is often the case, Requirement 3 produced the lowest scores for this session. As for Requirements 1 and 2,
there were several elements: candidates needed to address the financial, operational and strategic issues, as
well as ethical and business trust issues, relating to the proposal.
As part of this, and in line with all recent sittings for Requirement 3, they were also told to include supporting
calculations. As one tutor remarked, “the EP provided candidates with a small selection of numbers which
adept candidates should have used to their full potential.” Another noted that “the financial appendix was
straightforward and there was nothing in the content that should have caused candidates concern”.
In the event, a substantial number of candidates did include some computations. Many showed revenues of
£3m and £450k, and then applied a 30% margin. Around half of these went on to calculate the impact of the
expansion or revenue per hotel and thus were able to secure a CC grade. Only a few attempted to work out
replacement revenue. Some candidates mistakenly deducted the £100k design cost in arriving at GP (it is an
‘other cost’ in the management accounts).
Of those candidates who evaluated the figures, most gauged the contract size in terms of Piccolo’s overall
revenue, the Hospitality business stream or the original Dougal contract. Many also noted that the 30% GP
was lower than Dougal’s current margin (though weaker candidates compared it to 2016 60% rather than the
2017 50% that they should have determined at R1). Only a few went on to state the resulting impact on overall
margins. Those who calculated revenue per hotel usually also commented about it (“the £2.6m for the initial
supply in 2008 was from 159 hotels – ie, £16.4k per hotel versus £13.3k for the new arrangement with 225
hotels: we need to understand the reason for this difference”); this enabled them to achieve a passing grade
for the first AJ box.
While it was possible to achieve reasonable grades by focusing on the new material at Exhibits 19/20, better
candidates displayed a strong awareness of the AI and the wider context. In particular, they recognised the
board briefing at Exhibit 12 as an important reference-point, thus gaining a passing grade in the second A&UI
box. They also benefited from having the previous material on Dougal (Exhibits 6, 7 and 8) at their fingertips,
together with the very last item in the AI (Exhibit 13e, on the new company Zoto).
Candidates did poorly on operational and strategic issues. Few recognised that the proposal involved a large
number of products and deliveries within a short period – let alone the additional complication that the target
date was unknown (we are told only that Wadham’s acquisition takes effect on 1 December). For evaluation,
candidates focused on capacity, mainly for Zoto. They could have used their work on S&D and A&S costs
from R1 to discuss capacity at RDN following the problems experienced in the year or capacity within
Piccolo’s own management team following the March 2017 redundancies. They should also have spotted the
potential advantages of using the existing Canadian manufacturer Rolson for the new hotels in Canada.
Discussion of the new Thai and Indian products was often unfocused. Here, too, good knowledge of the case
would have reaped rewards, such as: “The design process is estimated to last 3 months and cost £100k. Both
of these may be understated: the design period for a new product can be up to two years and the cost can be
much more (annual product innovation and design spend is typically about £2m; overspend on Classic was
£240k). There is scope to sell these products to other customers (Hospitality and Retail), so any development
cost would be spread much further.” One candidate advised Piccolo to “tender for DH’s refurbishment at a
reasonable margin (40-60%) and not tender for the international cookware and tableware…” – as though the
main contract and the additional part could be decoupled.
On ethical and business trust issues, around half of candidates scored an SC or CC under SP&S but, as
usual, evaluation of ethical issues was poor. Some were apprehensive about the disposal of the tableware to
schools: “There may be potential ethical concerns as regards the donation of old tableware and cookware to
schools and in regards to lifetime guarantees.”

Most candidates gained a passing grade for their conclusions, and over half did so for recommendations by
again mentioning negotiation and due diligence.
Overall, as one tutor reflected, R3 “provided a good test of the candidates’ ability to evaluate a range of
commercial issues and to demonstrate their understanding of the relevance of the issues presented in the AI”.
Appendices on the whole were clear and well laid out. The first, relating to Requirement 1, was mostly well
done and at a sufficient level of detail, showing key movements, with both absolute and percentage figures.
Where lower grades were awarded, this was usually because calculations by customer or product were not
shown. For the second appendix, around three-quarters of the cohort gained a passing grade, setting out their
numerical work clearly. The main omission here was ‘other relevant calculations’. Where these were done,
they usually comprised a sensitivity analysis showing by how much costs would change to take the return
below / above 120%.
The majority achieved passing grades for the two boxes here. Under ‘structure’, some again failed to number
their pages or to include sufficient appropriate headings. Illegibility remains a problem, though the July 2017
session did see an improvement here. In terms of style, many scripts were in a memo format rather than an
external report. Candidates also seem to be becoming sloppier with their numerical annotations, missing £ or
k. Tactlessness was prevalent, especially at R2: whilst gaining the AJ mark in R2 for recognising potential
bias, many lost the tact mark: “Lucy produces higher revenues; is this an element of bias from Gautam Singh
that he believes Lucy will be more appealing?” or “They have been prepared by the marketing director so may
not be very accurate as he is not from a finance background.”

PART 4: APPENDICES
APPENDIX 1: FINANCIAL STATEMENT ANALYSIS: Analysis of performance
1: Against prior year 2017 2016 Change Change

£000 £000 £000 %
Revenue 37,436 41,713 (4,277) (10.3%)
Cost of sales (25,231) (25,394) 163 0.6%
Gross profit 12,205 16,319 (4,114) (25.2%)
GP% 32.6% 39.1%
Other costs (12,568) (13,156) 588 588
Operating (loss)/profit (363) 3,163 (3,526) (111.5%)
OP% (1.0%) 7.6%
Revenue
Hospitality 8,271 8,837 (566) (6.4%)
Retail 29,165 32,876 (3,711) (11.3%)
37,436 41,713 (4,277) (10.3%)
Mix
Hospitality 22.1% 21.2%
Retail 77.9% 78.8%
100.0% 100.0%
Gross profit / gross profit margin
Hospitality 41.6%/3,439 49.2%/4,345 (906) (20.9%)
Retail 30.1%/8,766 36.4%/11,974 (3,208) (26.8%)
32.6%/12,205 39.1%/16,319 (4,114) (25.2%)
Mix
Hospitality 28.2% 26.6%
Retail 71.8% 73.4%
100.0% 100.0%
Other costs
Sales and distribution 3,713 4,034 321 8.0%
Product innovation and design 2,057 2,153 96 4.5%
Advertising and marketing 3,751 4,038 287 7.1%
Administration and support 3,047 2,931 (116) (4.0%)
12,568 13,156 588 4.5%
2: Against ‘lower’ budget 2017 (actual) 2017 (budget) Variance Variance

£000 £000 £000 %
Hospitality 8,271 7,000 1,271 18.2%
Retail 29,165 31,000 (1,835) (5.9%)
Revenue 37,436 38,000 (564) (1.5%)
Hospitality 3,439 3,000 439 14.6%
Retail 8,766 9,500 (734) (7.7%)
Gross profit 12,205 12,500 (295) (2.4%)
GP% 32.6% 32.9%
Other costs (12,568) (12,000) (568) (4.7%)
Operating (loss)/profit (363) 500 (863) (172.6%)

3: Other analysis 2017 2016 Change Change

£000 £000 £000 %
Revenue by customer – Hospitality
Dougal Hotels 929 1,056 (127) (12.0%)
Ringford 1,537 1,299 238 18.3%
Quincy 738 766 28 (3.7%)
3,204 3,121 83 2.7%
Other 5,067 5,716 (649) 11.4%
8,271 8,837 (566) (6.4%)
Gross profit by customer – Hospitality
Dougal Hotels (50%) 466 (60%) 634
Ringford (35%) 545 (40%) 520
Quincy (50%) 370 (50%) 383
1,381 1,537
Other (41%) 2,058 (49%) 2,808
3,439 4,345
Note: For named customers, 2016 £000 calculated by applying % figures at Exh 7; 2017 % calculated from £000
revenue and gross profit figures; for ‘other’, margins calculated as balancing figures
Revenue by product category – Retail

Tableware (65%) 18,800 (60%) 19,726 (926) (4.7%)
Cookware (27%) 8,000 (30%) 9,863 (1,863) (18.9%)
Utensils (8%) 2,365 (10%) 3,287 (922) (28.0%)
29,165 32,876 (3,711) (11.3%)
Note: 2016 £000 calculated by applying % figures at Exh 4; 2017 % calculated as share of total £000
Classic
Forecast sales = £900,000 (9 months x £100,000) [Exhibit 10]
Actual sales = £450,000 (6 months x £75,000) [Exhibit 15]
Purchase costs
Per accounts 25,322 26,215
As share of revenue 67.6% 62.8%
Note: Alternatively, purchase costs could be recalculated on a constant currency basis.
Sales and distribution costs as % of revenue % of rev % of rev

Per accounts 3,713 4,034 9.9% 9.7%
Add back: RDN penalty (20 x £10,000) 200 -
Sales and distribution costs excl. one-off item 3,913 4,034 10.5%
Administration and support costs

As above 3,047 2,931
Less: redundancies (280) -
Administration and support costs excl. one-off item 2,767 2,931

APPENDIX 2: FINANCIAL DATA ANALYSIS: Calculation of return on external advertising
With Lucy Tyler With Eric Franks

Year ending 31 May 2019 2020 2019 2020
£000 £000 £000 £000
Indicative revenue 42,000 45,000 40,000 42,000
Revenue increase (£000) [A] 3,000 3,000 1,000 2,000
Revenue increase (%) 7.7% 7.1% 2.6% 5.0%
Fees payable
Basic (Lucy = 800 x 1.2; 800 x 1.2 x 1.2) 960 1,152 1,000 1,000
Success (based on 10% revenue increase) n/a n/a n/a -
960 1,152 1,000 1,000
Advertising agency cost (Thor / new) * 1,100 1,100 600 600
Total external advertising cost [B] 2,060 2,252 1,600 1,600
Return on external advertising [A]/[B] 146% 133% 63% 125%

* Cost for Thor is the fixed amount only – no information given about variable element in these years
For 2018, with revenue of exactly £39m, return = 39,000 – 37,436 = 1,564 / (800 + 900 = 1,700) = 92%. With
revenue of £40m, this would rise to 2,564 / 1,700 = 151%. With revenue of £38m, it would be 564 / 1,700 = 33%.
Sensitivity analysis
Sensitivity calculations could be prepared for a number of scenarios, for example:
 All 2019 and 2020 figures as above but 2018 revenue of £38m
 Using Lucy’s revenue forecasts for Eric or vice-versa
 Including extra advertising costs (£100k – 250k range)
WORKING FOR REQUIREMENT 3: Dougal Hotels revenue and gross profit
International
Initial supply cookware SUBTOTAL UK expansion TOTAL
£000 £000 £000 £000 £000
Revenue 3,000 450 3,450 1,000 4,450
Cost of sales (2,100) (315) (2,415) (700) (3,115)
Gross profit (30%) 900 135 1,035 300 1,335
Notes:
 Stated gross margin of 30% has been applied throughout

 International cookware revenue = £2k x 225
 UK expansion = 75/225 =1/3 x initial supply
 No figures included for overseas expansion as no information provided

July 2017 - Piccolo Limited
First Marking
DATE CANDIDATE NO.
TIME MARKER NUMBER
CC
SC
IC
ID
NA
Total 6 10 10 10 4 40
TEAM LEADER CHECKER

SIGNATURE SIGNATURE
Changes made? c
Executive summary
REQUIREMENT 1 - Review of Piccolo's financial performance REQUIREMENT 2 - Evaluation of Piccolo's celebrity chef arrangements
w Revenue v 2016: comment on Total / Hosp AND Retail (fig) w Lucy: % return on advertising expenditure figures (2019 AND 2020)
w GP/GP% v 2016: comment on Total / Hosp AND Retail (fig) w Eric: % return on advertising expenditure figures (2019 AND 2020)
w OP/OP%: loss-making position unsustainable w Evaluates revenue assumptions
w Compare to budget / 5% market decline w Evaluates celebrity/agency fee assumptions
w Comment on individual customer / product category (fig / reason) w Considers other risks/opportunities
w Comment on S&D / PI&D / A&M / A&S (fig / reason) w Concludes on way forward
w Fake PE7: impact (eg reputational damage) w Concludes/recommends on ethical/business trust issue
w Recommendation re fake PE7 w Other commercial recommendations
REQUIREMENT 3 - Evaluation of Dougal Hotels takeover
w Provides calculated revenue/GP figure
w Identifies financial impact on overall business
w Identifies key operational issue
w Identifies link to existing strategy
NA ID IC SC CC
w Demonstrates scepticism on information provided
w Concludes/recommends on ethical/business trust issue
NA ID IC SC CC
CC
SC
IC
ID
NA
Total 6
REQUIREMENT 1 - Review of Piccolo's financial performance
w Total revenue: down £4,277k AND down 10.3% w Hosp: down £566k / 6.4% AND qualitative comment
w Total GP: down £4,114k AND down 25.2% w Retail: down £3,711k / 11.3% AND qualitative comment
w Total GP%: 32.6% v 39.1% w Hosp: calc of revenue v 2016 by individual customer (fig)
w Total OP: down £3,526k AND down 111.5% w Retail: calc of revenue v 2016 by product category (fig)
w Total OP%: (1.0%) v 7.6% w Mix: Hosp 22.1% v 21.2% / Retail 77.9% v 78.8% / little change
Identifies business issues and wider context Financial analysis: GP/GP% (report)
w Brexit: forex movement / uncertainty / tourism w Hosp: down £906k / 20.9% OR 41.6% v 49.2%
w Market: competition / trading down / deferring purchases w Retail: down £3,208k / 26.8% OR 30.1% v 36.4%
w 2016 revenue: up 5.6% / Hosp down 5.1% / Retail up 8.9% w Hosp: GP/GP% v 2016 by individual customer (fig)
w Unable to pass on increased supplier prices w Comparison of GP/GP% to budget (fig)
w Utensils: target 15% of Retail revenue w Mix: Hosp 28.2% v 26.6% / Retail 71.8% v 73.4% / little change

-
NA ID IC SC CC
Financial analysis: OP/OP% (report)
NA ID IC SC CC w S&D: down AND £321k / 8.0% / activity level down
w S&D: calc of RDN penalty £200k
w PI&D: down AND £96k / 4.5% / despite Classic £240k overspend
w A&M: down AND £287k / 7.1% / £200k success fee not achieved
w A&S: up AND £116k / 4.0% / £280k redundancies
w Comparison of OP/OP% to budget (fig)
NA ID IC SC CC
w Total revenue fall > 5% market decline w Revenue: comment on Total / Hosp AND Retail (fig)
w Total/Retail < low budget / Hosp > low budget w GP/GP%: comment on Total / Hosp AND Retail (fig)
w Hosp: comment on reason for change (Dougal/Other) w OP/OP%: loss-making position unsustainable
w Hosp: comment on reason for change (Ringford/Quincy) w Comment on impact of fake PE7
w Retail: comment on reason for change (eg RDN losses)
w Classic: reduced revenue (fig) / missed peak Xmas sales
Evaluation of GP/OP analysis Makes recommendations
w GP down more than revenue / OP driven by fall in GP w Further analysis by product/customer needed
w Total GP%: impact of changes within Hosp revenue/GP w RDN: recommendation on way forward
w Total GP%: impact of changes within Retail revenue/GP w PE7: confront retailer management / investigate facts
w S&D: shows inefficiency with/without penalty adj (9.9% rev) w PE7: demand store recall / compensation / legal advice
w PI&D: reduced despite need to invest in new products w PE7: consider need for press release / social media response
w A&M: remains at 10% revenue / may need to be increased w PE7: reconsider ongoing trading with retailer
w A&S: redundancy costs offset by lower salaries in Q4 w Other financial performance recommendations
NA ID IC SC CC
Evaluation of fake PE7 issue
w Not cooking properly / possible health issues NA ID IC SC CC
w One store only / issue confined / full recall unnecessary

CC
w Piccolo victim of fraud / has done nothing wrong SC
IC
w Potential reputational damage
ID
NA
w Potential financial/accounting implications
Total 10
NA ID IC SC CC
REQUIREMENT 2 - Evaluation of Piccolo's celebrity chef arrangements
Uses AI / EP information (report) Calculation for Lucy (report / appendix)
w Lucy: outline contract terms eg 20% increase pa w Revenue increase: £3m AND £3m (£39m->£42m->£45m)
w Eric: outline contract terms eg £1m if £40m revenue w Fees: £960k AND £1,152k
w Lucy: known track record / contract renewal May 2018 w Ad agency: £1,100k AND £1,100k
w Eric: unknown to Piccolo / closed restaurants / popular w Calculates % return on advertising 146% AND 133% (own figs)
Describes business issues and wider context Calculation for Eric (report / appendix)
w Economic uncertainty / kitchenware market decline w Revenue increase: £1m AND £2m (£39m->£40m->£42m)
w Contract for 2 years w Fees: £1,000k AND £1,000k
w Target return on external advertising 120% w Ad agency: £600k AND £600k
w 25th anniversary: 2019 / linked advertising campaign w Calculates % return on advertising 63% AND 125% (own figs)
w Effectiveness of celebrity endorsements uncertain

-
NA ID IC SC CC
w Lucy: internet film showing competitor's products
NA ID IC SC CC w Lucy: impact on customer trust / possible contract breach
w Eric: own kitchenware line / talking to other companies
w Eric: motivation unclear / possible bidding war
w Thor: existing relationship / unclear why won't work with Eric
w New agency: new to Piccolo / unknown 2020 costs / unknown scope
NA ID IC SC CC
Evaluation of assumptions Draws conclusions (under a heading)
w Revenue increases may be optimistic eg 5% mkt decline w % return on advertising figures for Lucy AND Eric (figs)
w Inconsistent revenue growth / may be bias in budgeted rev w Concludes on assumptions
w Eric: £40m may be too easy / budgeted rev exactly £40m w Concludes on ethical/business trust issues
w Agency costs low eg Thor +£100k-£250k / 2020 increase w Concludes on way forward
w Compares calculated returns to target (120%)/each other
w Changes in assumptions will affect return % / choice
Evaluation of risks and opportunities Makes recommendations
w R: suboptimal decision based solely on arbitrary 120% w Review any market research / back-up for revenue estimates
w R: change may cause disruption / takes up mgt time w Negotiate fees with Lucy/Eric / clarify Lucy's extra demands
w R: no success fee for Lucy so no incentive to work hard w Negotiate costs with Thor/new agency
w O: 25th high-profile year / new agency = new ideas w Due diligence on new agency/Eric
w O: could use 'typical' consumer/animated character w Research the 'no celebrity' option
w O: could reduce Lucy's fees eg low 2017 rev/Eric option w Other recommendations
NA ID IC SC CC
Evaluation/recommendations: ethical/trust issues
w Discuss with Lucy eg to establish facts
w Consider response eg social media, legal advice

NA ID IC SC CC
w Impact on 2018 business if Lucy's contract not renewed
CC
w Discuss with Eric eg commitment, conflict of interest
SC
w Discuss with Thor reason for not working with Eric IC
ID
w Discuss with new agency scope of contract
NA
Total 10
NA ID IC SC CC
REQUIREMENT 3 - Evaluation of Dougal Hotels takeover
Uses AI / EP information Financial calculations (report/workings)
w Dougal: key Hosp customer w Initial supply: £3m
w Dougal: deferral of refurb / declining revenue w International cookware: £450k (£2k x 225)
w Deal date: 1 December 2017 / 4 months w UK expansion: £1m (75/225x£3m) / £1.15m (75/225x£3.45m)
w Full refurbishment of all hotels / UK expansion w Product replacements: £600k (20%x£3m) / £800k (20%x£4m)
w Calculates GP at 30% (x own fig)
w Calculates revenue per hotel
Describes business issues and wider context Operational and strategic issues
w Strategy 1: expansion to overseas markets w Proposal includes hotels in Canada / international menu
w Strategy 4: international cookware w Indian/Thai: not in current Piccolo product range
w Zoto: supplier of Indian/Thai products w Indian/Thai: design time/cost (3 months/£100k)
w GP%: Total 32.6% / Hosp 41.6% / Dougal 50.2% w Order is for large quantity of kitchenware within short period
w 2017 cash balance £2,183k w Order is for large number of deliveries within short period
w Own research with source w Staff redundancies in 2017

-
NA ID IC SC CC
w Wadham: known ruthless management style
NA ID IC SC CC
w Wadham: tough negotiations / disputes with key suppliers
w Wadham: likely to want an exit in 3 years
w Existing relationship with CEO (Ross Dougal) / 1st refusal
w Information provided by Ross Dougal / not direct from Wadham
w Disposal of existing tableware to schools
NA ID IC SC CC
Evaluation of impact on overall business Draws conclusions (under a heading)
w Significant contract / calc of relative size (rev / GP) w Concludes on revenue/GP (fig)
w Losing Dougal would have detrimental impact w Concludes on financial impact on overall business
w Suggested GP% (30%) < current GP% w Concludes on operational/strategic issues
w Low GP% (30%) will reduce overall GP% w Concludes on ethical/business trust issues
w Sufficient cash: to fund payment terms / set up costs w Concludes on way forward
w Comments on reduced revenue per hotel
w Strategic fit: overseas expansion (Rolson) / new products w Further back-up needed for costs/assumptions
w Indian/Thai: cookware can be sold to other customers w Negotiate T&C with Wadham
w Indian/Thai: design time/cost may be unrealistic w Source Indian/Thai cookware / consider Zoto
w Suppliers may not have capacity to supply in time w Discuss capacity with suppliers/RDN
w Impact on distribution/logistics / RDN capacity w Due diligence on Wadham/Zoto
w Need sufficient staffing capacity to manage contract w Other recommendations
NA ID IC SC CC
w Clash of cultures / management styles

NA ID IC SC CC
w Potentially lower revenue/GP
CC
w Risk of loss / opportunity with future new owners
SC
w Offer: not guaranteed / terms may not be acceptable IC
ID
w Corroborate facts / establish contact with Wadham
NA
Total 10
w Disposals in line with Piccolo's ethical stance
NA ID IC SC CC
w Hosp: revenue AND GP/GP% AND by customer w Legible
w Retail: revenue AND GP/GP% AND revenue by product w Appropriately numbered pages
w Well presented, labelled and numbers clearly derived w Relevant disclaimer AND report from IG
w Lucy: calculation for 2019 AND 2020 w Formal language for the board
w Eric: calculation for 2019 AND 2020 w Tactful / ethical comments
w Other relevant calculations eg sensitivity w Reasonable spelling / grammar
CC
SC
IC
ID
NA
Total 4
offering sound commercial advice where applicable.
across the script. Of these: 5 (maximum 6) were for the Executive Summary; 3 (maximum 4) in
the Appendices and Overall; and the remainder spread fairly evenly over the three main sections.
out of 9 for Applying Judgement and 4 out of 6 for Conclusions and Recommendations.
The script is quite a bit longer than average but there is little irrelevant material. This indicates a
candidate who was focused on the task at hand and who knew the Piccolo case well. The main
body of the report is spread fairly evenly across the three main sections (Requirement 3 is a
little shorter than Requirements 1 and 2). The overall report, together with the appendices,
demonstrates sensible planning and careful thought.
Consistent with the overall script, the sections here for Requirements 1 and 2 are of roughly
equal size and longer than that for Requirement 3. Overall, however, the executive summary
covers the three requirements evenly, in all cases providing a synopsis of key issues, relevant
numbers and commercial recommendations. The candidate uses £ and % analysis throughout
to provide precision and focus to the commentary.
In respect of financial performance, the candidate has presented the main figures in comparison
with 2016 as well as the market. He/she has also measured them against the lower budget, but
only for revenue. The results are drilled down by business stream and then further (in the case
of Hospitality) by customer. Reasons are provided where appropriate, eg “… owing to costs being
passed on from manufacturers but not to customers”; and “… influenced by the Lucy Tyler success fee
not payable as revenue less than £44m”. The only failing here – common across the cohort – was to
in not drawing attention to the key issue: Piccolo’s operating loss. The core aspects of the fake
pan issue are set out succinctly.
On Requirement 2, the main numbers are again stated clearly at the start. The candidate goes
on to cast doubt on the underlying revenue assumptions, referring both to market conditions and
to Piccolo’s own recent budgeting record. After a balanced assessment of the risks and
opportunities for each celebrity, the candidate sits on the fence: “We recommend that Piccolo
accepts neither current deal and instead renegotiates Lucy’s contracts in light of performance and consider
also acting with Eric solely on the Retro range” – a weak piece of advice that could not work well in
practice.
Coverage of Requirement 3 is also good, with numerical analysis again to the fore. There is a good
link to Piccolo’s cash position, and a concise exposition of the main operational and strategic issues
that eluded the majority of candidates: “Piccolo would also need to confirm capacity of RDN to meet
distribution and inventory demands and suppliers to meet required supply levels.” Ethical issues are
mentioned only briefly (reputation). There is no scepticism on the figures provided and no clear
advice on whether Piccolo should proceed. Recommendations are appropriate.

Review of Piccolo’s financial performance [Requirement 1]
This part of the report was the best of the three requirements, earning passing grades across all
four skills. It is divided into six main sections: revenue, gross profit, operating profit, fake product
issue, conclusions and recommendations. Such a structure ensures that all the principal parts of
the requirement will be covered.
The script addresses the headline numbers, with a full selection of figures in both report and
appendix (see below). Explanations are given for the movements in both Hospitality and Retail
and, within each, the candidate explores the results for individual customers and products, making
astute use of the vignettes provided at Exhibits 8/9. Coverage is extensive. He/she does not
analyse the revenue from ‘Classic’ financially – despite promising to do so – but makes a good
connection with another bit of AI material: “Piccolo’s poor performance even against this could be down
to increased competition from the likes of PanOply at Kaster, who launched their range on the same day as
the Classic but as a cheaper alternative.”
The candidate makes sensible use of business issues and the wider context, for example: the
economic uncertainty, the 15% revenue share target for utensils and the previous year’s results –
all aptly integrated into the narrative rather than presented as a standalone opening section.
The discussion of both gross profit and operating profit is good. Comments such as “The overall
Hospitality decrease can be attributed to the Ringford increase as a percentage of sales, as this already had
the largest margin prior to the 2017 decrease” and “The reduction in Retail GPM is surprising given the
reduction in sales of the low margin utensils” shows clear analytical thinking.
The discussion of ‘other costs’ is clear and logical. The candidate considers each of the four
captions in turn and demonstrates a detailed understanding of the dynamics affecting each, eg:
“Advertising and marketing costs have reduced by £287k (7.1%) in the year to £3,751k, and remain at
10.0% of sales in line with the target. This reduction was aided by not paying the success fee of £200k to
Lucy Tyler since revenue did not exceed £44m” and “Innovation and design saw a marginal decrease in
spite of the £240k spent on the ‘Classic’ range. Piccolo will need to ensure that this lack of innovation
doesn’t impact future performance.”
The candidate only scratches the surface of the fake pan issue, and does not offer any concrete
advice on the actions that Piccolo should take to minimise its impact.
The section ends with a strong set of conclusions, replete with figures, on key findings from the
financial statement analysis. However, while some items on the list of recommendations that follow
are relevant, others are too general and/or unrealistic. Also, although the operating loss is flagged,
it is not identified as a critical business issue.
Overall, this part of the report indicates a candidate with strong business awareness, full familiarity
with (and ownership of) the case material and an ability to give logical explanations for movements
in financial statements.
Evaluation of celebrity chef arrangements [Requirement 2]
As with many candidates, this was answered well. A majority of passing grades was earned,
reflecting a logical pathway through the various elements of the requirement. Among the four skills,
C&R achieved the lowest marks.
The script is structured with the headings ‘calculations’, ‘assumptions’, ‘Lucy Tyler’, ‘Eric Franks’,
‘ethics’, conclusions’ and ‘recommendations’. This does not follow the requirement wording; it is
perhaps telling that the box ‘evaluation of risks and opportunities’ has not gained a passing grade.
In a comprehensive opening, the candidate begins by describing concisely the outcome of his/her
‘ROEA’ calculations, including a succinct comparison against the 120% target and evaluative
commentary for each celebrity. The candidate correctly points out that if 2019 revenue falls even
slightly below £40m, no fee will be due to Eric.

The candidate then moves on to challenge in turn the main underlying assumptions, rightly
highlighting the revenue forecasts as the most important ones and applying appropriate
professional scepticism when evaluating them. The issue of the advertising agency costs is also
well argued. The candidate questions the worth of the ratio as a measurement tool (“the return on
advertising only considers the increase in revenue and external advertising spend on celebrity and agency”).
The script then considers issues relating to the two celebrities in turn. For Lucy, the candidate
refers to her track record, and considers the extent to which she is responsible for Piccolo’s
disappointing 2017 results. He/she refers to the potential disruption that would arise if Lucy were
not retained. For Eric, the candidate assesses his “strategic fit” based on the information given
about him in the AI and EP. In identifying a possible concern about his business history, the
candidate uses own research to show that he is not alone (“Jamie Oliver admitted to closing 6
restaurants in January 2017”).
Coverage of the ethical and business trust aspects is good. Because of the way in which the
answer is structured, these are spread across Requirement 2, notably in the sections on Lucy
and Eric. Elsewhere, the candidate identifies the issues of the internet film, including some novel
professional scepticism (“there is a risk that Lucy is using alternative brands in preparation for switching
allegiances”) and the required response; the existing relationship with Thor; the impact of a switch
(“if the contract was to be terminated, as decided now it is unclear that Lucy would be willing to fulfil her
contract and successfully market the brand in 2018”); and uncertainties over the (unnamed) new
agency: “The £600k could be just an introductory offer. In addition, it is not confirmed whether the new
agency will replace all work of Thor and not just celebrity endorsement.”
Conclusions and recommendations are not sufficiently logical or focused. The candidate has
provided a multitude of figures, but has not concluded on ethical issues and has hedged bets in
the choice of celebrity (a shortcoming repeated in the executive summary – see above). Other
than those relating to the ethical issues, credited under AJ, recommendations are sparse.
In summary, this was a good section of the report. It could have been improved by a more
focused review of risks and opportunities; consideration of the wider significance to Piccolo of its
25th anniversary and of the possible advantages of not having a celebrity endorsement at all; and
a more decisive conclusion on the way forward.
Evaluation of Dougal Hotels takeover [Requirement 3]
Requirement 3 gained a majority of passing grades. The candidate has used the headings
‘financial impact’, ‘operational’, ‘strategic’, ‘ethics’, ‘conclusions’ and ‘recommendations’, thereby
enabling comprehensive coverage of the key topics. This method suggests that the candidate has
spent some time planning the answer and its structure. The candidate has appreciated the
importance of Exhibit 12 (board briefing) to the scenario, giving an anchor for the discussion.
The section begins by detailing the financial impact of the proposal. This includes revenue and
profit for both the main supply and the international kitchenware, but not the Canadian part of the
arrangement. The candidate assesses the calculated figures against several benchmarks:
Piccolo’s overall revenue, its gross profit margins for 2017 and the original contract with Dougal.
The depth of understanding of Piccolo’s accounts, illustrated in Requirement 1, is again displayed

here: “This would make it the lowest GPM of Hospitality customers, even below Ringford, and reduce the
overall Hospitality GPM, currently at 41.6%, especially given its significance as a percentage of revenue.”
This is developed even further into areas not assessed at Requirement 1, but highly relevant to a
new business opportunity: “The contract would … require an initial outlay, which will stretch finances.
Since the deal is expected 01.12.17 costs will have to be incurred before revenue from busy season begins in
October. Costs would be initial £2,100k plus £100k development and £420k COS, which exceed the YE cash
balance of £2,183k.”
Under ‘operational’, the candidate deals with a number of the key issues: timeline for the Thai/Indian
items; the effect on capacity for the manufacturers and for RDN; and the tension between Piccolo’s

usual 5-year replacement cycle (varying according to the quality of hotel) and Wadham’s normal 3-
year exit.
Under ‘strategic’, the script begins by raising an issue of business trust – Wadham’s ‘ruthless
management style’. It then assesses the Asian cookware in the context of Piccolo’s strategy and the
fit with Zoto, followed by the planned expansion into Canada and its fit with another strategic
objective and with the existing supplier, Rolson. Other than in relation to Wadham, coverage of
ethical issues is limited: for example, the disposal of old tableware to schools is not addressed.
Passing grades were obtained for both boxes under C&R, with financial, operational and strategic
points all included here. Unlike for Requirement 2, there is a decisive recommendation.
The candidate has included three appendices, one for each requirement. (In line with established
practice, the appendix for Requirement 3 is not marked separately but is assessed in the marking
key section for Requirement 3.)
terms and as percentages, as well as revenue mix and analysis by customer and product category.
The calculations at Appendix 2 are set out neatly, with appropriate labelling.
For Requirement 3, the candidate has shown the key revenue and profit figures for the proposal.
However, the deduction of design costs in arriving at gross profit is not consistent with Piccolo’s
practice of treating these as operating costs. Logically, the candidate should have also included an
estimate of other costs to arrive at a ‘true’ profit, a point recognised in the body of the report: “These
calculations ignore any management time or additional distribution costs that would impact the bottom line.”
The script is well structured. Clear headings are used within each requirement, mostly serving
as an aide-mémoire to address each main component. Overall, it has more than met the main
requirements and demonstrates a strong commercial understanding of the case scenario. There
are, however, several cases of poor language and tactlessness – even one case of both failings
in the same sentence: “Financially, Eric is worse for budgeting owing to the contingency of his fees,
and therefore the increased risk of manipulating revenue so the fee is not payable.”

REPORT
To: Piccolo Board
From: Ingleby Grant
Date: 19 July 2017
Subject: Review of performance and future plans
Terms of reference
This report contains the following:
1) A review of performance for the year ended 31 May 2017

2) Evaluation of Piccolo’s celebrity chef arrangements
3) Evaluation of the Dougal Hotels proposal
Disclaimer:
This report has been produced for the use of the Board of Piccolo Limited and should not be distributed
to, or relied upon by, any third parties without our prior written consent. No liability can be accepted in any
such event.
1 A review of performance for the year ended 31 May 2017
Piccolo’s revenue has reduced significantly by £4,277k (10.3%) to £37,436k from £41,713k in 2016. This
is disappointingly lower than the 5% market decrease and puts it below the lowest budget of £38,000k.
Revenue has fallen in both revenue streams, by £566k (6.4%) in Hospitability and £3,711k (11.3%) to
£29,165k in Retail. The Hospitability fall is in line with the 5% reduction in 2016 while the Retail reduction
contrasts the 9% increase in 2016.
The Hospitability decrease is in spite of the Ringford increase of £238k (18.3%) to £1,537k, as this is
offset by the £127k (12.0%) decrease to Dougal and £649k (11.4%) decrease to other customers. This is
in line with Dougal not replacing as a result of the acquisition and other customers that cannot pay debts
being dropped.
The gross profit fell from £4,114k (25.2%) to £12,205k from £16,319k, as a result of costs remaining in
line in spite of the revenue decrease. This is owing to costs being passed on from manufacturers but not
to customers.
The GPM reduced in both streams and from 39.1% to 32.6% overall. The Hospitality decrease is
attributable to increased risk with the lowest margin customer, Ringford.
Operating profit decreased by £3,526k (111.5%) to (£363k) from £3,163k, and this is as a result of the
poor gross profit, as other costs marginally decreased by £589k (4.5%).
This was influenced by the Lucy Tyler success fee not payable as revenue less than £44m and there will
be reduced RDN costs in 2018 for low delivery rate.
The fake pans issue could result in lost reputation, and therefore sales for Piccolo as they pride
themselves on quality.
We recommend putting out a statement about the issue and how to identify pans as well as contacting
retailer.
2 Evaluation of Piccolo’s celebrity chef arrangements
The proposed contract with Lucy Tyler would create a return on expenditure of 146% in 2019 and 133%
in 2020, both above the 120% target. However, these are sensitive to a fall in revenue with a 1.25% and
2% fall in 2019 and 2020 reducing it to 120%.

The proposed Eric Franks contract would create a return of 62.5% in 2019 and 125% in 2020. However,
missing the expected £40m revenue in 2019, evenly minorly, would result in the fee not being paid and
the return being 150%,
However, these cannot be relied upon based on the assumptions since the uncertainties in the market
mean revenue cannot be predicted. In addition, Piccolo was significantly out in 2018.
In addition we are unaware of the 2020 advertising fee for Eric Franks.
Quality and brand reputation are key to Piccolo and Lucy Tyler embodies this. Piccolo should investigate
the news claims and negotiate the increase in the fee but not damage relationship. Changing from Lucy
could confuse customers.
Eric Franks is a good strategic fit for Piccolo owing to the age range he appeals to, and could present an
additional opportunity to market the retro range to 21-30 year olds.
The key task is the new advertising agency and lack of awareness at the moment. Piccolo should perform
due diligence.
There is strong reliance on Lucy Tyler and Thor at the moment, therefore Piccolo must be careful to be
honest and not damage relationships.
We recommend that Piccolo accepts neither current deal and instead renegotiates Lucy’s contracts in
light of performance and consider also acting with Eric solely on the Retro range.
3 Evaluation of the Dougal Hotels proposal
The initial supply and menu changes deals could bring in revenue of £3,450k based on current hotels,
and this equates to 9.2% of 2017 revenue, and would therefore have a significant impact.
This would increase Hospitality’s share of revenue, but have a negative impact on the GPM, given the
30% proposed and current 41.6% in Hospitality and 32.6% overall.
The contract would endure initial outflows of £2,100k plus menu changes and design process of at least
£100k, which is greater than the year end cash balance of £2,183k. Piccolo should consider whether a
loan is required.
Piccolo would also need to confirm capacity of RDN to meet distribution and inventory demands and
suppliers to meet required supply levels.
Strategically the concern is the reputation of tradition and the failing Canadian hotels. However,
expansion overseas is a key strategy of Piccolo and they already have knowledge owing to Rolson based
there.
Zoto would be a strategic fit but Piccolo should also research alternatives regardless of supplier Piccolo
should branch out portfolio to Asian.
We recommend renegotiating the 30% margin and completing significant due diligence on Wadham and Zoto.
1 Review of performance for the year ended 31 May 2017 (see Appendix 1)
i) Revenue
Revenue has significantly decreased by £4,277k (10.3%) from £41,713k in 2016 to £37,436k in 2017.
This is a poor performance against the latest market estimates of a 5% market decrease and means that
Piccolo was below even the lowest budget of £38,000 by £564k (1.5%).
The revenue movement was driven by reductions in both streams, with Hospitality falling by £566k (6.4%)
to £8,271k and Retail by £3,711k (11.3%) to £29,165k.
The fall in Hospitality revenue is in line with the decrease of 5% in 2016 and can partly be attributed to the
less predictable nature of the stream and its dependency on the replacement cycle.

The 2016 decrease was largely attributable to Dougal delaying replacement in the year, and based on the
further reduction of £127k (12.0%) to £929k, this appears to be the case again. This is likely to be
influenced by the ongoing acquisition by Wadham, and all items may be replaced by Piccolo in 2018.
Revenue from Quincy has only marginally reduced by £28k (3.7%) to £738k, and this is surprising given
the expected opening of 30 stores per year.
Revenue from Ringford has increased by £238k (18.3%) to £1,537k and this implies that they have
continued with the purchase of 40 Reeve conference centres in the year and engaged with Piccolo for
table and cookware.
Revenue from other customers has significantly reduced by £649k (11.4%) to £5,067k and this is in
keeping with the expectation that Piccolo would dispose of smaller customers with financial difficulties
that are unable to pay debts.
Given the lack of information on Retail revenue by customer, we are unable to perform a detailed analysis
on the significant reduction to Retail revenue. However, we are able to identify that tableware has
increased its share of Retail revenue by 4.5%, while cookware decreased by 2.6% and utensils by 1.9%.
This is likely in respect of the release of the ‘Classic’ tableware range on 1 September 2016. Although, as
discussed later in this report, revenue from the range was disappointing, this will have offset decreases in
the remaining items.
The reduction of utensils to 9% revenue implies that Piccolo is unlikely to meet its target of 15% by 31
May 2018.
The Retail reduction could be in respect of the increasingly saturated market and the decreased
consumer confidence as a result of the economic uncertainty following the election and Brexit. This is
evidenced by a 1.4% decrease in retail sales in Q1 2017 (The Guardian).
Piccolo’s poor performance even against this could be down to increased competition from the likes of
PanOply at Kaster, who launched their range on the same day as the Classic but as a cheaper
alternative.
ii) Gross profit
Gross profit has reduced significantly by £4,114k (25.2%) to £12,205k from £16,319k in 2016. This is
attributable to costs remaining largely in line with 2016 in spite of a significant decrease in revenue.
As noted by Sabrina there was an overall increase in 10% to purchase costs in the market against a 5%
decrease in revenue. Increased costs in 2016 not passed on will later than expected.
This has resulted in the overall GPM falling from 39.1% to 32.6%. This is accompanied by a decrease in
the Hospitality GPM from 49.2% to 41.6%, and Retail from 36.4% to 30.1%.
Across the Hospitality stream the GPM of two of the three key customers has reduced in 2017, and this is
in respect of increased manufacturers costs being harder to pass on than in Retail.
Dougal fell from its constant 60% in the past two years to just 50.2%, while Ringford decreased from its
already low 40% to just 35.5%. Quincy remained constant at 50.1% suggesting that Piccolo was able to
pass costs on.
The overall Hospitality decrease can be attributed to the Ringford increase as a percentage of sales, as
this already had the largest margin prior to the 2017 decrease.
The reduction in Retail GPM is surprising given the reduction in sales of the low margin utensils. The
decrease instead suggests that Piccolo may have offered financial incentives to Kaster to compete with
PanOply or that there were initial discounts on the Classic range when released. Given the seasonality of
retail sales, a poor Christmas could have a significant impact.
iii) Operating profit
The operating profit has decreased by £3,526k (111.5%) to (£363k) from £3,163k. This is largely in
respect of other poor gross profit performance, since other costs reduced by £588k (4.5%) in the year.

Sales and distribution had begun to be streamlined in 2016 making up a value of just 9.7% in 2016 and
this has seen only a marginal increase to 9.9% in 2017.
In addition, given the 88% delivery rate for the year, Piccolo can expect RDN’s fee charge for this of
£200k to be offset against future sales and distribution costs. When this is taken into consideration this
was not a bad expense for Piccolo in 2017 but will want to ensure no reputational damage.
The operating loss goes against even the lowest budgeted outcome of a £500k profit.
Advertising and marketing costs have reduced by £287k (7.1%) in the year to £3,751k, and remain at
10.0% of sales in line with the target.
This reduction was aided by not paying the success fee of £200k to Lucy Tyler since revenue did not
exceed £44m. We are also aware of the value of contingent fee paid to Thor. Since this varies up to
£150k it could have a big impact.
Innovation and design saw a marginal decrease in spite of the £240k spent on the ‘Classic’ range.
Piccolo will need to ensure that this lack of innovation doesn’t impact future performance. Admin and
support increase is likely in respect of the £280k redundancy fee, and full year salary paid to these
employees.
iv) Fake product issue
The fake sales of PE7 pans are not a new issue in the industry given the article on this on the Scam Alert
website in March 2017, however, Piccolo will want to ensure that this does not damage its reputation, and
therefore sales and profitability.
The risk is that customers will not notice that it is a fake pan and criticise Piccolo on forums or to their
friends, thus reducing future Retail sales. This will additionally cause Piccolo additional expenses in
respect of management time, advertising and marketing.
Piccolo should therefore address this issue promptly to stop it spreading, given current health concerns
about PFOA.
v) Conclusions
Revenue has significantly decrease in 2017 by £4,277k (10.3%) to £37,436k as a result of reduced sales
in both streams and a reduction greater than the market of 5%.
Gross profit has decreased dramatically by £4,114k (25.2%) to £12,205k, with the GPM falling to 32.6%
as a result of costs increasing by more than sales across the market and staying in line with 2016 in spite
of reduced sales.
The operating loss of £363k (down £3,526k, 11.5%) is low even against the lowest budget (£500k profit)
and is owing to the poor gross profit as other costs decreased minorly in the year.
The fake PE7 sales could result in a damaged reputation for Piccolo and therefore reduced sales if not
addressed.
Piccolo’s cash position has reduced by £643k in the year as a result of operating loss and will need to be
considered.
vi) Recommendations:
Piccolo should:
- Discuss fake pans with the retailer selling them

- Put out a statement about fake pans and how to identify
- Renegotiate supplier contracts to pass on costs
- Discuss delivery rate with RDN
- Reconsider viability of utensils
- Check figures as management accounts may not be reliable.

2) Evaluation of Piccolo’s celebrity chef arrangement
i) Calculations: (see appendix 2)
Based on the calculations in appendix 2, the return on external advertising in respect of Lucy Tyler would
be 146% in 2019 and 133% in 2020.
Both of these outcomes are above the target return of 120% as set by Piccolo. If costs are to remain the
same, revenue would need to fall by more than £898k against budget for the return to fall below 120% in
2020, and more than £528k in 2019.
These are significant values but only 2.0% and 1.2% of revenue in each year, and therefore sensitive to
fluctuations.
Based on the information provided, the expected return on Eric Franks is 62.5% in 2019 and 125% in
2020. This is significantly under target in 2019 and just over in 2020.
However, if revenue was to fall by as little as £0.1m in 2019 the fee would not be payable and return
increases to 150%.
If revenue increased by 10% in 2020, meaning Eric’s success fee was payable, the return would still be
greater than 120% at 216%.
ii) Assumptions
The key assumption used in the calculation is the expected revenue in 2018, 2019 and 2020. The 2017
performance against budget demonstrates the reality of the current market, and the inability of Piccolo to
successfully predict.
In addition, there is an expected increase to £39,000k in 2018, against the weak market, seeing an
overall reduction of 5% in 2017 and no evidence to support this. We are unable to confirm the Dougal
contract.
The advertising agency costs also cannot be relied upon. This is largely in respect of the new agency, or
the £600k could be just an introductory offer. In addition, it is not confirmed whether the new agency will
replace all work of Thor and not just celebrity endorsement. If only in respect of Eric Franks, the
advertising expense would be significantly higher.
In addition, the return on advertising only considers the increase in revenue and external advertising
spend on celebrity and agency. This neglects any money time or research time that could have a
significant impact.
The increase in revenue is also likely to be impacted by a variety of factors.
Furthermore celebrity endorsement is likely to only impact Retail sales, yet the calculation includes
Hospitality.
iii) Lucy Tyler
The key non-financial benefit to working with Lucy is the already strong working relationship that Piccolo
currently has. This involves Lucy effectively being the face and voice of the company and any disruption
to this could confuse customers and damage sales.
Furthermore, if the contract was to be terminated, as decided now it is unclear that Lucy would be willing
to fulfil her contract and successfully market the brand in 2018.
Since Piccolo are currently really dependent on Lucy, were she to be replaced, there would need to be a
suitable replacement lined up.
Lucy has this far proven to be a good fit for Piccolo as a result of her strong ethical standards and
promotion of healthy eating. It is unlikely that the latest scandal regarding the use of alternative brands
will impact this reputation, but this should be discussed with Lucy.

There is a risk that Lucy is using alternative brands in preparation for switching allegiances, and this will
need to be confirmed, before further commitments.
As a negative to Lucy Tyler, Piccolo has seen a significantly weaker performance in 2017, and it will need
to be confirmed whether this is as a result of Lucy’s advertising or a lack thereof.
The Lucy Tyler fee is also significantly higher fixed fee than Eric Franks, and this is not ideal in respect of
current cash flows, which are increasingly reduced.
Dependency on just one celebrity is not considered to be beneficial, especially not to the extent that
Piccolo relies upon Lucy.
Lucy’s demands for extra fees will also need to be considered, as this appears to be unreasonable given
current performances and could damage the relationship.
iv) Eric Franks
Switching to work with Eric Franks would be a risky move, since Piccolo have not worked with him before.
However, Eric Franks appears to be a strategic fit on the basis that his restaurants appealed to 25-40
year olds, which is Piccolo’s key target market. His good looks, and sense of humour appeal to 21-30 age
range, which partly fits the Piccolo target and could also represent a new opportunity to brand at, which
could be beneficial given the recent weak performance.
This description of Eric also fits with the idea of the retro range, which is notably popular in the market, as
that was the style of his previous restaurants. This theme could also be tailored to represent Piccolo’s 25th
Anniversary.
In addition, Eric’s good looks could be used for television adverts, during programmes such as GBBO,
due back on Channel 4 soon, and this could combat growing speculation that advertising mediums are
not suitable. This would, however, incur additional costs.
The fact that Eric had to close 4 restaurants in the year could be a concern, however, even Jamie Oliver
admitted to closing 6 restaurants in January 2017 (The Guardian) as a result of the economic
environment, and is therefore not uncommon.
If Eric’s marathon attempt was for charity, this would also suit Piccolo’s ethical policy.
The key risk is that the switch does not pay off resulting in reduced profits and therefore sales, as well as
a damaged relationship with Lucy.
If Piccolo does not act with Eric, he could go to a key competitor instead, therefore steal Piccolo’s market
share.
Another key risk is Thor, since they complete all marketing for Piccolo, and therefore do not want to
damage relations.
Financially, Eric is worse for budgeting owing to the contingency of his fees, and therefore the increased
risk of manipulating revenue so the fee is not payable.
If this was the case it would significantly aid Piccolo’s cash flow in 2019.
v) Ethics
The key business trust issue is in ensuring transparency with Lucy and Thor. Relationships are key to
Piccolo and therefore should not be damaged. We recommend making them aware of potential changes.
Piccolo has a strong ethical reputation and relies on its brand, going behind a key supplier’s back would
damage this and prevent others from engaging.
vi) Conclusions
The Lucy Tyler proposal would achieve a return on expenditure of 146% in 2019 and 133% in 2020, both
above the target of 120%.

However, this is sensitive to revenue changes and could fall below in 120% with 1.25% and 2% change to
revenue in 2019 and 2020.
The Eric Franks proposal would achieve a return of 62.5% in 2019 and 125% in 2020. However, a limited
reduction in 2019 would cause an increase to 150% return.
There are a number of unreliable assumptions, including the revenue predictions, as Piccolo did not
predict well in 2017.
A benefit to Lucy Tyler is maintaining the strong relationship and brand position. A change could confuse
customers.
Eric Franks would offer a fresh alternative that is a strategic fit. If revenue fell below £40m in 2019, this
would also have a cash flow benefit.
We recommend that neither contract is accepted and Piccolo negotiates Lucy’s fee down and working
with Eric alongside Lucy solely on the retro range.
vii) Recommendations
Piccolo should:
- Undertake due diligence on Eric Franks

- Liaise with the other advertising agency regarding second year
- Discuss with Thor why not working with Eric Franks
- Recalculate budget in line with market
- Discuss press articles with Lucy
- Put out a statement regarding press articles on Lucy.
3 Evaluation of the Dougal Hotels proposal
i) Financial impact
As detailed per appendix 3, the contract could bring in an additional £3,000k revenue and £900k gross
profit in respect of the central replacement, and potential revenue of £600k and gross profit of £80k for
the menu changes.
This could equate to revenue of £3,600 in 2018, excluding any immediate expansions, being 9.2% of
2017 revenue. This also excludes Canadian income.
This would, barring no other significant changes, increase Hospitality’s share of revenue.
However, these calculations ignore any management time or additional distribution costs that would
impact the bottom line.
Furthermore, the GPM of 30% is much below the 60% in 2015 and 2016, and even the 50.2% in 2017.
This would make it the lowest GPM of Hospitality customers, even below Ringford, and reduce the overall
Hospitality GPM, currently at 41.6%, especially given its significance as a percentage of revenue.
The main contract cost is £3m, which is not significantly more than the £2.6m for the initial contract with
Piccolo, prior to expansions, being only 159 hotels, therefore consider why.
The contract would bring in significant revenue, which is beneficial to Piccolo, but would require an initial
outlay, which will stretch finances. Since the deal is expected 01.12.17 costs will have to be incurred
before revenue from busy season begins in October.
Costs would be initial £2,100k plus £100k development and £420k COS, which exceed the YE cash
balance of £2,183k.
We are also not aware of the cost of engagement with Zoto, their success may indicate competitive prices.
It could be good to focus on Hospitality given the increase in foreign visitors as a result of the weakened
sterling (the Guardian).

ii) Operational
The key area to consider is the ability of Piccolo’s suppliers to meet the time line. The Thai cookware will
take three months to develop and there are only just over 4 months between now and then. Piccolo would
need to liaise with suppliers to confirm feasibility.
In addition, Piccolo will need to consider if RDN can meet the demand, especially at the busy Christmas
period when they are already stretched.
The deal would involve preparing the products beforehand and holding in inventory, since Piccolo hold
only 5% and RDN 95%, it will need to be confirmed if there is capacity.
The typical replacement cycle is 5 years, with fewer sporadic replacements expected in better quality
hotels such as Dougal. However, there is no indication of the length of the project or replacement cycle.
In addition, Wadham are notorious for leaving after around 3 years, this may result in limited future
planning. A positive is that if Piccolo maintain relations they could be able to do another replacement
when Wadham sells in three years.
The online portal of Piccolo will be beneficial in assisting with this, and the increased other funds will help
Dougal meet debts.
iii) Strategic
Piccolo will need to consider whether Wadham is a good match for them given their ruthless management
style. Piccolo has a strong reputation for quality and relationships and will not want to damage this solely
in pursuit of increased revenue.
The proposed production of Asian cookware with Zoto is a strategic fit for Piccolo’s aim of extending its
portfolio and fits with the increase in popularity of Asian cookware following globalisation. Diversification is
popular.
Piccolo has success with non-stick pans, such as PE7 and will need to see if Rolson has capacity and
ensures health risks associated are not proven.
The proposed acquisition of 20 Canadian hotels suits Piccolo’s objective to expand overseas. This is a
benefit given the economic uncertainty and increasing foreign companies coming to the UK.
Piccolo has experience with Canada through Rolson, and therefore knows RDN could aid distribution
there.
The risk is that the Canadian chain was falling and therefore may not suit the Piccolo brand for quality.
However, association with Ringford has weakened the strength of this.
Zoto is one of a wave of new competitors in manufacturing, therefore Piccolo should ensure there is not a
better fit with more attractive prices elsewhere. The key item to consider is maintaining emphasis on
tradition and innovation.
iv) Ethics
The key ethical issue is associating with Wadham given their ruthless reputation. This could damage
Piccolo’s brand image, which is key to success.
It may also result in a loss of customers and suppliers.
Emphasis on speaking to Piccolo first with tough negotiations could put pressure on a deal.
v) Conclusions
The proposed deal could bring in initial revenue of £3m for replacements and £450k for menu change,
along with additional £150k with expansion.

The gross profit margin is significantly lower than the 50.2% in 2017 and will significantly impact
Hospitality and overall revenue.
In terms of operations the length of the contract will need to be determined along with the replacement
cycle, especially since this is normally 5 years and management have a reputation for leaving after 3.
The proposal to work with Zoto is likely to be a strategic fit but Piccolo will need to investigate.
Regardless they should extend the portfolio in line with globalisation.
Expansion to Canada is in line with strategic aim but hotels may be lower quality.
We recommend that Piccolo does not accept the contract at 30% but negotiates.
vi) Recommendations
Piccolo should:
- Do due diligence on Wadham

- Liaise with RDN to ensure capacity for distribution and inventory
- Consider getting a loan for initial outflow
- Renew the initial Dougal contract
- Due diligence on Zoto
- Research alternatives to Zoto

Appendix 1
a) Summary financials:
2017 2016 Movement Movement
£’000 £’000 £’000 %
Revenue 37,436 41,713 (4,277) (10.3)
COS (25,231) (25,394) 163 (0.6)
Gross profit 12,205 16,319 (4,114) (25.2)
Other costs (12,568) (13,156) 588 (4.5)
Operating (loss)/ profit (363) 3,163 (3,526) (111.5)
Gross profit margin 32.6% 39.1%
Operating margin (1.0%) 7.6%
b) Revenue by sector:
Hospitality 8,271 8,837 (566) (6.4%)
Retail 29,163 32,876 (3,711) (11.3%)
% Hospitality 22.1% 21.2%
% Retail 77.9% 78.8%
c) Gross profit by sector:

Hospitality 3,439 4,345 (906) (20.9%)
Retail 8,766 11,974 (3,208) (26.8%)
Hospitality GPM 41.6% 49.2%
Retail GPM 30.1% 36.4%
d) Other costs:
Sales & distribution 3,713 4,034 (321) (8.0)
Product innovation & design 2,057 2,153 (96) (4.5)
Advertising & marketing 3,751 4,038 (287) (7.1)
Admin & support 3,047 2,931 116 4.0
Advertising & marketing % sales 10.0% 9.7%
Sales & distribution % sales 9.9% 9.7%
e) Hospitality by customer:
Revenue:
Dougal 929 1,056 (127) (12.0)
Ringford 1,537 1,299 238 18.3
Quincy 738 766 (28) (3.7)
Other 5,067 5,716 (649) (11.4)
Gross profit:
Dougal 466
Ringford 545
Quincy 370
Other 2,658
GPM:
Dougal 50.2%
Ringford 35.5%
Quincy 50.1%
Other 40.6%
f) Retail by product
Tableware 64.5% 60%
Cookware 27.4% 30%
Utensils 8.1% 10%

Appendix 2:
a) Lucy Tyler ROEA: Increase in total revenue by total external adv.
Year ending 31 May 2019: Revenue 42.0

£’000
Revenue increase from 2018 3,000
Thor fixed fee (1,100)
Lucy Tyler fee (800k x 120%) (960)
Increase in revenue 3,000
Total external advertising 2,060
ROEA 2019 LT 146%
Year ending 2020

Thor fixed (1,100)
Lucy Tyler fee (960k x 120%) (1,152)
Increase in revenue 3,000
Total EA 2,252
ROEA 2020 LT 133%
Sensitivity to fall to 120% revenue reduced by:
2020:
Increase fall to: 2,702 = decrease £298k
Total EA 2,252
ROEA 120%
2019:
Increase 2,472 = fall of £528k
EA 1,060
ROEA 120%
b) Eric Franks ROEA:
Year ending 31 May 2019

Adv fee 600
EF fee 1,000
ROEA 2019 62.5%
Year ending 31 May 2020

Revenue increase 2,000 = 5%
Adv fee 600
EF fee (1.0m (not 0.25m)) 1,000
ROEA 2020 125%
Sensitivity
2020: if revenue increased 10%:
Revenue increase 4,000

Adv fee 600
EF fee (1.25m) 1,250
ROEA 216%
2019: revenue falls by 0.1m
Revenue increase 900

Adv 600
EF 0
ROEA 150%

Appendix 3
a) Dougal proposal:
£’000
Revenue on initial supply 3,000
COS (GPM 30%) (2,100)
Gross profit 900
Menu change revenue:
£’000
Now 225 x 2,000 450
Future 75 x 2,000 150
COS (420)
Design process (100)
80
TOTAL POTENTIAL INCOME 3,600

GP 980
Ignores not quantifiable Canadian
Tot 2018 = initial 3,000k and 450k = 9.2% 2

topics in the marking key. It should be read in conjunction with the review of the First Illustrative
Script and full Examiners’ Report for this session.
This script failed the exam. Although it addresses some of the key issues and contains some
good sections, it has not gained sufficient passing grades (Clearly Competent (CC) and
Sufficiently Competent (SC)).
In overall terms, the candidate earned 17 passing grades. However, 3 of these (from a total of 4
available) were achieved on the back page of the marking key (Appendices and Overall). For the
rest of the script, only in Requirement 2 were sufficient passing grades obtained; Requirements 1
and 3 and the Executive Summary did not display the necessary breadth and depth. In terms of
professional skills (maximum 30), passing grades were achieved in 3 out of 6 boxes for Assimilating
and Using Information (A&UI); 5 out of 9 for Structuring Problems and Solutions (SP&S); 3 out of 9
for Applying Judgement (AJ); 1 out of 6 for Conclusions and Recommendations (C&R). The report is
fairly evenly balanced between the three requirements, but there is in general too much (not always
relevant) content in the ‘Conclusions’ and ‘Recommendations’ and not enough analysis or
evaluation.
Executive summary
The executive summary contains sections for the three main requirements, each comprising an
overall review followed by a set of conclusions and recommendations. Coverage in most cases is
not quite enough for a pass, resulting in a majority of Insufficiently Competent (IC) grades.
For Requirement 1, the candidate has included figures for revenue, both overall (including
comparison with budget) and for the two business lines, together with references to individual
Hospitality customers and product categories. On gross profit, he/she has mentioned only the
margins for two Hospitality customers, with nothing on the company overall or either business
stream – a curiously selective approach. There is nothing at all on the operating loss. After a
short paragraph on the impact of the fake product issue, the section ends with some random
conclusions and recommendations about costs.
On the celebrity chef arrangements, the candidate begins strongly by summarising the outcome
of the ratio calculations. However, there is then no evaluation of the assumptions or the risks and
opportunities. After a concise paragraph about Lucy Tyler’s internet film, the candidate concludes
on the way forward but does not offer any recommendations.
Coverage of Requirement 3 is the best part of the executive summary. Again, it starts with the
headline figures and goes on to assess some of the important operational and strategic factors.
The conclusions and recommendations are relevant and decisive. However, there are several
key omissions: no financial evaluation in the context of Piccolo overall, no professional scepticism
on the numbers provided and no discussion of any ethical or business trust issues.
Review of Piccolo’s financial performance [Requirement 1]
This was weaker than Requirement 1 answers for most of the cohort. Although the key areas
are addressed, coverage in most cases is superficial. The candidate has scored well for A&UI
by identifying the (£ and %) movements in the main captions from the accounts and by setting
the business context. However, the analysis that follows does not tackle the key features: for
example, the change in total Retail revenue is not mentioned at all; there is no comparison of
gross profit or operating profit to budget; there is nothing about the performance of the new
product, Classic. There is also no discussion of revenue or gross profit mix between the two
business lines (the figures appear in Appendix 1 but are not carried forward into the narrative).

In general, the section on Retail is far too brief, focusing almost entirely on the revenue split by
product category. Also, when reviewing operating costs, the candidate has failed to recognise
that the £200k penalty from RDN is already reflected in the management accounts, and instead
speculates on the consequences if Piccolo were to levy it in the future.
The candidate discusses the PE7 only briefly, and this continues into the conclusions and
recommendations. He/she has again focused on only one aspect of the issue rather than
considering the wider implications. In general, the conclusions and recommendations section is
disproportionately long. The main figures are stated – including Retail revenue, even though not
in the main part of the answer. Although the operating loss is rationalised, the candidate has not
drawn attention to the severity of the situation.
Evaluation of celebrity chef arrangements [Requirement 2]
This is the best of the three main requirements, gaining just enough passing grades. These
grades have largely been achieved by means of a good numerical section, in which the candidate
has followed the required format for the ratio calculations to arrive at and articulate clearly his/her
findings. This also includes a sensible flexing of the numbers to reflect the previous variations in
the scope of Thor’s fees.
The script has obtained lower marks for the evaluation of issues, and subsequent extension into
conclusions and recommendations. In a number of places, it just fails to develop the analysis in
enough detail to gain SC or CC grades. The main area of weakness is in respect of risks and
opportunities – as with the First Illustrative Script, by using the names of the celebrities instead of
the words from the requirement, the candidate has not fully focused on the topic to be addressed.
Where an evaluation is attempted, it is simplistic and somewhat staccato: “EF’s restaurants closed
partly because people aged over 40 disliked it. They also believed it was overpriced. If EF likes high prices,
he probably likes high quality, which would match Piccolo’s strategy.” Also, there is no consideration of
the ‘no celebrity’ option and the ethical and business trust matters arising are not covered in
sufficient breadth or depth.
Conclusions and recommendations are again inadequate. The candidate has rightly brought the
main ratio figures into the start of this section, and has concluded that Piccolo should accept Eric
(which follows logically from the foregoing work). However, there is nothing on the assumptions
and only a brief allusion to one of the ethics and business trust matters. The recommendation to
“collaborate with EF to produce his own line of kitchenware” is misguided at best, uncommercial at
worst. As at Requirement 1, the candidate has introduced a new issue in this final section that
could and should have been debated earlier – namely, the uncertainty over the £600k fee that
would be charged by the new advertising agency if Eric were appointed.
Evaluation of Dougal Hotels takeover [Requirement 3]
In broad terms, this section is well structured. However, as for Requirement 2, the headings do
not follow those given in the requirement – especially the key words, ‘financial’, ‘operational’,
‘strategic’, ‘ethical and business trust’ – and so some important issues have been missed. This
has led to a preponderance of IC and ID grades.
The candidate has again displayed mathematical ability and confidence by setting out the key
figures (in an appendix – see below). He/she shows a good understanding of the case material
by computing revenue for product replacements and by comparing the calculated profit margins
with those achieved by Piccolo in 2017. Other topics covered well are: the planned expansion
into Canada (with observations such as “Piccolo can use Rolson to supply cookware, therefore
saving on transport costs” and “RDN are based in Canada so we [sic] can place trust in reliable
deliveries”); Wadham’s role; capacity for new inventory (with a link to the non-current assets
note in the 2017 management accounts); and the design time/cost for the new Indian and Thai
cookware, taking account of the quality issues being experienced with the PE7.

Other than Wadham’s ruthless management style, ethical and business trust issues are not
identified and this has led to lower marks under both the SP&S and AJ skills.
Once more, the conclusions and recommendations are extensive. Once more they begin well
by restating the main financial findings and advising Piccolo on the way forward (“act on this
opportunity and make a deal with Wadham”). However, while most of the other crucial conclusion
areas are covered, the recommendations are more in the way of general reflection than being
decisive and pertinent recommendations.
The candidate has included three appendices, one for each requirement.
Appendix 1 is very detailed. Some of the information was not required (analysis of the statement
of profit or loss below operating profit level) and only some of the remainder has been used in
the report itself. With better planning, the candidate could have employed the time more
judiciously and limited the length of this appendix.
This is followed by Appendix 2, in which the calculations for Lucy and Eric are clearly set out.
For Appendix 3, the candidate has tabulated the projected revenue and gross profit for each of
the two years, including a speculative figure for the Canadian expansion and an amount for
replacement revenue under Piccolo’s standard 5-year cycle. There is also a deduction for the
design costs – correctly shown below gross profit. (Note that this appendix is not marked
separately but relevant credit is awarded under Requirement 3 – see above.)
The report is well structured, with appropriate use of sentences, paragraphs and headings.
However, much of the language is loose, and also the candidate has been tactless in the
comment about Gautam Singh’s revenue projections.

REPORT
To: Piccolo Limited
From: Ingleby Grant
Date: 19th July 2017
Report of the past financial year and
future outlook of proposals

Terms of reference
This report has been produced for the use of Piccolo Limited and should not be distributed to or relied
upon by any third parties without our prior written consent. No liability can be accepted in such an event.
Executive Summary
The below summarises:
1) Analysis of financial performance

2) Evaluation of celebrity chef arrangements
3) Evaluation of Dougal acquisition proposal.
1 Financial performance
Total revenue has fallen significantly by £4,277k or 10.3%. This is below the pessimistic budget of £38m.
Hospitality revenue reduced by £566k or 6.4% even though more sales were made to Dougal, Ringford
and Quincy. Gross profit margins fell by 10% for Dougal (50%) and by 5% for Quincy (35%).
Retail revenue fell by £4,114k or 25.2%. Increased reliance is being placed on tableware sales. It now
has 64.5% of total retail revenue. Utensils have fallen to 8.1% from 10%. A future strategy for 31 May
2018 is being missed to increase utensils to 15%.
Fake products have been found of the PE7. The financial impact is yet to be concluded, however there is
likely to be negativity on it is spread on social media.
Lucy Tyler’s success fee of £200k is not payable due to the target revenue of £44m being missed.
However this is counteracted by the £280k cost of redundancies.
Piccolo need to pass costs onto customers soon or their margins will be squeezed further.
Product innovations need to be increased to keep the competitive advantage.
2 Evolution of celebrity chef arrangements
Lucy Tyler will achieve Piccolo’s 120% return on advertising in both years of a new contract. In 2019 it will
be 146% and 133% in 2020.
If this return is flexed to include additional fees to Thor the return will be 134% (2019) and 123% (2020).
Eric Franks return is not as high in the first year, 62.5%, but almost doubles in 2020 to 123%.
Thor will stop providing services to Piccolo if Franks is chosen and so a new advertising agency will be
used, initially at £500k cheaper (in the first year).
Although Piccolo have a longstanding relationship with Tyler, a trust issue has come to light regarding her
use of a competitor’s product. It has had 1m hits on social media. This is damaging to our brand.
Piccolo should take the opportunity to change celebrity chef on the 25 th anniversary.
By 2020, Franks can achieve the same return of 123% on advertising. He attracts a similar target market,
21-30 to Piccolo 25-40 so the initial sales predictions may in fact be higher.
It is important to understand the reason why Thor do not wish to be associated with Franks before
proceeding.

3 Evaluation of Dougal proposal
The proposal generates profits of £1,015k in 2019 and £225k in 2020.
Not accepting the proposal will result in the loss of Dougal as a customer, £929k in 2017, and greater
reliance will be placed on Ringford and Quincy. Market share will therefore be lost.
Zoto have the potential to design an Indian dish in 3 months which would mean supplying Wadham for
their new curry nights at Dougal.
Future strategies for 31 May 2018 can be met as Zoto will mean diversifying manufacturers.
Wadham have 20 hotels in Canada, meaning Piccolo can trial international expansion. Rolson can be
used as cookware manufacturers as they are based here and RDN as distributors as they also have a
presence in Canada.
The capacity of RDN and Piccolo needs to be assessed to judge whether Wadham can be supplied the
full £3m worth of refurbishment.
Piccolo should negotiate a better gross profit margin than 30% as it was previously as high as 60% in
2016 (50% in 2017).
The offer after this should be accepted because even though Piccolo will make less profit from UK sales
to Dougal, the attraction of international expansion via Wadham is too great.
Zoto should be used as a business partner to create Thai/Indian dishes because their potential for growth
is exponential. If Piccolo do not collaborate, then another competitor will.
1.0 Analysis of Piccolo’s financial performance
1.1 Revenue
Total revenue has fallen significantly by £4,277k or 10.3%. This is surprising based on the budgets
provided. It is below the low budget estimate of £38m.
Higher inflation following Brexit vote in June 2016 has hit household budgets and dented the key driver of
UK growth, consumer spending (Guardian May 2017).
Piccolo’s high quality goods are not a necessity for households who can choose a cheaper option.
There has been a 5% downturn in the UK Kitchenware market, but Piccolo have doubled this fall.
Hospitality
Revenue fall by £566k or 6.4k. Its performance was more in line with the UK decline.
When analysing the big 3 customers, Dougal, Ringford and Quincy, it can be seen that Ringford was the
only customer of growth. Sales grew by £238k or 18.3%.
Piccolo is now placing a greater reliance on Ringford as they now make up 18.6% of Hospitality revenue,
14.7% in 2016.
This is bad for profitability as Ringford historically has the worst gross profit margin (GPM) at 40%.
In the previous year Dougal delayed a replacement cycle. After sales declining by £127k or 12.0% it
seems they delayed again. This may increase sales in the next financial year.
Retail
The revenue mix is Tableware 64.5%, Cookware 27.4% and Utensils 8.1%. This has changed since 2016
when the mix was 60%, 30%, 10% respectively.

Although utensils create the least profit so a reduction in the mix is not a bad thing it is not in line with
future strategy to grow utensils to 15% of total Retail revenue.
1.2 Gross profit
Total GP has fallen by £4,114k or 25.2%. This is mainly due to the weakening of sterling. Piccolo’s
suppliers invoice them in sterling so they have increased prices so not to lose out on exchange
differences themselves.
Again as in 2016, Piccolo has been unable to pass these costs onto the consumer due to the lack of
customer confidence currently.
Hospitality
The Big 3’s margins have fallen considerably apart from Quincy. In the past 2 years GPM has been
Dougal 60%, Ringford 40%, and Quincy 50%. In 2017 Quincy’s remained at 50%, but Dougal’s fell to
50% and Ringford’s reduced to 35%.
These 3 customers account for 40% of Hospitality GP so this has had a detrimental impact.
1.3 Operating loss
Total operating profit fall by £3,526k or 111.5%. It is now loss making.
Lucy Tyler’s advertising bonus was not achieved as the £44m revenue target fell way short. If this had
been paid than this cost line would have remained fairly constant.
Product innovation costs fell by £96k or 4.5%, which is disappointing since this is a key driver of future
growth.
Sales and distribution costs reduced by 8.0% which is in line with the 10% fall in sales. This cost relates
almost entirely to RDN.
Piccolo could potentially fine RDN for the late deliveries at £10k per 0.1% below delivery target of 90%.
This would generate income of £200k although could damage supplier relations.
1.4 Fake product
The substance to make non-stick pans, PFOA, is yet to be cleared for manufacturing in the U.S. meaning
there are clearly doubts over its health and safety.
Fake cookware can be produced easily and sold at discount. If the fakes are believable then the brand
will be associated with poor quality.
Piccolo need to ensure that their pans (PE7) do not carry the same faults as they have a duty of care to
that customer.
1.5 Conclusions
Total revenue has fallen significantly by £4,277k or 10.3% due to a 5% downturn in the UK kitchenware market.
Hospitality revenue reduced by £566k or 6.4%, even though more sales were made to the Big 3, 38.7% in
2017 vs 35.5% in 2016.
Retail revenue fell by £3,711k or 11.3%. Retail creates up 78% of Piccolo’s sales and is affected more by
consumer spending which is why the fall is greater.
Gross profit reduced by £4.114k or 25.2% due to an increase in costs from suppliers due a reducing pound.
Piccolo could not pass these costs on to the consumers.
Hospitality margins have fallen by 10% for Dougal to 50% and by 5% for Ringford to 35%.

There is an operating loss for the first time in many years at £363k. This is mostly attributable to
redundancies and the loss of some small Retail customers.
Fake products mimicking Piccolo products have been creating health scares. The PE7 logo has been found
on the fakes. The financial impact is not yet known, but the PE7 was beginning to gain market share.
1.6 Recommendations
At some point Piccolo need to pass on the increased costs issued by the suppliers. One option could be
to consider new and/or additional suppliers in order to pick and choose the price that suits.
Redundancy costs should not occur next year so it is possible to return to profitability then. Product
innovation investment is key to future success so it is important to push this.
Focus on Dougal and Quincy in the Hospitality sector as they provide the best margins and profitability.
A marketing campaign should be undertook to promote the PE7 to ensure customers are confident of the
products.
2.0 Evaluation of celebrity chef arrangements
Piccolo have a target return of 120% when dividing the increase in total revenue by total external
advertising expenditure. This should be taken into consideration in the below analysis.
2.1 Lucy Tyler (LT)
Based on the fee and Thor’s fixed fee, choosing LT will create a return of 146% in 2019 and 133% in 2020.
Lucy has been associated with Piccolo since 2013 and has proven useful in generating revenues,
especially in the retail sector. Before 2017, Piccolo enjoyed significant growth whilst using LT.
LT’s offer is to increase the fixed fee by 20% and remove the success fee element. LT may think that the
revenue targets are set too high by Piccolo or that it is unfair to base her performance on that of
hospitality also.
Removing the success fee will not really reduce LT’s motivation to increase sales.
The forecasted revenue for 2018 of £39m seems reasonable as it will be the 25 th anniversary of Piccolo,
but the revenue growth is very high after this. The UK will only just be leaving the EU at this point and
there will still be doubt over consumer spending.
Another factor to consider is Thor’s additional fees not taken into account by Gautam. Piccolo spend
between £100-250k on extras. This for example could be to health scares relating to the PE7 as identified
in section 1 of this report.
The calculation has therefore been flexed to include an average Thor fee of £175k per annum. The
revised return on advertising is now 134% in 2019 and 123% in 2020.
Both of these returns are above the desired 120%, however it is falling so when discussions take place
two years time then this could fall below.
2.2 Eric Franks (EF)
To create a return for year ended 2019, LT’s 2018 revenue assumption has been used to form a revenue
movement.
In 2019, the return is only 62.5%. This is likely to be due EF being newly associated with Piccolo and
being new to advertising kitchenware products.
2020 shows significant improvement to 123%, achieving the desired 120% return.
The weak performance in 2019 is due to EF demanding a high fixed fee of £1m. Although this is above
LT, it is not set to increase.

EF also has a success fee in 2020. This has not been achieved based on the revenue assumptions.
If Piccolo did generate a 10% rise in revenue to £44m, then they would lose out by paying £250k to EF.
Piccolo realistically need to earn an 11% increase for the success fee to be viable.
2.3 LT vs EF
LT has 5 years’ experience promoting Piccolo products and the public strongly associates the company
and person together. Although she was not part of the successful 15 year anniversary ‘Pick a Piccolo’,
she will have arrived at the back end of it and understood how important it is.
EF has no experience in advertising but has been a chef his whole life. He has a keen interest in sorting
his own range of kitchenware, which could be produced alongside the 25th anniversary.
EF’s demand for fee is very high compared to LT’s offer, however LT may have approached Piccolo with
a reduced fee due to her recent press coverage (see ethics below).
LT was known for being on children’s TV. Whilst this was great exposure in the UK, EF actually attracts
Piccolo’s market, which is 25-40.
EF’s restaurants closed partly because people aged over 40 disliked it. They also believed it was
overpriced. If EF likes high prices, he probably likes high quality, which would match Piccolo’s strategy.
The forecasted revenue for the 2 proposals is very different. Gautam can obviously base LT’s on prior
performance, but he has not provided reasoning why EF’s revenue would be so much lower.
2.4 Ethical and business trust issues
Although LT is not contracted to use Piccolo products when cooking at home, it would be hoped she
would use them as she is employed to promote them.
Piccolo needs to discuss this video/film with LT before taking further action as there may be a plausible
reason. It may even lead to Piccolo manufacturing a better product.
Piccolo need to find out why Thor will not be associated with EF. It may be due to a conflict of interest or
that EF does not match their target audience.
However if it is for an unethical reason then Piccolo should take this into consideration.
2.5 Conclusion
Using the flexed LT calculation, by 2020 both options will create the same return of 123%.
At best LT will return 146% (2018) and 135% (2020) and EF will return 62.5% (2019 and 123% (2020).
Using EF will mean changing all suppliers of external advertising as Thor will be lost.
LT had 4 successful years, but in the last revenue fell by 10.3%, being more than the economic downturn,
suggesting her association with Piccolo has lost its impact on sales.
2.6 Recommendations
Piccolo should first speak to Thor regarding their association with EF and if their reason is not unethical,
then Piccolo should change celebrity chef to EF.
EF will be timed with the 25th anniversary so is a good time to change. It will also attract quality and the
ideal target market for Piccolo.
After promoting the anniversary, Piccolo should collaborate with EF to produce his own line of kitchenware.
Piccolo would have further discussions with the new agency about future fees as the £600k may
represent a first year discount.

3.0 Dougal Hotels proposal
Firstly, Wadham acquiring the Dougal chain and refurbishing it probably means losing existing revenues.
However in 2017 year end this was only £929k.
Piccolo has the potential to earn more than that and especially in the first year.
3.1 Forecast calculation
For 2018 revenue includes the £3m from initial refurbishment, £2,000 per hotel for woks and dishes used
to prepare curry and the Canadian hotels Wadham is to convert.
Disappointingly the offer seems to be only at a gross margin of 30%. Previously Dougal earned Piccolo a
margin of 60% with this falling to 50% in 2017 (as identified in section 1).
With Piccolo suffering an operating loss in 2017, this squeezing of margin by 20% will not help recovery.
In 2019 gross profit will fall to £225k. This could be potentially higher depending on a replacement cycle
and breakages. The calculation assumes a 20% replacement of the initial supply.
3.2 International dishes
Programmes such as the Great British Bake Off have made baking extremely popular in the past 10
years. The TV series ‘Curry in a Hurry’ is likely to create excitement.
This is a potential opportunity for Piccolo because if they can create a successful product (with Zoto’s
help), then it can be marketed in the retail sector also.
3.3 Wadham’s ownership
Although there is a history of Wadham’s ruthless management style they are likely to be successful.
Wadham are retaining key staff and assisting Dougal get back on track by injecting capital and offering
board level expertise.
Wadham leaving in 3 years will be okay as long as Ross Dougal is supported properly.
3.4 Zoto
According to Your Table magazine in June 2017, Zoto are on the rise. They want to produce high quality
products like Piccolo.
It would be much better for Piccolo to have Zoto as a business partner rather than a competitor. Using
Zoto for the international dishes means expanding the number of suppliers used. Piccolo currently relies
on 4 suppliers and this would help spread the risk.
It also meets a target for future strategy by 31 May 2018.
There is concern over the time period to design a new Thai or Indian cookware dish. 3 months is very
short, and it will be subject to health and safety testing. After issues regarding the PE7, Piccolo do not
want to attract any further attention, even if the PE7 were fakes. Also interested in supplying conference
centres, which Ringford have recently acquired from Reeve.
3.5 Overseas expansion
Accepting the opportunity with Wadham would mean the potential for overseas expansion to Canada.
With only 20 hotels this is a perfect opportunity to trial, especially if Wadham sell Dougal in 3 years.
There is no long standing commitment.
Piccolo can use Rolson to supply cookware, therefore saving on transport costs. Piccolo could invoice in
Canadian dollars in the hope of cheaper prices. The exchange rule is favourable and most likely will be
for the next two years for Piccolo to convert into sterling.

RDN are based in Canada so we can place trust in reliable deliveries, despite their 88% success rate in 2017.
3.6 Capacity
RDN currently hold 95% of Piccolo stock. It needs to be considered whether they have the capacity for
overseas orders or the additional woks/Indian dishes.
Piccolo purchased PPE worth £250k in 2017. If this was for the expansion of the warehouse then this
could be used to hold the additional stock.
3.7 Conclusions
The Dougal proposal generates profits of £1,015k in 2019 and £225k in 2020 subject to adjustments on
expansion and breakages.
Not accepting the offer would result in the loss of all Dougal revenue. Piccolo would then lose market
share in hospitality and place greater reliance on Ringford and Quincy.
Zoto are a promising and growing company that would provide a fantastic collaboration to expand the
number of suppliers and product portfolio.
The deal with Wadham provides an opportunity for international expansion in Canada where Piccolo
already have trade relationships with Rolson, cookware manufacturer, and RDN, distributor.
3.8 Recommendations
Piccolo should act on this opportunity and make a deal with Wadham, although they need to negotiate a
better gross profit margin.
Piccolo should choose Zoto to develop Thai/Indian dishes because if the hospitality sales are strong and
the feedback is positive then sales can be pushed out to retail customers.
This should first be done to Longfield who are a kitchenware specialist and attract ‘foodie’ types of people.

Appendix 1 – Financial data analysis
Profit or loss 2017 Margins Mvmt £ Mvmt % 2016 Margins

% %
£000 £000 £000
Revenue 37,436 (4,277) (10.3) 41,713
Change in Inventiory 91 (730) (88.9) 821
Purchase of goods for resale (25,322) (893) (3.4) (26,215)
Gross profit 12,205 32.6 (4,114) (25.2) 16,319 39.1
Other costs (12,568) (588) (4.5) (13,156)
Operating profit/ (loss) (363) (0.9) (3,526) (111.5) 3,163 7.6
Net finance income 25 (9) (26.5) 34
Profit (loss) pre tax (338) (0.9) (3,535) (110.6) 3,197 7.7
Taxation 68 (639)
Profit/(loss) (270) 2,558
Segmental analysis
Revenue 2017 Mix % Mvmt £ Mvmt % 2016 Mix %

£000 £000 £000
Hospitality 8,271 22 (566) (6.4) 8,837 21.2
Retail 29,165 78 (3,711) (11.3) 32,876 78.8
Total 37,436 41,713
Gross profit 2017 Margin % Mvmt £ Mvmt % 2016 Margin %
£000 1000
Hospitality 3,439 41.6 (906) (20.9) 4,345 49.2
Retail 8,766 30.1 (3,208) (26.8) 11,974 36.4
Total 12,205 32.6 16,319 39.1
Other costs 2017 Mix % Mvmt £ Mvmt % 2016 Mix %
£000 £000 £000
Sale & Dist 3,713 29.5 (321) (8.0) 4,034 30.7
Product Innov 2,057 16.4 (96) (4.5) 2,153 16.4
Advertising 3,751 29.8 (287) (7.1) 4,038 30.7
Admin & Support 3,047 24.2 116 4.0 2,931 22.3
12,568 13,156
Hospitality
Revenue 2017 Mix % Mvmt £ Mvmt % 2016 Mix %

£000 £000
Dougal 929 11.2 (127) (12.0) 1,056 11.9
Ringford 1,539 18.6 238 18.3 1,299 14.7
Quincy 738 8.9 (28) (3.7) 766 8.7
3,204 38.7 83 2.7 3,121 35.3
Other 5,067 61.3 (649) (11.4) 5,716 64.7
8,271 (566) (6.4) 8,837
Gross profit
2017 Margin %
Dougal 466 50
Ringford 545 35
Quincy 370 50
1,381
Other 2,058
3,439
Retail
2017 Mix %
£000
Tableware 18,800 64.5
Cookware 8,000 27.4
Utensils 2,365 8.1
29,165

Appendix 2 – Celebrity chef 2019/2020
Piccolo measures its return on external advertising expenditure as
Increase in total revenue

Total external advertising expenditure
There is a target return of 120%.
Lucy Tyler: 2019 2020

£000 £000
Lucy’s fee 800k x 1.2 960 x 1.2 1,152
Thor fixed fee 1,100 1,100
2,060 2,252
Movement in revenue (42m-39m) 3,000 (45-42) 3,000
Return 146% 133%
Piccolo also have additional Thor fees between £100k-250k. An average has been taken to flex the
forecast above.
External advertising (2,060 + 175) 2,235 2,427

Revised return 134% 123%
Eric Franks: (Appendix 2 continued)
Lucy Tyler’s expected revenue for Yr 2018 has been used in this calculation to create a movement in total
revenue.
2019 2020
£000 £000
Eric’s fee 1,000 1,000
New agency 600 +5% 630
1,600 1,630
Movement in Revenue (40-39) 1,000 (42-40) 2,000

Return 62.5% 123%
The 5% new agency fee increase is based on the percentage increase in revenue 2019-2020.
Appendix 3 – Dougal proposal
2018 2019
£000 £000
Revenue – initial supply 3,000
Rev – International dishes 2,000 x 225/(300 – 225) 450 150
Revenue – Canada (3,000/225) x 20 hotels 267
Revenue – replacement @ 20% per annum 3m 600
Total Revenue 3,717 750
Gross profit @ 30% 1,115.1 225

Design process with Zoto (100)
Profit 1,015 225

WEDNESDAY 8 NOVEMBER 2017
(4 HOURS)
CASE STUDY
CANDIDATE NUMBER
page;
examiners.
ICAEW USE ONLY
ICAEW/CS/N17 237588
BLANK PAGE
ICAEW/CS/N17 237588
November 2017 Case Study: R4 Waste Collection and Recycling Limited (R4)
List of exhibits
1 About you, Nik Harris; your employer, Boyle Downer ICAEW Chartered Accountants
(BD); and your client, R4 Waste Collection and Recycling Limited (R4)
2 The UK waste collection and recycling industry and R4
3 R4: history and overview
4 Email from Freda Tusk to Shan Patel: R4 financial and operational history and review of
management accounts for the three years ended 30 September 2016
5 R4: management accounts for the three years ended 30 September 2016
6 Email from Freda Tusk to Shan Patel: review of R4 business operations for the year
ended 30 September 2016
7 R4: Material Recycling Facility (MRF)
8 R4: industrial and commercial (I&C) recycling operations
9 R4: special events waste contract operations (SEWCO)
10 R4: recycling network arrangements and operations
11 R4: 3rd party mixed waste collection organisations
12 Email from Tam Dooley to R4 board: management accounts review, corporate

responsibility, operational and strategic review
13 Email from Jackie Tong to R4 board: report on MRF issues in the year ended 30
September 2016
14 Media articles
15 Email from Shan Patel to Nik Harris, 8 November 2017: R4
16 R4: management accounts for the year ended 30 September 2017
17 Email from Freda Tusk to Shan Patel, 7 November 2017: management accounts
18a Email from Ali Mann to Shan Patel, 6 November 2017: new SEWCO proposal from OB1
19a Email from Jackie Tong to Shan Patel, 3 November 2017: LWC new client contract
ICAEW/CS/N17 Page 1 of 15
BLANK PAGE
R4 Waste Collection and Recycling Limited (R4): Case Study requirement
You are Nik Harris, a final-year trainee ICAEW Chartered Accountant working in the
business advisory unit of Boyle Downer (BD), a firm of ICAEW Chartered Accountants. One
of your clients is R4 Waste Collection and Recycling Limited (R4), a company operating in
the industrial and commercial waste collection and recycling industry. You report to Shan
Patel, a partner in Boyle Downer.
Requirement
You are required to prepare a draft report for the R4 board, as set out in the email dated
8 November 2017 from Shan Patel to you (Exhibit 15). Your report should comprise the

Marks allocation

90%
100%
BLANK PAGE
EXHIBIT 15
EMAIL
From: Shan Patel

To: Nik Harris
Subject: R4
R4 has produced its management accounts for the year ended 30 September 2017. R4’s
board has asked BD to help with assessing R4’s financial performance for the year ended
30 September 2017. The board has also asked for advice on some specific financial matters
and broader strategic and operational issues. I am attaching the following:
 R4’s management accounts for the year ended 30 September 2017 (Exhibit 16)
 An email from Freda Tusk providing additional information about the management
accounts and board discussion notes concerning R4 depreciation (Exhibit 17)
 An email from Ali Mann about a new SEWCO proposal (Exhibit 18a) and related
media articles (Exhibit 18b)
 An email from Jackie Tong concerning a problem with R4’s client LWC relating to one of
its contracts (Exhibit 19a), together with media articles (Exhibit 19b).
Please draft for my review a report addressed to the R4 board. The report should comprise
the following.
1. A review of R4’s management accounts for the year ended 30 September 2017 in
comparison with the year ended 30 September 2016.
Your review should be based on the management accounts as set out in Exhibit 16. It
should cover revenue and gross profit, both overall and individually for the two revenue
streams: mixed waste and general waste. In your review you should refer to the
additional information provided in Exhibit 17 relating to the management accounts. You
should also respond to the request for advice from the R4 board concerning
depreciation (Exhibit 17).
2. An evaluation of the proposal for a SEWCO contract from a new client, OB1, as detailed
in Exhibit 18a.
Using the information in Exhibit 18a, calculate the revenue and gross profit for this
SEWCO proposal. You should assess the adequacy of the assumptions and include
any business trust and ethical issues as well as commercial considerations, including
those arising from the media articles in Exhibit 18b. You should provide a justified
recommendation as to whether R4 should accept this proposal.
3. An evaluation of the issues surrounding the recycling activities being conducted by R4

for its client LWC (Exhibit 19a), referring also to the matters identified in Exhibit 19b.
You should evaluate the financial, operational and strategic factors, including any
business trust and ethical issues. You should also assess the overall implications for
R4’s recycling operations. You should provide appropriate calculations to support your
evaluation.
BLANK PAGE
EXHIBIT 16
R4 Waste Collection and Recycling Limited
Management accounts for the year ended 30 September 2017

Note £000s
Revenue 1 55,354
Gross profit 8,687
Operating costs (6,948)
Finance charges (863)
Taxation (175)

Notes £000s
Non-current assets
Tangible assets 2 14,367
14,367
Current assets
9,192
Total assets 23,559
Bank loans 4 12,000
12,000
Current liabilities
Bank overdraft 1,138
7,239
Statement of cash flows
£000s
Adjustments for:
Depreciation and loss on disposals 1,994
Net finance expenses 863
3,733
Change in trade and other receivables (1,320)
Change in current liabilities (503)
Taxation paid (162)
Net finance expenses (863)
Purchase of tangible assets (678)
Proceeds from disposal of tangible assets 41

Cash and cash equivalents at start of year (1,386)
Cash and cash equivalents at end of year (1,138)
Note 1 Revenue and cost of sales

Quantity Cost of Gross
Mixed waste Revenue processed sales profit
I&C operations Notes £000s Tonnes £000s £000s
I&C mixed waste fees a 5,848
I&C recyclate sales b 2,897
8,745 31,492 6,915 1,830
SEWCO
SEWCO fees c 3,138
SEWCO recyclate sales d 2,867
6,005 9,654 3,920 2,085
3rd party waste collectors
3rd party gate fees e 977
3rd party recyclate sales f 4,496
5,473 48,866 4,447 1,026
Total mixed waste 20,223 90,012 15,282 4,941
General waste
I&C general waste g 33,177 129,024 29,491 3,686
SEWCO general waste h 1,954 6,012 1,894 60
Total general waste 35,131 135,036 31,385 3,746
Overall total 55,354 225,048 46,667 8,687
For additional information on Note 1, see Exhibit 17 (a–h).
Note 2 Non-current assets
Tangible assets Leasehold IT, Plant &

Cost £000s £000s £000s £000s
At 1 October 2016 1,070 15,598 5,477 22,145
Additions - 101 577 678
Disposals - - (352) (352)
At 30 September 2017 1,070 15,699 5,702 22,471
Depreciation
At 1 October 2016 655 2,459 3,307 6,421
On disposals - - (257) (257)
At 30 September 2017 738 3,818 3,548 8,104
Carrying amount at 30 September 2017 332 11,881 2,154 14,367
Note 3 Trade and other receivables

2017
£000s
Prepayments and sundry 875
9,192
Note 4 Bank loans

2017
£000s
Initial loan 3,000
Additional loan 9,000
12,000
Note 5 Trade and other payables

2017
£000s
Other payables 813
6,101
BLANK PAGE
EXHIBIT 17
EMAIL
From: Freda Tusk

To: Shan Patel
Subject: Management accounts
Note 1 Revenue and cost of sales – additional information relating to the management
accounts
The following factors affected R4 operations and financial performance during the year to
30 September 2017:
a There was no change in mixed waste fees per lift charged to clients. Similarly, MRF costs
per tonne of £91 have remained the same as in 2016.
b Mixed waste recyclate sales increased by £6 to an average of £92 per recyclate tonne.
c Higher average SEWCO fees were negotiated. However, because of poor weather
conditions and other problems, SEWCO clearance costs increased to £315 per tonne.
d There was a change in the recyclate mix with an increase in residual general waste but
there was also an increase in recyclate prices per tonne for SEWCO mixed waste. As a
result, SEWCO mixed waste increased slightly to an average price of £297 per tonne.
e Owing to market circumstances and competitor pricing, 3rd party gate fees per tonne
were held at the same level as the previous year.
f 3rd party recyclate sales increased by £6 to an average of £92 per tonne (as for b).
g Because of market conditions and competition, general waste fees per lift remained the
same as in the previous year.
h The ratio of SEWCO general waste to mixed waste increased noticeably because of a
widespread increase in non-recyclable food waste.
Board discussion notes concerning depreciation – request for advice
During the recent board review of the management accounts to 30 September 2017, and in
the context of the repayment of the initial bank loan of £3 million in April 2019, the following
issues were raised:
 The total depreciation charge of £1,940k shown in Note 2 is significant. Of that figure,
£1,359k relates mainly to the Fairleigh MRF and is based on a tonnage processed rate –
using an estimated total lifetime processing tonnage of 1,200,000 tonnes.
 R4 is also continuing to incur losses on disposals of its non-current assets.
 There was a query concerning the impact on the three primary financial statements in the
management accounts, if amendments to estimates used in the depreciation calculation
resulted in an increase of, say, £500k in the total depreciation charge from £1,940k to
£2,440k (in the year ended 30 September 2017).
 There were also concerns about the impact that such a change in the depreciation charge
might have on R4’s ability to make its scheduled repayment of the initial £3 million loan in
2019.
Please address these board issues. (Do not re-perform any detailed financial statement
analysis.)
EXHIBIT 18a
EMAIL
From: Ali Mann
To: Shan Patel cc: R4 board
Subject: New SEWCO proposal from OB1
R4 has been approached by OB1, an events organiser based in Sheffield, with a proposal for
R4 to collect and recycle the waste from a series of music festivals and other events that will
take place during the summer months of 2018. A successful outcome may lead to further
work.
Details provided by OB1
 There will be 10 events managed by OB1 in 2018

 The mix of events comprises:
o 50% music festivals (each lasting between three and five days), attended mainly by
younger audiences who stay for the duration of the event
o 50% events such as garden and flower shows on permanent exhibition sites (each
lasting two or three days), attended mainly by older visitors on a day ticket basis
 The events will be held in the period from 1 April to 30 September, mostly over weekends
 OB1 is prepared to pay a maximum of £335 per tonne for all waste collection services
 Based on prior years’ experience, OB1 estimates that the total waste generated will be
30,000 tonnes across all 10 events
 OB1 normally requires exclusivity – ie, that the waste collector does not undertake other
SEWCO contracts at the same time. This ensures that the collector has sufficient
capacity, and that there is no conflict with any waste collection for similar events at the
same time.
R4 estimates for the OB1 proposal
1) Using 2017 costs, R4 could collect and process the total OB1 waste for £315 per tonne
2) At least 60% of waste collected would be mixed waste recyclable at R4’s MRF
3) MRF costs per tonne would remain the same as in 2017
4) Using current recyclate prices per tonne, and based on proportions provided by OB1, R4
estimates that the weighted sale price per tonne would be:
OB1 estimate Sale Weighted

proportions price sale price
per tonne per tonne per tonne
% £ £
Cardboard 30 100 30
Steel 20 150 30
Aluminium 20 500 100
Hard plastics 30 200 60
Revenue from mixed recyclates 100 220
5) OB1’s normal requirement of exclusivity concerning SEWCO contracts by its waste

collectors may prevent R4 from continuing its current SEWCO work. R4 may need to
consider the impact of losing all other SEWCO contracts (using 2017 as a basis) as a
factor in assessing this OB1 proposal.
EXHIBIT 18b
Regional News September 2017
Festival food waste dumped on school playing field

During the school summer holidays, an enormous quantity of waste has been dumped on a
school playing field, causing all sports events at that school to be cancelled, and leaving it
with the extremely difficult and costly problem of clearing up.
It appears that the waste – which has been partially sorted and compressed – has come from
a music festival which took place recently at a nearby farm site. The waste comprises mainly
food and other non-recyclable general waste, including wet cardboard cartons – increasingly
the container of choice for food and drink at such events. This decomposing waste will cause
a health and safety issue and will attract vermin.
The festival organiser, OB1 (one of the UK’s main festival organisers), stated: “We have paid
for all waste to be removed from the festival site – including this segregated waste. We
cannot be held liable for the fly-tipping actions of the waste contracting organisation that we
had contracted to do this job.” As yet, no waste contractor has admitted responsibility.
A Local Authority spokesperson, who also serves as a member of the school management
body, commented that it appeared that the quantity fly-tipped was probably the vast majority
of all the waste generated from the event. Fines could be imposed on all concerned and
planning permission could be withheld from future events if this current fly-tipping problem is
not resolved promptly.
UK Geographic October 2017
Disruptive effect of festivals outweighs positive economic impact

An economic and social study of music festivals and similar events has concluded that
despite being a major economic lifeline for many rural communities, the overall effect that the
arrival of thousands of spectators can have on these communities is largely negative.
The fact is that the arrival of thousands of visitors who are generally in holiday mode means
that local goods and services can be sold to these willing customers – providing an economic
boost to businesses which might otherwise fail. The negative factors include the disruption to
traffic flows around festival sites, the problems of supplying the huge surges in numbers with
basic goods and amenities, and the damage caused by poor visitor behaviour.
In some locations, it is felt that this poor behaviour, which can include all forms of littering and
messy waste disposal, is not dealt with appropriately by festival organisers. One resident who
lives in an attractive village close to an annual major festival site said: “The problem is that
festival goers are only here to have fun. They believe that because they buy a carton of milk
from a local shop, they are making a significant economic contribution for which we should all
be grateful. In fact, they rarely consider the awful mess that they leave behind for residents to
remove. Festival organisers must control these situations and educate their audiences with
regard to the waste generated and left behind. If they do not do this, residents here and at
other sites throughout the UK will be voting to stop all types of festivals in their locality”.
EXHIBIT 19a
EMAIL
From: Jackie Tong

To: Shan Patel cc: R4 Board
Subject: LWC new client contract
In the year ended 30 September 2017, R4 has had an increasing problem with the
processing of mixed waste from Lindon Waste Contractors (LWC). The problem has arisen
because recently LWC obtained a new mixed waste collection contract – at a fixed price –
which R4 is processing on its behalf.
The facts
 Starting 1 July 2017, LWC won a two-year contract to collect office waste from three large
office buildings managed by Finer Properties Limited (FP) in the centre of Leeds.
 LWC bid for this office waste contract on the understanding that it comprised mixed waste
of paper and cardboard (approximate ratio 2:1) and included items such as confidential
paper waste (bank statements, legal documents, exam papers and personnel files).
 Between them, the three office buildings employ more than 10,000 people, and generate
the equivalent of 10 full standard truckloads of waste each week, to be processed by R4.
 This contract currently represents just over 300 tonnes of mixed waste per month.
 The mixed waste being collected by LWC actually contains paper and cardboard but also
includes a noticeable volume of discarded coffee cups, which cannot easily be separated
out and cannot be recycled locally.
 The confidential waste which is supposed to be shredded by the companies before
recycling has in some cases only been partially shredded. This is causing security
concerns for R4 because pages of confidential information remain readable at Fairleigh.
Specific effect on R4
 Since 1 July 2017, there has been an increase of 15% in the processing costs of recycling
these LWC truckloads of waste from FP because of the need for additional scrutiny,
security and supervision.
 There is also an increase in the percentage of unsaleable recyclate (general waste) in
these truckloads – caused by the coffee cup waste among the paper and cardboard – this
percentage is estimated to be at least 10%.
 As a result, in the year ended 30 September 2017 there has been a small but observable
increase in the amount of waste sent to non-recyclable general waste disposal – at a cost
to R4.
 R4 is concerned that the processing of this particular contract may not really be profitable.
 LWC has provided more than 30% of all the 3rd party waste processed by the R4 MRF
since its installation. In the year to 30 September 2017, apart from this FP contract, R4
processed over 16,500 tonnes of LWC mixed waste.
 R4 is aware that if it does not continue to process this waste for LWC, then all LWC work
may be lost.
EXHIBIT 19b
UK Trader October 2017

Increasing penalties for failure to meet recycling targets
Within a short period of time after its EU membership ceases, the UK intends to adopt all
international recycling regulations into its own legal and regulatory process. As a result,
failure to meet recycling targets in the future will cause penalties to be applied by the UK
Government to Local Authorities. These will in turn apply penalties to the commercial
organisations responsible for collecting and recycling waste in their locality.
In most cases, the penalties will be financial and will increase as the failure to meet recycling
targets increases. The expectation is that these targets will become more demanding, and
the related penalties are expected to become more strictly applied as time passes. Targets
would normally be expressed in increasing percentages (or tonnages) of all waste being
processed by an organisation. In other cases, the penalties will be attached, by way of
stricter and more limiting criteria, to the use of property for mixed waste collection operations.
Others will have more specific local criteria – such as location collection restrictions for
recycling operations.
A spokesperson for UK Local Authorities stated: “This means that a recycling organisation
may only be allowed to collect waste from within a certain radius of the recycling facilities
which it uses. This would avoid one district becoming responsible for processing the waste
generated in another district”.
Recycler Monthly October 2017

Innovation in recycling
Innovations continue to occur, albeit slowly, in the recycling of used coffee cups. Recently, a
number of new businesses have each created coffee cup recycling and new manufacturing
processes which make use of previously unwanted coffee cups. One such UK organisation,
Signacups, is producing public signposts and signs for house names or numbers. There is
also a rumour of it making a possible breakthrough by manufacturing vehicle number-plates
from recycled coffee cup materials – which would open up a huge new market. This company
is looking for increased links within the UK mixed waste market.
Signacups collects waste coffee cups using attractive, specialised waste coffee cup bins
located within offices in carefully selected regions in the UK. Jake Planter, CEO of
Signacups, has said: “Businesses do not want a large industrial and messy bin located in the
office. The biggest problem is persuading and educating coffee drinkers to put their waste
coffee cups into these specially designed bins – the processing is then fairly straightforward”.
Signacups has identified that the volume of coffee cups deposited into a recycling bin can
very quickly fill that bin unless the cups are crushed before being deposited – which drinkers
seem reluctant to do. The alternative is to have a recycling bin adapted for stacking used
coffee cups inside one another – but this depends on all cups being of similar size.
Both of these issues require more investment by the recycling organisation, either in more
frequent, segregated collections or in high-quality engineered bins. The solutions would
involve a higher charge to the client – which is resisted. It is not an easy problem to solve.
Contents
Page

Introduction 2
Information provided in the Exam Paper 8
Analysis of Exam Paper Information Exhibits 15-19 9
Requirement 1: Review of R4’s financial performance 13
Requirement 2: Evaluation of OB1 SEWCO proposal 14
Requirement 3: Evaluation of R4 LWC recycling contract 14
Appendices and overall paper 15
Part 4: Appendices
Appendix 1: Analysis of R4’s management accounts 16
Appendix 2: Analysis of OB1 SEWCO proposal 17
Workings for evaluation of R4 LWC recycling contract (Requirement 3) 18
Part 5: Marking Key

Introduction
This report covers the November 2017 Case Study exam: R4 Waste Collection and Recycling Limited (R4). It is
issued in conjunction with two illustrative scripts and related examiners’ commentaries. The first script was in
the first quartile of all assessed scripts; the second failed the exam. In reviewing these scripts, it is important to
be aware that it is rare for a script to be uniformly ‘good’ or ‘bad’. A successful script will present appropriate
coverage of all requirements but may include errors of calculation or logic; an unsuccessful script may contain
one or two appropriate sections and/or some good points but be let down by poor or incomplete text elsewhere.
Attached to this report are appendices with examples of the sort of work that candidates did, or might have
done, under ‘financial analysis’. The two illustrative scripts offer further insights in the area of financial analysis.
75.2% of all candidates sitting the paper passed, compared with 76.1% in July 2017 and 74.9% in November
2016. The pass rate reflects the fact that this case was of a similar standard to all recent case studies. As in
recent papers, the Examiners had introduced factors within the requirements which made them less predictable.
candidates that the R4 case concerns a company engaged in the waste collection and recycling business. It has
two main business lines: mixed waste (MW) collection and recycling, and general waste (GW) collection and
disposal. The business has experienced revenue growth in recent years but especially since April 2015 when it
invested in a new Materials Recovery Facility (MRF). The candidate is in the role of Nik Harris, a final-year
ICAEW trainee Chartered Accountant working in the business advisory department of Boyle Downer ICAEW
Chartered Accountants (BD), reporting to the engagement partner Shan Patel. R4 is a recently acquired client.
The AI identifies that following the investment in the new MRF in April 2015 revenue has grown strongly: up
from £42 million in 2015 to almost £51 million in 2016 (20.9% increase). The company relies on an overdraft
(agreed limit of £1.5 million) and has to work hard on its cash flow to stay within its limit. The management
accounting information in the Exam Paper (EP) shows that R4 increased its revenue and gross profit in 2017.
The requirements in the EP followed on from the information provided in the AI. In summary, they comprised:
(1) an analysis of the revenue and gross profit, both overall and individually, for the two revenue streams: MW
and GW for the year ended 30 September 2017, by comparison with the previous year. There was also a
request to explain the impact of the depreciation charge on the three main financial statements
(2) an evaluation of a new SEWCO proposal from OB1 for the period April to September 2018 to process
30,000 tonnes of festival waste for a maximum fee of £335 per tonne. The proposal had to be evaluated,
together with the consideration of all the assumptions and business trust and ethical issues.
(3) an evaluation of the contract with LWC to process MW from an LWC client, Finer Properties (FP) including
any business trust and ethical issues.
Tutor firms in their reviews have commented that “All issues within this Case were discussed and foreseeable upon
analysis of the AI and students should have been well prepared” and that “The exam contained no nasty surprises … time
management and careful selection of calculations … will be pivotal to success”.
Study from the candidates’ perspective and that this exam was of a comparable level with previous Case Study
exams in assessing candidates’ professional skills.
Successful candidates followed the instructions provided in the rubric, and the instructions in each of the three
requirements, and produced full and balanced answers to those requirements. Their reports were properly
structured, covered all requested aspects, contained appropriate, clearly-labelled appendices and concise,
relevant executive summaries, highlighting the key factors. Successful scripts provided logical, clear answers to
each requirement and the top scripts were of an excellent quality.

Candidates who failed did so for a variety of reasons but, as always, a small number who failed appear to
have misallocated their time between the three requirements. Some candidates who failed did not provide either
appropriate analysis or adequate evaluation of assumptions. Others failed to apply adequate judgement in a
particular section of the report, together with only basic conclusions and poor or general (but tried and trusted)
recommendations such as “perform due diligence” or, in this case, the more specifically useless such as: “R4
should increase its percentage of mixed waste recycling”.
heading with good integration of AI and EP information – particularly for financial analysis calculations – and a
sufficient use of relevant facts provided throughout the case. However, the business issues and wider context in
Requirements 2 and 3 posed some problems for weaker candidates.
requirement or calculation (see below); and, because of the importance of good analysis to any section of the
report, it is difficult for a candidate to recover from inadequate or sub-standard analytical work.
their analysis – particularly in Requirement 1. Weak candidates failed to demonstrate their judgement by not
critically evaluating assumptions presented in the case or by not reflecting adequately on their own (sometimes
weak) analysis. The ability to apply judgement is a major differentiator in scripts.
candidates often presented only basic conclusions, and offered limited or general recommendations.
loss. It also required a consideration of depreciation. Most candidates demonstrated the required level of
competence in performing the financial analysis against prior year – assisted by good preparation from the AI.
As one tutor firm stated, “Whilst not mentioned in the EP student will have been expected to comment on two key
metrics highlighted in the AI (i) the 40% recycling target (met) and (ii) the 25% margin on mixed waste (missed)”.
Weaker candidates struggled to explain depreciation, which affected their judgements and recommendations.
Requirement 2 was to evaluate the proposal for a new SEWCO proposal from OB1 by calculating the revenue
and cost of the proposal with and without exclusivity. Candidates were specifically asked to assess the
adequacy of the assumptions made. Strong candidates provided comprehensive analysis and evaluation of all
issues based on good preparatory work. Weak students managed the relatively simple calculations but tended
not to question assumptions appropriately. Their conclusions and recommendations were similarly weak.
Requirement 3 concerned the evaluation of R4 LWC recycling contract. The majority of candidates presented
clear financial analysis of the issues but presented less comprehensive operational and strategic analysis.
Weaker candidates provided less convincing analysis overall and were not competent on related judgement.
They failed to provide an appropriately balanced consideration of all the issues or to tie the information back to
matters previously identified in the AI. Many had only weak conclusions and recommendations.
Appendices, Executive Summary (ES) and overall. All reports contained appendices and the vast majority were
clear and relevant because of good preparation. As one tutor stated “The AI presented candidates with a range of …
well-presented examples [which] enabled the candidates to walk through calculations that would ultimately form the basis
of the numerical analysis that they would be required to perform in the exam”. Most reports contained an ES which
dealt with the different sections of the report, but many did not always focus on the key factors in each section.
Good candidates demonstrated the ability to assess the R4 scenario and write a clear, relevant report. Weak
scripts showed less evidence of a well-structured report in sections – frequently the result of poor planning.
Conclusion
R4 was a topical Case Study, dealing with current business issues set at an equivalent level to previous cases.
As tutor firms stated, “Candidates would have found opportunities for further research plentiful with frequent articles
appearing in the national press” and “This was an exam paper which provided a fair test of a candidate’s professional skills
and knowledge of the information provided in the AI”. The examiners agree that the R4 case was a fair assessment
which rewarded the thorough preparation evident in the scripts of strong candidates. Those candidates who
were poorly prepared, or inflexible in their analytical thinking, found these weaknesses exposed in this exam.

The Case Study relates to R4 Waste Collection and Recycling Limited (R4), an owner-managed company
based at Fairleigh, near Barnsley in the north of England. As its full name suggests, R4 is engaged in waste
collection and recycling. The waste with which R4 operates can be divided into two main categories: general
waste and mixed waste. General waste is collected from customers and disposed of at other organisations
waste disposal facilities (WDFs). Mixed waste is collected, or brought onto R4’s Materials Recovery Facility
(MRF [conventionally pronounced ‘merf’]) at its Fairleigh site for processing. The candidate is in the role of Nik
Harris, a final-year trainee ICAEW Chartered Accountant working in the business advisory department of Boyle
Downer (BD) reporting to the engagement partner Shan Patel. R4 is a recently acquired client.
1 About you, Nik Harris; your employer, Boyle Downer ICAEW Chartered Accountants (BD); and your
client, R4 Waste Collection and Recycling Limited (R4)
2 The UK waste collection and recycling industry and R4
3 R4: history and overview
4 Email from Freda Tusk to Shan Patel: R4 financial and operational history and review of management
accounts for the three years ended 30 September 2016
5 R4: management accounts for the three years ended 30 September 2016
6 Email from Freda Tusk to Shan Patel: review of R4 business operations for the year ended 30 September
2016
7 R4: Materials Recovery Facility (MRF)
8 R4: industrial and commercial (I&C) waste collection and recycling operations
9 R4: special events waste contract operations (SEWCO)
10 R4: recycling network arrangements and operations
11 R4: 3rd party mixed waste collection organisations
12 Email from Tam Dooley to R4 board: management accounts review, corporate responsibility, operational
and strategic review
13 Email from Jackie Tong to R4 board: report on MRF issues in the year ended 30 September 2016
14 Media articles
By studying and analysing this Advance Information, candidates could establish an overall picture of R4 .
(Additional commentary by the examiners is provided in a different font and in brackets.)
Exhibit 1 provides a brief background to the candidate Nik Harris, the firm Boyle Downer (BD) ICAEW
Chartered Accountants and R4. (This exhibit identifies the range of work covered and necessary skills expected of the
candidate. These include the skills of assessing financial and non-financial information to perform a qualitative and
quantitative review of issues arising, together with performing any additional financial data calculations to evaluate
business opportunities or risks [emphasis added] and the related financial benefits or costs.)
Exhibit 2 provides a summary of the UK waste collection and recycling industry, and the various categories and
operations within that industry. (In particular, it identifies the streams of activity in which R4 is engaged [General Waste

and Mixed (recyclable) Waste] and its waste processing operations. It also provides an introduction to how recycling
organisations, including R4, generate revenue.)
Exhibit 3 gives a brief history of R4 and its interconnected business lines:
 Materials Recovery Facility (MRF)

 Industrial and commercial (I&C) waste contract operations
 Special events waste contract operations (SEWCO)
 Recycling network arrangements and operations – use of other companies’ WDFs.
R4’s operations are based on a large site, known as Fairleigh, leased from the Local Authority. It is located near
Barnsley in the north of England, with many of the company’s I&C clients based within 30 kilometres of this site.
R4 has operated with its own small MRF on-site since 2009 for processing the mixed waste which it collects
from its I&C clients. R4’s mixed waste recyclate is sold to a number of major organisations on a regular basis.
Effectively no recyclate inventory is held at Fairleigh. Exhibit 3 also includes the composition of the board and
the senior management posts. R4 has an ICAEW-qualified Finance Director: Freda Tusk.
Exhibit 4 is an e-mail from Freda Tusk (FT) to Shan Patel (SP) accompanying the R4 management accounts
for the three years ended 30 September 2016. It provides a short review of R4’s financial history and
management accounts highlighting key points which cannot easily be discerned from the actual financial
statements. This includes such facts as: “the depreciation rate for the MRF uses tonnes of waste processed during the
financial year against total expected lifetime tonnage”. R4 made a significant investment in a new MRF in April 2015
and disposed of the original MRF, which was “economically obsolete”, at a loss. R4 financed this £14 million
purchase with additional share capital and a new bank loan of £9 million (repayable in April 2025) on top of an
existing bank loan for £3 million (repayable in April 2019). R4 also operates with an overdraft – maximum facility
£1.5 million. (This summary financial story, provided by FT, explains the recent main volume changes to R4’s mixed
waste operations and this information must be integrated by candidates with other numerical information provided in later
exhibits to enable a comprehensive understanding of R4.)
Exhibit 5 provides five pages of R4’s management accounts and notes for the three years to 30 September
 R4 has achieved revenue growth from 2014 to 2016 but there has been more than 20% growth in 2016 as a
result of the investment in the new MRF in April 2015. (Further detailed analysis of the revenue streams may be
available through the notes below and subsequent exhibits.)
 Gross profit % has improved marginally over the three years from 12.1% (2014) to 15.8% (2016). (This is a
solid performance set alongside the growth in sales indicating that R4 has a firm control of costs.)
 There are small percentage changes in operating costs by comparison with revenue, up from 11.1% (2014)
to 12.5% (2016). (This may indicate weak control over costs but as no breakdown is provided further detailed
analysis is not possible at this stage.)
 Operating profit has been improving steadily in absolute terms over the three years (from £401k in 2014 to
£1,690k in 2016) and in percentage terms when compared with revenue (from 0.99% in 2014 to 3.3% in 2016).
(This is a positive trend albeit from a low base but, given the strong growth in sales, and the increase in GP%, indicates
an overall satisfactory control of costs.)
 The statement of financial position confirms that R4 made a significant investment in non-current assets in
2015 (an analysis of the relevant note 3 (below) reveals more).
 There has been a slackening of the accounts receivable against revenue over the three years. (This may
reflect changes in types of customer contracts and longer trading terms – which could be a factor in the increase in
overall sales – but it may also indicate weaker controls by R4 which, given its difficult cash position [see below], must
be a concern.)
 The additional bank loan of £9 million was taken out to fund the purchase of the new MRF and other non-
current assets – it is due to be repaid in 2025. The existing loan of £3 million is due for repayment in April
2019. (Both loans are interest-only loans; this assists cash flow but capital repayments require managing – see below.)
 The level of trade and other payables is increasing steadily in absolute terms (from £4,747k in 2014 to
£6,591k in 2016) – there has been an increase in percentage terms against relevant costs in the statement
of profit or loss. (This steady increase in trade and other payables indicates that R4 is probably paying its creditors
less promptly. This may indicate cash flow issues – see further analysis below.)
 The statement of cash flows (SCF) – reconciling to the bank overdraft – indicates that substantial levels of
cash are being generated from operations, which show the significant effect of depreciation and losses on
disposal on profit before tax. A noticeable negative impact on cashflow in 2016 is the speed of collection of
receivables with a large increase in accounts receivable in 2016 (£2,437k). The investment in non-current
assets in 2015 is clearly significant (£15,546k). The long-term funding in that year from the bank loan of £9

million and share capital of £1 million does not match this investment. As a result, there has been a squeeze
on working capital with an increase in the 2015 year-end bank overdraft of more than £1 million to £1,426k.
The bank overdraft remains at a similar level in 2016 (£1,386k). (This SCF tells an important story and requires
detailed reading and understanding. It should be reviewed again after the information on the notes to the accounts has
been assimilated, and other exhibits later in the case, to ensure full comprehension.)
o Revenue: The increases in revenue in 2016 have occurred in both MW: up by £4,930k (35.6%) to
£18,786k; and GW: up by £3,901k (13.8%) to £32,212k. The marked increase in total MW came
from a smaller base of £13,856k in 2015 than the GW base of £28,311k in 2015. These changes
are reflected in the sales mix in which MW increased from 32.9% in 2015 to 36.9% in 2016 of total
revenue. (Further detailed analysis, of MW in particular, cannot really be seen from these notes.)
o Cost of sales: Overall these costs are decreasing against revenue, from 87.9% (2014) to 84.1%
(2016), which is a good sign. (No further numerical detail is provided so only the overall picture can be
assessed – it indicates steady control of costs.)
o Non-current assets: Information is provided for all of the three years since the beginning of October
2013, broken down into the major categories and showing the related depreciation – it is a
significant aspect of this business. (As is already known, the most substantial transactions (acquisitions
and disposals) occurred in 2015 and their impact on cashflow is discussed above. However, there are
continuous material losses on disposals (which can be calculated) in all years but particularly in 2015 –
information is provided so that it is possible to see what is happening for each category of non-current asset –
this indicates that depreciation may be understated on all assets and R4’s policies may need to be reviewed.)
o Trade and other receivables: Given the low and consistent level of prepayments, the large changes
in this figure are in trade receivables. (These have increased from a consistent 41 days in 2014 and 2015
to 51 days in 2016, which indicates a slackening in control or change in trading policy and needs to be
reviewed.)
o Trade and other payables show that more than 85% relate to trade payables – and the increase of
trade payables against relevant costs indicates that R4 pays its trade suppliers less promptly.
(Given its overdraft, R4 may be trying to manage its position by using trade credit – which can be risky.)
Exhibit 6 is an e-mail from FT to SP, comprising an overview of R4’s 2016 business operations. It presents a
summary of revenue and cost of sales for 2016 showing the main business lines and their related cost of sales.
It also identifies the gross profit (GP) for each business line. In addition, there are notes for each of the business
lines which explain how these average annual figures have been arrived at and where additional information
relating to each major activity can be seen (in subsequent Exhibits). The three main MW activities (I&C,
SEWCO and 3rd party waste collectors) all have components which pass through the Fairleigh MRF. GW fees
and costs are identified separately. Information provided about the MW lines shows that the revenue from each
of the three activities comprises two components: fees charged to clients and income from recyclate sales. It
also identifies that there are variable levels of GP for each aspect of MW activity. The additional analytical
commentary explains other operational and financial factors relating to target GP margins (25%) and MW and
GW tonnage ratios (40:60), as well as non-current asset investment activity and overdraft information. (This is
clearly a key exhibit. It summarises, amplifies and explains the first three components of R4’s statement of profit or loss
and allows readers an insight into the financial and operational elements of MW and GW activities including annual
tonnages of waste processed. Because the notes also refer to subsequent exhibits, it is clear that this information sits at the
centre of the R4 business scenario. It should be clear that it would pay candidates to understand this Exhibit in detail.)
Exhibit 7 describes the R4 Materials Recovery Facility (MRF) investment and operations. The process involves
the separation of MW into its recyclate constituents and a small component of residual GW (on average 10%
over the year) which goes to landfill. There are two linked financial schedules: one shows the average revenue
and costs of processing MW for 3rd party contractors per tonne; the other shows the net revenue (including the
non-recyclable GW component) from recyclates. Both components of revenue per tonne (gate fees from 3rd
party contractors and net revenue from recyclate sales) are set against the MRF costs per tonne. (This exhibit
provides an important financial summary of the MRF operations from which it is clear that this is core to R4’s business
activities. The tonnages being processed and the recording of that process allow the monitoring of the use of the MRF in
any year. Those total tonnages are shown in Exhibit 6.)
Exhibit 8 describes R4’s I&C waste collection and recycling operations for both MW and GW and provides two
financial schedules summarising the costs and charges for these different collection services. It identifies that all
MW is processed through R4’s Fairleigh MRF and that GW collections go directly to the waste disposal facilities
(WDF) of other organisations. GW disposal involves the payment of both a WDF gate fee and the UK

government landfill tax per tonne. (From the financial schedules it appears that MW gives the higher GP per tonne by
comparison with GW (£4 versus £2). However, it should be noted that GW involves no further processing or other
operations by R4 – making it a very straightforward aspect of the business.)
Exhibit 9 describes the SEWCO process. It provides an example of festival waste collection which shows how a
bid and its related costs might occur, together with an example of the type of recyclate mix and sales price
which might arise. (This exhibit emphasises that the key to SEWCO success is for R4 to bid as keenly as possible to win
the business, and then make the real profit out of extracting the highest amount of MW possible at the best recyclate price.
Knowing the potential festival audience is essential but there are many uncontrollable external factors in this type of work.)
Exhibit 10 provides information on R4’s recycling network arrangements and operations. A financial example is
provided of a good 3rd party waste collection business involved in collecting confidential paper waste and
cardboard from offices – with no residual GW. R4’s use of other organisations WDFs is also explained. (This
aspect of work is highly competitive, but in many ways totally integrated, as businesses involved in waste collection
operations seek the most appropriate, efficient and cost-effective way of dealing with the waste collected.)
Exhibit 11 provides information on R4’s 3rd party MW collection organisations. These are companies that have
contracts to collect waste from their clients but have no facilities through which to process this waste. They use
the Fairleigh MRF and R4 collects a gate fee as well as earning revenue from the recyclates which arise. Two
organisations are identified: Lindon Waste Contractors Limited (LWC), which pays promptly and provides R4
with a “substantial amount” of MW work; and ZQ, which is described as “reliable” (its MW is consistently of an
appropriate quality). (This exhibit gives a brief insight into the integrated operations within the waste collection industry.)
Exhibit 12 comprises an email from Tam Dooley (CEO) to the R4 board and Shan Patel providing an update on
R4’s operational and strategic risks and summarising the response of the board to the R4 2016 financial
statements. These board responses indicated areas of concern, and lack of understanding on particular aspects
of the financial statements. (The information provided in this exhibit is important. There is background information
which should have served as a starting point in any SWOT, PESTLE or Five Forces preparatory analysis which a candidate
may have undertaken – integrated with and augmented by other facts from the case and their own targeted research. But
there was also obvious commentary indicating financial statement concerns, which should have alerted candidates to ensure
that they could offer clear explanations to R4 of the issues raised: such as depreciation and financial statement bridges.)
Exhibit 13 comprises an email from Jackie Tong (JT) to the R4 board and Shan Patel describing a number of
specific concerns with the new MRF. This email identifies the 2016 MW tonnage processed and the need to
meet Local Authority (LA) recycling rate targets for the next five years or suffer a restriction on GW tonnages.
(This exhibit details some of the operational successes and concerns associated with the MRF particularly with regard to
tonnages processed.)
 Exhibit 14a is an item from National News concerning the drop in household recycling rates for the first time
in 2015. The implications are that the UK will miss the EU recycling target of 50% of its household waste by
2020. This failure may reflect a wider negative change in the attitude towards recycling in all circumstances.
(This article and others have a variety of implications for all waste recycling companies.)
 Exhibit 14b is from Recycle News. It covers the issue of illegal tipping of waste (fly-tipping), by careless,
wilful or criminal acts. The article identifies that high landfill tax fees – intended to encourage proper mixed
waste disposal and recycling, which has lower charges – acts instead as a deterrent to the use of legitimate
general waste sites and encourages fly-tipping on an industrial scale. The suggested solution is to find
some form of persuasion – using “Nudge Theory” – alongside the legislation to achieve a change in public
attitudes. (Note: the author of “Nudge Theory” – Professor Richard Thaler – was awarded the Nobel Prize in
Economics in October 2017 – possibly as a result of being referenced in this April 2017 article.)
 Exhibit 14c City News reports on the issue of the disposal of coffee cups and whether they can be recycled.
(The coffee cup disposal conundrum was also the subject of a series of other reports in the media, and questions in the
UK Parliament, in the immediate run-up to Case Study Exam Day – but unfortunately [especially for candidates] no
clear solution was offered.)
 Exhibit 14d is a report in the International Times describing how rubbish collected in Rome is being
transported to act as fuel in a waste-to-energy plant in Austria. (This article highlights the fact that the disposal
of waste is a universal problem which frequently needs international solutions.)
 Exhibit 14e is a Technology Gazette article describing an initiative by Procter and Gamble to use plastic
waste collected by volunteers in a limited run of shampoo bottles – thereby pointing the way forward for
other innovations in waste recycling. (The article suggests that companies that perform such ground-breaking
activities can achieve positive publicity as well as a worthwhile product.)

Information provided in the Exam Paper
The Exam Paper information contained nine pages of additional information by way of seven exhibits. The new
 Exhibit 15 – Email from Shan Patel to Nik Harris, 8 November 2017: R4 Limited
 Exhibit 16 – R4: management accounts for the year to 30 September 2017
 Exhibit 17 – Email from Freda Tusk to Shan Patel, 7 November 2017: management accounts
 Exhibit 18a – Email from Ali Mann to Shan Patel, 6 November 2017: new SEWCO proposal from OB1
 Exhibit 19a – Email from Jackie Tong to Shan Patel, 3 November 2017: LWC new client contract
Please draft for my review a report addressed to the R4 board. The report should comprise the following.
1. A review of R4’s management accounts for the year ended 30 September 2017 in comparison with the
year ended 30 September 2016.
Your review should be based on the management accounts as set out in Exhibit 16. It should cover
revenue and gross profit, both overall and individually for the two revenue streams: mixed waste and
general waste. In your review you should refer to the additional information provided in Exhibit 17 relating
to the management accounts. You should also respond to the request for advice from the R4 board
concerning depreciation (Exhibit 17).
2. An evaluation of the proposal for a SEWCO contract from a new client, OB1, as detailed in Exhibit 18a.
Using the information in Exhibit 18a, calculate the revenue and gross profit for this SEWCO proposal.
You should assess the adequacy of the assumptions and include any business trust and ethical issues as
well as commercial considerations, including those arising from the media articles in Exhibit 18b. You
should provide a justified recommendation as to whether R4 should accept this proposal.
3. An evaluation of the issues surrounding the recycling activities being conducted by R4 for its client LWC
(Exhibit 19a), referring also to the matters identified in Exhibit 19b.
You should evaluate the financial, operational and strategic factors, including any business trust and
ethical issues. You should also assess the overall implications for R4’s recycling operations. You should
provide appropriate calculations to support your evaluation.


Analysis of Exam Paper (EP) in Exhibit 15
 Using the new financial information, candidates should assess the 2017 results using previous information
(prior year and other financial information from the AI) and reflect on any preparatory analysis already
carried out. The exact financial analysis comprises an analysis of “R4’s revenue and gross profit both overall
and individually by revenue streams: mixed waste and general waste” in comparison with the equivalent 2016
results. The review should also refer to the additional information provided in Exhibit 17 and a response to
the request for advice from the R4 board concerning depreciation and its impact “on the three primary financial
statements”.
 Evaluating the new SEWCO proposal for OB1 meant considering the information as provided by OB1 and
responded to by R4 (Exhibit 18a) and the SEWCO analysis in the 2017 management accounts (Exhibit
16). It also meant referring to the SEWCO information already provided in Exhibit 9 and elsewhere in the AI
(see analysis and commentary above) and candidates’ preparatory analysis. By combining the information,
it would be possible to prepare a profit or loss for delivering the OB1 proposal. Candidates had to “assess the
adequacy of the assumptions and include any business trust and ethical issues as well as any commercial
considerations including those arising from the media articles in Exhibit 18b”. This involved a critical commercial
review of the information provided – particularly in operational terms for this new client – both with and
without all other SEWCO work.
 The third requirement entailed the evaluation of “financial, operational and strategic factors (including any ethical
or business trust issues)” of the MW contract for LWC, which had already started, as indicated in Exhibit 19a
and b. This new contract has a number of recycling and confidentiality issues, some already identified in the
AI and re-emphasised in the Exam Paper which might also have implications for all of R4’s recycling
operations. (It would be necessary for candidates to perform relevant calculations to support their evaluation.)
executive summary, within the time available in order to produce a well-balanced report.
Analysis of Exam Paper (EP) information in other exhibits (Exhibits 16-19b)
From reading the other new exhibits candidates should have established the following.
together with accompanying notes. These notes show details of: revenue, cost of sales and gross profit per
business line; non-current assets; trade and other receivables; bank loans and trade and other payables. The
2017accounts are in a similar format to the 2016 information presented in the AI (Exhibits 5 and 6) and should
not have posed any problem for candidates to assimilate. (This should have been a highly predictable exhibit –
although as always the actual figures would not have been known in advance. Analysis of the actual results to 30
September 2017 would have been anticipated and detailed analysis of the AI figures, particularly the analysis for the two
revenue streams, would have been normal and essential preparatory work. It is important to note that this analysis must
only be conducted on the figures as presented in this exhibit and not be re-performed after any depreciation consideration.)
Exhibit 17 is an email from Freda Tusk (FT) to Shan Patel (SP) providing additional financial and operational
information concerning the two revenue streams for the year ended 30 September 2017 which needed to be
used in the detailed financial statement analysis performed by the candidates, to provide an overall
commentary. This exhibit also contains details of “board discussion notes concerning depreciation”. In these notes
the issues identified include that “R4 continues to incur loss on disposals of its non-current assets” and a query
“concerning the impact on the three primary financial statements” of amendments to depreciation charges. (The
numerical performance analysis should have concentrated on the big MW and GW changes in 2017 by comparison with
2016. As well as calculating the impact of the additional depreciation on each of the primary financial statements,
candidates had to be aware that a drop in profits could affect bank confidence and that a reduction in the value of non-
current assets would have an impact on the value of those as collateral for the bank loans.)
Exhibit 18a comprises one page of information on the new OB1 SEWCO proposal. OB1 provides most of the
key assumptions: number and nature of events (without providing a breakdown of number of attendees at each); total
tonnage (30,000 tonnes seems a high round figure estimate); timings (but not locations); maximum fee for collection
services per tonne (£335, which seems low) and recyclate proportions per tonne (all seem appropriate if not slightly
conservative). R4 estimates include: the cost of providing this service per tonne (£315 – this is not a big change from

2016); that 60% of the waste collected would be recyclable (this seems optimistic given other recent experiences);
other costs would remain the same as 2017 (this seems unlikely given the actual 2017 increases from 2016). The
issue of exclusivity provides a clear basis for a second calculation. Other information relating to this project is
included in Exhibit 18b. (SEWCO revenues and costs have been described in detail in the AI and candidates were
expected to be able to assimilate this new information easily. In both the AI and EP, SEWCO revenue and costs are split
between MW and GW and as a result, it was expected that candidates’ calculations for this proposal would be
straightforward. The financial and operational assumptions given had to be assessed, as well as any that were missing.
Candidates also had to “take into account any potential business trust or ethical issues as well as any commercial
considerations, including those arising from Exhibit 18b”.)
Exhibit 18b comprises two short media articles. One relates to OB1 festival food waste fly-tipping by its waste
contractor in which OB1 disclaims responsibility for this problem. The second raises the question of the
disruptive effect of festivals and the potential that residents who are negatively affected will vote against their
continuation. (From the AI and elsewhere, candidates would have been aware the nature and definition of and the public
concerns over fly-tipping. As a result, the fly-tipping article might have been anticipated and was easy to assimilate,
including the potential impact on reputations. The article indicating the negative impact of festivals is straightforward.)
Exhibit 19a, is an email from Jackie Tong (JT) to Shan Patel providing details of a current problem concerning
a specific new LWC mixed waste contract. There is both numerical and descriptive information in the details
provided in this exhibit. This information has to be analysed and appraised in the context of other facts provided
elsewhere in the EP and the AI. LWC is a significant client which R4 probably cannot afford to lose. (Candidates
have to assess the impact of this existing problem with a contract which may be ongoing for another 21 months. They must
consider its impact in financial, operational and strategic terms in relation to this contract, the client, and on the whole of
R4’s operations. The recycling difficulties identified have an impact which both makes this new contract unprofitable and
poses additional risks. The problems need to be assessed and the recommendations need to be realistic and diplomatic.)
Exhibit 19b comprises two media articles. The first concerns the increased penalties which commercial waste
collection organisations may face for failing to meet recycling targets. The second describes innovations in the
recycling of takeaway coffee cups. (The content of these articles develops the issues introduced previously and should
have served to raise awareness (or remind candidates) of the factors involved in these matters. Candidates need to consider
what must be done for the specific LWC contract to mitigate its impact and also what route R4 might follow as it looks at
alternative solutions.)
The above information provided in the EP follows on directly from the financial and commercial story told in the
AI. The main facts are that the growth in R4 revenue by £4,356k from £50,998k to £55,354k is a growth of 8.5%
(above the predicted national growth of 4.9%). With R4 prices and costs per tonne held during the year, all
revenue increases in both MW and GW are down to increases in activity. As a result, MW recyclate tonnage has
increased – but is still only just achieving the required 40% target of total tonnes collected and processed. MW
revenue has increased mainly because of market increases in recyclate prices. SEWCO margins have declined
because of the clearance costs increasing as a result of poor weather, and a higher level of non-recyclable food
waste increasing the percentage of general waste from this work. 3rd party gate fees and recyclate revenue
have increased significantly and driven the R4 MW results. GW collection and processing has increased by
8.2% in terms of tonnage but its related GP has increased by only 7.2%. Along with the increase in total
revenue, total gross profit has increased by £641k and GP% has dropped only marginally to 15.7% from 15.8%.
(There is a need for careful, integrated financial analysis of the R4 results to identify what has caused any changes and the
application of logical judgement to that analysis. There is also the need for a clear explanation of the issues surrounding the
depreciation charges and the continuing losses on disposal for the non-financial members of R4’s board.)
The story, which is established in the financial statements, is further developed in the scenarios for
Requirements 2 and 3. In Requirement 2, candidates have to assess, using structured financial data analysis, a
new SEWCO proposal (the highest GP% area of the business). There is a need to apply good judgement in
assessing the assumptions concerning the OB1 proposal. Requirement 3 needs a structured financial,
operational and strategic review of a current LWC contract to identify the problems and risks and then suggest
solutions. Information provided in the EP and some information already supplied in the AI concerning the issues
must be used. Both Requirement 2 and Requirement 3 included the consideration of business trust and ethics.
For Requirement 1 the financial statement analysis of the management accounts for R4 for the year to 30
been a straightforward exercise numerically looking for the key changes – based largely on assessing Note 1 of

the 2017 management accounts by comparison with the equivalent information in Exhibit 6 from the AI. The
accompanying explanatory notes in Exhibit 17 to each line of Note 1 mirrored a similar analytical summary in
the AI (Exhibit 6) and should have been a straightforward exercise to review, assess and integrate into a report.
(The specific issue that some members of the board may not understand the issue of depreciation and the losses on disposal
together with the impact on the three primary financial statements requires understanding, clear explanations and the
appropriate use of the numbers given to illustrate those explanations. For a badly-prepared candidate who cannot
understand, assess or explain the issue succinctly, this section may not have been as easy as it should have been.)
Requirement 2 required some very basic financial data analysis to calculate the profit or loss account for the
new OB1 SEWCO proposal – with or without exclusivity. The calculations based on the assumptions provided
by OB1 and developed by R4 should have been followed by an evaluation of those assumptions. The most
important factor was the exclusivity demand from OB1 concerning other SEWCO work. In operational terms, at
30,000 tonnes this proposal is almost double the entire SEWCO work for 2017. If the suggested ratios are
correct, then adding 18,000 tonnes to MW processing would be extremely helpful to R4 in achieving its recycling
targets. In revenue terms (compared with other SEWCO work) this contract would be much higher. However,
the issues with the previous fly-tipping incident may have far-reaching implications – OB1 does not appear to be
prepared to take any responsibility for any clean-up. R4 needs new contracts but not if its reputation is at risk.
(The calculations are straightforward but there is much else to be considered and evaluated. Professional judgement –
particularly on the exclusivity condition and on the fly-tipping incident – was essential. In assessing the commercial
situation, would R4 want to give up all of its established SEWCO work for one single client? – the risk would be enormous.
It might be better to negotiate exclusivity of (say) dates for OB1 SEWCO work which would establish a balance and a
commitment on both sides. What would be the impact of exclusivity on R4’s existing customers and on R4 reputation and
goodwill? Another issue is whether R4 has sufficient MRF capacity at any one time to allow it to deliver this OB1 contract.
A sensible evaluation of financial, operational and commercial criteria, with a recommendation, had to be made.)
Requirement 3 required the evaluation of the new LWC mixed waste contract and the problems that had been
identified with processing this office waste. Candidates should have used the numerical information provided to
assess the new contract, its profitability and its materiality both on R4’s 2017 results and in the period going
forward. It is essential to R4 to ensure that these operational issues, and the possible solutions, are considered
in context against the value of all LWC contracts in terms of revenue, gross profit and cash flow and tonnages
processed. (Candidates should also have considered the implications for R4 as a whole and the need for diplomacy and
tact in offering advice in addressing this issue. It also meant identifying and evaluating all the commercial, business trust
and ethical issues which required a logical and integrated review of AI and EP information.)
Grades were awarded under five topics: Executive summary; Review of R4’s financial performance; Evaluation of
OB1’s SEWCO proposal; Evaluation of LWC recycling contract; Overall paper. For each topic, under each of the four
Professional Skills, there were a number of ‘boxes’ representing specific areas in which the skill was to be
Competent); IC (Insufficiently Competent); ID (Insufficiently Demonstrated); NA (Not Addressed). The number of

 Review of Piccolo’s financial performance 2 3 3 2 10
 Evaluation of Piccolo’s celebrity chef arrangements 2 3 3 2 10
 Evaluation of Dougal Hotels takeover 2 3 3 2 10
7 11 10 8 36
40

Professional skills
Assimilating and using information
In all requirements, candidates had to make extensive use of information from both the AI and EP in order to
build their answers. By its very nature of being a comparative analytical exercise, Requirement 1 obliges
candidates to demonstrate A&UI skills, which the vast majority do both by way of numerical work and identifying
appropriate business issues and the wider context. Similarly, with the analysis of financial data using
calculations which had been presented in the AI, candidates demonstrate good numerical A&UI skill in
Requirement 2. They were less strong on business and wider context issues. In Requirement 3 both numerical
skills and wider issue understanding were in good evidence – specific credit was given for well-presented and
clearly-derived numbers and many candidates succeeded in gaining this credit. A good feature of the majority of
scripts in this exam was the appropriate use of numerical information to add focus to analysis – particularly in
Requirement 3. Presenting a clearly derived summary of the financial or numerical context for a scenario is a
skill which all candidates should possess.
There were some wider context issues which candidates were expected to include despite the fact that these
were not always repeated or emphasised in the EP. These included the looming £3 million loan repayment in
2019 and R4’s continuing overdraft position (which limits, or determines, R4’s future actions); the processing
capacity and current utilisation rate of the MRF; the LA recycling targets for current and future years.
Structuring problems and solutions
As is expected, most candidates demonstrated good skills in structuring problems and solutions. This is
because they followed the structure and steps indicated in each requirement and performed the analysis which
they were requested to do. SP&S is the core component in each section of the report and the assessment
criteria follow the requirement instructions in each section. For Requirement 1, this is financial analysis of the
statement of profit and loss and the analysis of depreciation; in Requirement 2, it is the evaluation of the
SEWCO proposal from OB1 together with a review of the assumptions and an analysis of business trust and
ethical issues; for Requirement 3, it is the evaluation and assessment of the LWC recycling contract in financial,
operational and strategic terms (including any business trust and ethical issues).
Stronger candidates worked through the steps of each requirement in a structured way, ensuring that they dealt
with the points requested in adequate detail. Scripts of weaker candidates were less precise and frequently
included excessive or irrelevant detail, or omitted some aspects of the analysis. This could be seen to apply in
all sections but as always in the financial analysis section, weak candidates appeared too absorbed in
unnecessary analysis – despite the best endeavours of the examiners to point the way towards the answer.
However, the depreciation issue in Requirement 1 caused a bit of difficulty with one in three candidates failing to
obtaining passing grades in SP&S for this basic, and well flagged, topic. Requirement 2 was the best answered
in terms of SP&S with large numbers of candidates securing clear passing grades across the three boxes.
Unfortunately, the scripts of weaker candidates continue to display a dismal ability to identify and critique the
assumptions – although these would have to have been used in the initial calculations. It is difficult to
comprehend such weaknesses. In Requirement 3, a very large number of the candidates used appropriate
numerical analysis but then failed to identify and analyse sufficient elements in either the operational and
strategic issues or the business trust and ethical boxes. (As stated in previous exam reports, any weakness in SP&S
affects the subsequent sections of AJ and C&R, although a strength in SP&S does not always carry into AJ and C&R.)
Applying judgement
Most strong candidates applied good judgement built on the analysis which they had conducted. In particular, in
Requirement 1 this included an appropriate evaluation of the analysis of revenue and gross profit but the
judgement relating to depreciation was weak (and, very worryingly, often completely wrong). In Requirement 2,
there was good evaluation of the commercial considerations but the evaluation of the assumptions was
disappointingly patchy, although the evaluation of the business trust issues was adequate. In Requirement 3,
the evaluation and judgement relating to LWC impact on overall business and operational and strategic issues
was often not adequate but the judgement on the evaluation of ethical and business trust issues was sufficient.
As in many exams, weaker candidates failed to demonstrate good skills in AJ. They failed to develop their
analysis by not evaluating the information or assumptions given or failed to question the critical factors from

their analysis in the appropriate depth. As stated previously, this failure to formulate and communicate good
judgement in the report usually correlates with a failure overall.
As always, good candidates provided logical, clear conclusions – under a heading – which followed on from
their previous analysis and judgement in that section. Good candidates also provided sound commercial
recommendations which were appropriate to the business circumstances,
Weaker candidates tended not to provide as many conclusions and those that were provided were short and not
developed. Weaker candidates rarely offered many appropriate recommendations, but instead made a series of
banal or obviously generalised recommendations, with no development, which received very little reward such
as “R4 should increase the utilisation of the MRF at Fairleigh” – which is on a par with the perennial “the business
should increase its revenue” – the examiners would like to be flies on the wall when such helpful advice is
presented to the board.
Almost all candidates wrote an executive summary – although not all executive summaries were of an
appropriate standard. Good executive summaries were aimed at the target audience – the R4 board – and
covered the three aspects of the report concisely, identifying the most important factors in each section. In the
review of R4’s financial performance, this included identifying the point that R4 just achieved the LA’s 40% MW
target. The next section included the fact that the OB1 SEWCO proposal is significant and its importance in
meeting future MW targets. The final section contained numerical information to support the analysis of the
LWC issue. Good scripts presented each section as a précis of the context of the relevant scenario, the original
analysis in the report, the judgements made, and a summary of the conclusions and recommendations from
each section. Good summaries contained the essential numerical information in the ES extracted from the body
of the report.
As has been stated in previous exam reports, many weak candidates had an ES that was poor in terms of focus
on the key issues or factors for each section. These candidates failed to present the relevant facts – and
especially the key figures – concerning the items considered to be important from the report (some of these are
indicated in the previous paragraph). There is also always the problem that attempting to summarise a weak
section of the main report leads to a weak part of the ES. For a few candidates there was also evidence of poor
planning and time management but in this exam they were a very small minority.
Requirement 1: R4 financial analysis
As is expected, the main financial statement analysis requirement was well answered by the vast majority of
candidates, with appropriate use of an appendix (see below). The opening paragraph of this requirement
provided a clear pathway for structuring the financial statement analysis comprising “revenue and gross profit (GP)
both overall and individually for the two revenue streams: mixed waste (MW) and general waste (GW)” (abbreviations
added). The requirement only asked for a revenue and GP analysis, and given that there was a summary in
Note 1 to Exhibit 16 which was similar to the summary in the AI in Exhibit 6, candidates should have been able
to assimilate and assess this information and respond rapidly to the requirement. In addition, Exhibit 17
presented key numbers and facts relating to the required analysis. Most candidates were prepared for this type
of analysis and the question was answered accordingly.
There is always the risk that when presented with a range of apparently relevant information, candidates will
over-analyse in the appendix and provide a review in the report which covers everything without managing to
identify and provide a commentary focussed on key issues. As one tutor firm observed, “candidates should always
be extremely mindful that this is only a four-hour exam, during which the analysis of revenue and gross profit is one of
many tasks that they need to complete”. Unfortunately, there are always some who do not heed this advice.
A knowledgeable* read of Note 1 Exhibit 16 and Exhibit 17 (*gained by knowing the AI numerical information
and examples thoroughly) would have revealed that the R4 fees charged to I&C clients had remained static, as
had R4 and other WDF gate fees – so too the MRF costs. This obviated the need for extraneous analysis of
these items. One of the biggest factors in change was clearly MW and GW tonnage collected and processed –
very simply R4 had experienced volume, mix or activity changes. As one tutor remarked, “R4’s ability to meet
Local Authority recycling targets had been highlighted as a key operational issue in the AI and although there was no
specific reference to this target in the new exhibits, it should have remained at the forefront of candidates’ minds coming
into the exam”. Good candidates remembered this and their reports dealt with the volume changes and

particularly whether these changes in MW volume meant that R4 achieved the 40% LA recycling target. Weaker
candidates lacked this focus. Significantly, a very high number of candidates achieved passing grades in AJ by
clear evaluation of R4’s revenue and gross profit changes.
However, the specific request to explain depreciation and any change in the depreciation estimate proved to be
a testing task for a significant proportion of candidates. Good candidates attempted an explanation of the
depreciation calculation in principle and commented on the possibility of the MRF being under-depreciated: “The
last four years have seen losses on disposal of assets implying depreciation rates are too low. There is a danger the MRF
will become obsolete before it is written down, creating a large loss on disposal.” The weakest candidates made basic
errors: “Speedier depreciation would mean R4 need to replenish new assets faster” and, possibly realising their own
limitations, gave the following advice (presumably to the non-accounting members of the R4 board): “Train R4
board in accounting principles/engage outside trainer.” This section of this requirement proved to be a good
differentiator between candidates.
Requirement 2: Evaluation of new SEWCO proposal from OB1
This requirement assessed candidates’ ability to evaluate the SEWCO proposal information from OB1 and the
R4 estimates based on that proposal. There were numerous factors: total tonnage of waste to be collected;
individual size of each event; MW & GW proportions; timing of the work; all pricing and cost estimates; R4
capacity and, most importantly, an exclusivity condition that OB1 wanted to establish with R4 for this work – all
had to be considered. A template for the calculation had been provided in the AI. This should have meant that
the calculations and evaluation would be straightforward to a well-prepared candidate – and so it proved. The
initial calculation was particularly straightforward, as was the exclusivity calculation – if candidates remembered
to do it. As one tutor firm stated, “Weaker candidates may have struggled to identify the impact of losing other SEWCO
contracts as a result of the exclusivity clause that R4 expected this contract to contain. Stronger candidates should have not
only been able to offer a figure for this opportunity cost, but should have also questioned whether the exclusivity clause
was negotiable”. Precisely.
Candidates also had to “assess the adequacy of the assumptions … and provide a justified recommendation”. As listed
above (and with all the details in Exhibit 18a), there was no shortage of major assumptions and issues to
consider. Good candidates, having performed correct calculations, then evaluated all assumptions, and
considered the negative effect of the fly-tipping report and the criticism of festivals. As well as having difficulties
with the calculations, weak candidates did not provide adequate critical analysis of the assumptions. This meant
that they failed to apply appropriate judgement in this requirement.
Good candidates demonstrated their skills in most aspects of this section of their report, and scored good
marks. Weaker candidates struggled with all aspects and tended not address this requirement logically. As one
tutor astutely stated, “[This] was another very fair requirement. Candidates who had performed sufficient preparatory
work with the information provided in the AI would have found this question very appealing indeed”.
Requirement 3: Evaluation of LWC recycling contract
Requirement 3 was an evaluation and assessment of the new LWC recycling contract which is posing problems
for R4. Candidates had to “evaluate the financial, operational and strategic factors, including any business trust and
ethical issues … and assess the overall implications for R4’s recycling business”. Numerical and financial data were
provided and a large majority of candidates made sensible use of this information linked with other financial
information in the EP in Exhibits 16 and 17. A large number of candidates provided a clear, short, separate set
of workings with the key financial facts properly identified (see Appendix 3 attached for examples). The
background and wider context for this issue is that R4 needs to achieve the LA 41% recycling target (and further
incremental increases) going forward and that it has a large overdraft and a pending £3 million loan repayment
(scheduled for April 2019). LWC is crucial to both strategic issues. However, LWC is also creating a problem
with its management and control of the new office waste contract in which the MW delivered to R4 contains
unrecyclable coffee cups and confidential waste which has not been properly shredded.
This requirement poses that very realistic conundrum – how to quantify and deal with a problem which concerns
your most important client, diplomatically? There are additional layers to this problem, one of which is that the
contract is ongoing in a number of ways: firstly, it has been in existence since July 2017 and R4 has already
been slow to act; secondly, it is due to continue until June 2019. This is a prickly problem which is not about to
end, and which has to be grasped and dealt with – by the candidates.
Good students demonstrated sufficient judgement over the facts supplied and their own calculations, by
correctly identifying the complexity of the problem for R4 in financial and operational terms. They also linked

their analysis and judgement to the earlier information in the AI which had identified the quality, importance and
financial benefits which LWC brought to R4 as a client. Weaker candidates did not make those links so clearly
and for some their answers were the equivalent of a shrug of the shoulders indicating that they would prefer not
to have to deal with this problem. Others were more banal: “LWC have put R4 in an awkward position” which is
very true – but it is what to do about it that is the crucial thing.
This was a section where the situation posed is typical of commercial reality that is: assisting a client dealing
with an existing problem. As one tutor firm commented, “it is common place that Chartered Accountants find
themselves advising clients on as many problems as they do opportunities in the real world. So this requirement will
provide good practice for many of the candidate’s future careers”. Sadly, for some, that future career as a qualified
ICAEW Chartered Accountant may be held back a while.
Appendices and overall paper
All answers contained appendices and the majority of candidates made good use of the numerical work from
their appendices in their reports. Most appendices for Requirement 1 were clear and relevant, as well as being
properly labelled. There was (as always) some evidence of excessive financial analysis in the appendix for
Requirement 1, but this was less than usual. Candidates who do this are clearly unable to adapt or vary their
standard pre-prepared schedules in the light of the actual requirement. On occasions, this meant that there was
the over-analysis of each line of revenue regardless of materiality, significance of change or the impact this
detailed analysis would have on their valuable exam time.
The vast majority of candidates’ appendices relating to Requirement 2 followed a clear pattern which had been
presented in the templates in the AI. Inevitably, some were very messy and hard to follow. Good appendices
followed the structure which the information and previous schedules suggested and were a logical assembly of
the financial information for the proposal with and without exclusivity. A number were very brief and poorly
labelled: these did not convey much clear information with the calculations and, as a result, they attracted little
credit.
The majority of scripts showed workings for Requirement 3 as a separate schedule. Better scripts presented a
clear numerical summary of a candidate’s analysis of the financial and numerical information – which provided a
reassuring indication of a candidate’s clarity of thought and presentation. This clarity was rewarded by a bullet in
the Marking Key.
Most candidates produced a well-structured document and also wrote sufficiently clearly and legibly. Mercifully
for the markers only a small minority presented hard /impossible to read scripts. It is still worth repeating that if a
script (or part of a script) cannot be read, it cannot be awarded any marks for that part of the answer – and that
is one of most common reasons for failing the Case Study exam. The majority of scripts met the requirements
and were appropriate for R4 board use. A minority made inappropriate statements, particularly concerning the
depreciation issue, which the R4 board would not have considered acceptable. As always, the top scripts
provide impressive evidence of the necessary professional skills needed to be a successful ICAEW member
and, as such, these scripts were a great pleasure to read.

Appendix 1: R4 management accounts analysis
2017 2016 Change Change 2017 2016

Revenue £000s £000s £000s % Mix % Mix %
Mixed waste
I&C operations 8,745 7,703 1,042 13.5 15.8 15.1
SEWCO 6,005 6,713 (708) (11) 10.8 13.2
3rd party waste collectors 5,473 4,370 1,103 25.2 9.9 8.6
Total mixed waste 20,223 18,786 1,437 7.6 36.5 36.8
Total general waste 35,131 32,212 2,919 9.1 63.5 63.2

Total revenue 55,354 50,998 4,356 8.5 100.0 100.0
2017 2017 2016 2016

Gross profit GP GP GP GP Change Change
Mixed waste £000s % £000s % £000s %
I&C operations 1,830 20.9 1,478 19.2 352 23.8
SEWCO 2,085 34.7 2,456 36.6 (371) (15.1)
3rd party waste collectors 1,026 18.7 619 14.2 407 65.8
Total mixed waste 4,941 24.4 4,553 24.2 388 8.5
Total general waste 3,746 10.7 3,493 10.8 253 7.2
Total GP 8,687 15.7 8,046 15.8 641 8.0
Tonnage 2017 2016 Change Change

Mixed waste tonnes tonnes tonnes %
I&C operations 31,492 28,350 3,142 11.1
SEWCO 9,654 11,475 (1,821) (15.9)
3rd party waste collectors 48,866 41,216 7,650 18.6
Total mixed waste 90,012 81,041 8,971 11.1
General waste
R4 general waste collection 129,024 120,960 8,064 6.7
SEWCO 6,012 3,825 2,187 57.2
Total general waste 135,036 124,785 10,251 8.2
Overall total 225,048 205,826 19,222 9.3
Mixed waste proportion of total waste 40% 39.4%
Effect of change/increase in depreciation by £500k on management accounts
1. SP/L: OP/ PBT will decrease by £500k; less tax effect of £100k (assuming 20% tax) to give a PAT of £301k
2. SOFP: Non-current assets will be lower by £500k to £13,867k
3. SOFP: Retained earnings will be £400k lower at £2,420k
4. SOFP: Trade and other payables (including tax) will go down by £100k to £6,001k
5. SCF: no overall effect (any changed depreciation is added back to the changed PBT)

Appendix 2 OB1 SEWCO

£000s
OB1 SEWCO revenue £335 x 30,000 10,050
Recyclate revenue £220 x 18,000 3,960 (396)
14,010 13,614
OB1 SEWCO collection
costs £315 x 30,000 (9,450)
Recyclate costs £91 x 18,000 (1,638)
Total OB1 GP in 2018 2,922 20.9%
Reduction because some might be non-recyclable (10%) (396)
Net OB1 gross profit in 2018 2,526 18.6%
Issue of foregoing all other SEWCO
Based on 2017 Revenue Quantity C of S GP

£000s tonnes £000s £000s
Mixed waste 6,005 9,654 3,920 2,085 34.7%
General waste 1,954 6,012 1,894 60
Total SEWCO 7,959 15,666 5,814 2,145 27.0%
Exclusivity analysis
OB1 SEWCO OB1-SEW
Tonnes Tonnes Tonnes
Total tonnage 30,000 15,666 14,334
Change
£000s £000s £000s
Total revenue 14,010 7,959 6,051
Total GP 2,922 2,145 777

Appendix 3 (Workings) R4 / LWC / FP contract (R3)
LWC / FP mixed waste processing Normal FP per

per tonne tonne
Revenue £ £
Gate fees for LWC mixed waste (per tonne) 20 20
Sale LWC recyclates (per tonne - see below) 78 68
98 88
MRF costs
MRF total cost per tonne (increased by 15%) £91 x 115% (91) (105)
(even £91 gives a loss)
GP per tonne recycled on contract 7 (17)
Total loss from LWC / FP contract since July 2017 (10 x 7 x 13) 910 (15,470)
tonnes gross loss
FP LWC recycling comprises paper and cardboard (2:1) with different

prices
(see example Exh 10, page 33)
Composition Sale price Average
per tonne per tonne per tonne
% £ £
Paper (AI) 60 80 48
Cardboard (AI and EP) 30 100 30
Recyclable 90 78
Non-recyclable coffee cups (say) 10 (100) (10)
Total 100 68
Per 2017 value of all LWC contracts worth an estimated 33.9% of all 3rd
party
(16,500/48,666) % = 33.9%
3rd party waste collector revenue in 2017 Total LWC
£000s £000s
3rd party gate fees 977 331
3rd party recyclate sales 4,496 1,524
5,473 1,855
Related MRF costs in 2017 (4,447) (1,508)
GP 1,026 347
LWC as proportion of total mixed waste tonnes processed

=16,500/90,012 18.33%

November 2017 - R4 Limited
First Marking
DATE CANDIDATE NO.
TIME MARKER NUMBER
CC
SC
IC
ID
NA
Total 6 10 10 10 4 40
TEAM CHECKER
LEADER SIGNATURE
Changes made? c
Executive summary
REQUIREMENT 1 - Review of R4's financial performance REQUIREMENT 2 - Evaluation of OB1 SEWCO proposal
w Revenue: comment on Overall AND MW/GW with figs w Revenue AND GP from OB1 contract with figs
w GP/GP%: comment on Overall AND MW/GW with figs w Significant contract / calc of relative size / overreliance
w Successful tonnage inc / MRF not running at maximum capacity w Impact on meeting 2018 LA target (41%)
w Any I&C / SEWCO / 3rd party comment with figs w Evaluates assumptions
w 40% target just met / important to meet 41% target next year w Negotiate exclusivity clause
w Depreciation: impact / review policy w Concludes on way forward
w Monitor cash available for loan repayment in 2019 w Concludes/recommends on ethical/business trust issue
w Other commercial recommendations w Other commercial recommendations
REQUIREMENT 3 - Evaluation of LWC recycling contract
w Provides FP contract GP with fig
w Loss of LWC: financial impact / target impact / too important to lose
w Comments on operational/strategic issues
w Site operational problems need to be addressed promptly
NA ID IC SC CC
w Concludes/recommends on confidential waste issue
w Concludes/recommends on current coffee cup problem
w Financial review of all contracts
NA ID IC SC CC
CC
SC
IC
ID
NA
Total 6
REQUIREMENT 1 - Review of R4's financial performance
w Overall revenue: up £4,356k AND up 8.5% w I&C: up with fig AND qualitative comment
w MW revenue: up £1,437k AND up 7.6% w SEWCO: change with fig AND qualitative comment
AND
GW revenue: up £2,919k AND up 9.1%
w 3rd party: up with fig AND qualitative comment
w Overall GP: up £641k AND up 8.0%

AND w Revenue mix: MW/GW static AND 36.5%/63.5% v 36.8%/63.2%
Overall GP%: 15.7% v 15.8%
w Tonnage: MW up 8,971 / 11.1% OR GW up 10,251 / 8.2%

w Overall tonnage: up 19,222 / 9.3%
w Tonnage mix with fig: MWvGW / I&C / SEWCO / 3rd party
Identifies business issues and wider context Financial analysis: GP/GP% (report)
w Consumer awareness / recycling rates / government policy w Total MW: up £388k/8.5% OR GP% 24.4% v 24.2%
w National growth rate 4.9% / R4 2016 growth rate 20.9% w Total GW: up £253k/7.2% OR GP% 10.7% v 10.8%
w Gate fees static (at £20) w I&C: GP up with fig OR GP% with figs (eg 20.9% v 19.2%)
w Recyclate prices increased £92 v £86 / £6 w SEWCO: GP comment with fig

OR GP% with figs (eg 34.7% v 36.6%)
w MRF costs static (at £91)

w 3rd party: GP up £407k/65.8% OR GP% 18.7% v 14.2%
w Bank loan £3m repayable in 2019
NA ID IC SC CC
Identification of depreciation issues

NA ID IC SC CC
w Estimate based on management judgement
w Depreciation of MRF is based on actual tonnage processed
w Depreciation does not affect cash flows
w GP/PBT down £500k / 5.8%/57%
w NCA/NA/RE down £500k / 3.5%/11.6%/18%
w Bank loans secured on NCA
NA ID IC SC CC
w I&C: reason for change eg more trucks/efficiencies w Revenue: comment on Overall AND MW/GW with figs
w SEWCO: reason for change eg weather/food/despite fees w Revenue: comment on tonnage with fig
w 3rd party: reason for change eg volume w GP/GP%: comment on Overall AND MW/GW with figs
w Overall growth driven by increases in activity w Identifies importance of 3rd party / SEWCO / 40% target
w MRF: at 75% of capacity / not at full capacity w Concludes on impact of depreciation
w Compares MW% with 40% local authority target
Evaluation of GP/GP% analysis Makes recommendations
w Compares GP %change with revenue %change w Further analysis by revenue stream
w MW GP% remains below R4's 25% target w Concentrate on growing SEWCO/3rd party
w I&C improvement: reason eg better recyclate prices w Review depreciation policy/rates/EUL
w SEWCO change: reason eg inc collect'n cost / lower % MW w Discuss issues with bank
w 3rd party improvement: reason eg recyclate prices > costs w Monitor cash available for loan repayment in 2019
w GP% impacted by change in revenue mix eg SEWCO w Monitor compliance with 41% target for 2018
NA ID IC SC CC
Evaluation of depreciation issues
w Losses on disposal indicate depn understated (rate/EUL)
w Tonnage processed < 120,000 annual capacity

NA ID IC SC CC
w MRF not written off over 10 year life / actual adj > £500k
CC
w Depn charge has significant impact on profit
SC
w Depn charge has significant impact on NCA IC
ID
w Bank will monitor NCA book values / seek extra security NA
Total 10
NA ID IC SC CC
REQUIREMENT 2 - Evaluation of OB1 SEWCO proposal
Uses AI / EP information (report / appendix) Calculation for OB1 (report / appendix)
w Contract price £335 AND collection cost £315 w Total revenue £14,010k/£13,614k (£10,050k + £3,960k - £396k)
w Tonnage 30,000 w Collection cost £9,450k (30,000 x £315)
w MW tonnage 18,000/16,200 / 60% w Recyclate cost £1,638k (£91 x 18,000)
w Recyclate price £220 AND processing cost £91 w Calculates GP £2,922k/£2,526k AND GP% 20.9%/18.6% (own figs)
w Non-recyclate adjustment 10% w Exclusive: rev up £6,051k / tonnes up 14,334 / GP up £777k
Describes business issues and wider context Assumptions
w 2017 SEWCO: total revenue £7,959k / 15,666 tonnes w Activity assumptions provided by OB1
w 2017 SEWCO: GP £2,085k/£2,145k / GP% 35%/27% w Profile of attendees unknown / mix of recyclate unpredictable
w 2017 SEWCO: decline in MW activity w £335: maximum / could be lower
w MRF annual capacity 120,000 tonnes w 30,000 tonnage: estimate / looks high / could be lower
w OB1 seeking exclusivity / contract just for one year w MW 60%: recyclate tonnage open to question
w May lead to further work if done successfully
NA ID IC SC CC
w R4 has strong corporate responsibility ethos
NA ID IC SC CC w OB1 implicated in fly-tipping media article
w OB1 seeking to shift responsibility / ultimately responsible
w General negative mood towards festivals / festival goers
w Possible contract breaches if cancel existing clients
NA ID IC SC CC
Evaluation of commercial considerations Draws conclusions (under a heading)
w Significant contract / calc of relative size / overreliance w Revenue AND GP from OB1 contract with figs
w Changes in assumptions will impact GP/decision w Tonnage: capacity limits / impact on meeting 41% target
w Impact of inc activity on £91 / fixed cost / economy of scale w Evaluates assumptions
w GP%: compares to 2017 / lower than 25% target w Concludes on ethical/business trust issues
w Exclusivity makes proposal less attractive w Concludes on way forward
w Cashflow implications of proposal unknown
Evaluation of assumptions Makes recommendations
w Possible bias / OB1 may be optimistic w Negotiate with OB1 / do not accept exclusivity
w Numbers/tonnage depend on weather/external factors w Establish locations/logistics for OB1 events
w Compares to 2017 fig (£325) / unknown 2018 market rate w Establish monthly/weekly capacity limits for MRF
w Calcs MRF utilisation 82% / consider monthly capacity w Review cashflow implications
w Impact on meeting 2018 LA target (41%) w Due diligence on OB1
w Any increase in non-recyclate (10%) waste will impact GP w Other commercial recommendations
NA ID IC SC CC
w Possible clash of corporate cultures
w Discuss with OB1 / clarify facts

NA ID IC SC CC
w R4's reputation may be tainted by association
CC
w Be proactive with the community / encourage recycling
SC
w Review existing clients contracts / may lose permanently IC
ID
NA
Total 10
NA ID IC SC CC
REQUIREMENT 3 - Evaluation of R4 LWC recycling contract
Uses AI / EP information (report / workings) Financial calculations (report / workings)
w Paper&card: mix 2:1 AND prices £80 and £100 w Total tonnage 3,640pa/303pm / 3,600pa/300pm
w Non-recyclable coffee cups 10%/20% w Total revenue per tonne £88/£69 (£68+£20 / £49+£20)
w LWC:16,500 tonnes / approx 30% 3rd party waste w MRF costs £105 (£91 x 1.15)
w LWC: strong growth / up 10% w Loss per tonne £17 (own fig)
w Workings well presented and clearly derived w Calculates 2017 loss approx £15k (3 months)
w Calculates annual loss approx £61k
w If FP contract lost all LWC work may be lost w Possible overdependence on LWC
w LWC pays promptly w Considers capacity constraints
w LA recycling target for 2018 is 41% w Contract started July 2017
w Increasing penalties for missing recycling targets w Non-recyclable waste disposal causes additional cost
w Bank O/D £1,138k / £3m loan repayable in 2019 w Extra staff needed for scrutiny/security/supervision
w Readable confidential waste at Fairleigh
w R4 does not shred confidential paperwork
w Coffee cup recycling current national issue
w LWC work should only include paper and card
w R4 involved in waste management education
NA ID IC SC CC
Evaluation of impact on overall business Draws conclusions (under a heading)
w LWC excluding FP work has annual GP of £347k w Provides FP contract GP with fig
w LWC including FP work has annual GP of £286k w LWC loss: financial impact/target impact/too important to lose
w Calcs revised GP% AND compares to R4 GP%/target w Concludes on operational/strategic issues
w LWC makes positive contribution / too important to lose w Concludes on ethical/business trust issues
w LWC enables R4 to achieve LA recycling targets
w LWC improves R4's cashflow/WC management
w Possible shift in balance of power between R4/LWC w Site operational problems need to be addressed promptly
w Impact of LWC/FP on MRF utilisation rate w Financial review of all contracts
w Contract run for 4 months without apparent monitoring w Negotiate higher fees with LWC
w Non-recyclable waste could be more than 10% w Monitor ongoing compliance with recycling targets
w Operational problems will increase processing costs w Long-term development of recycling operation for cups
NA ID IC SC CC
w Potential breach of Data Protection Act

NA ID IC SC CC
w Inform LWC OR LWC/FP/offices must address problems
CC
w Consider using Signacups/other coffee cup recyclers
SC
w May be in breach of contract terms / review contract IC
ID
w Run coffee cup recycling campaign / education programme
NA
Total 10
NA ID IC SC CC
w Overall analysis: revenue AND GP/GP% w Appropriate use of paragraphs / sentences
w Analysis by MW AND GW w Legible
w Analysis by tonnage w Appropriately numbered pages
w Well presented, labelled and numbers clearly derived w Disclaimer of liability AND report from BD
w OB1 collection fees AND cost w Formal language for the board
w OB1 recyclate sales price AND processing cost w Tactful / ethical comments
w Exclusivity calculation w Reasonable spelling / grammar
CC
SC
IC
ID
NA
Total 4
FIRST ILLUSTRATIVE SCRIPT AND EXAMINERS’ COMMENTS – NOVEMBER 2017
the topics in the marking key. It should be read in conjunction with the review of the Second
This script passed the exam. It is of average length – but as always this depends on the actual
handwriting – and was fully readable with very few crossings-out. This candidate achieved 28
competent grades (Clearly Competent (CC) and Sufficiently Competent (SC)) balanced across
the whole report. Good passing grades were obtained in all three Requirements. The
professional skills grades (maximum 30) were: in 5 out of 6 grade boxes for Assimilating and
Using Information (A&UI); in 6 out of 9 for Structuring Problems and Solutions (SP&S); in 6 out
of 9 for Applying Judgement (AJ); and in 4 out of 6 for Conclusions and Recommendations
(C&R). This candidate achieved sufficient competent grades in the three Requirements:
Requirement 1 (review of R4’s financial performance); Requirement 2 (evaluation of OB1
SEWCO proposal); and Requirement 3 (evaluation of R4 LWC recycling contract).
In the original script the 18 pages of the main body of the report are split more or less equally
between the three Requirements. There were appropriate appendices for all requirements,
including a short relevant appendix for Requirement 3.
This report starts with an appropriate front page title and terms of reference section – the report
is from Boyle Downer (BD). The executive summary (ES), which follows, has a clear structure
and is split fairly evenly between the three topics.
The summary of the financial analysis of the R4 management accounts contains some
appropriate numerical analysis covering revenue and GP but rather surprisingly does not
mention any aspect of tonnage increases and the fact that R4 has just achieved the Local
Authority 2017 recycling tonnage percentage target. The references to the depreciation issue
are acceptable but no mention is made of the looming loan repayment. It is a logical summary of
R4’s financial performance but there are some noticeable gaps.
The section dealing with the new OB1 SEWCO proposal contains the appropriate numerical
information for the proposal with and without exclusivity but it does not identify the significance
of this proposal by comparison with all R4 SEWCO work (including tonnage). Nor does the
candidate question the key assumptions. The recommendations are sufficient.
In the evaluation of the LWC recycling contract, the candidate identifies critical numerical factors
and indicates the overall importance of the size of the LWC contract. The script also includes
appropriate commentary on confidential waste and the coffee cup disposal issue but is weak on
the overall impact for R4 such as better contract monitoring.
The ES covered all three areas appropriately and used some numbers in all sections without
always identifying the key financial points or the operational magnitude of the issues.
 identified the tonnages processed in the revenue and GP analysis;
 commented on the operational impact that the OB1 SEWCO proposal would have;
 commented on the need for better monitoring of clients, both physically and contractually.

Review of R4’s financial performance [Requirement 1]
The financial statement analysis in this section is accompanied by a good Appendix 1 (see
requested – revenue and gross profit in both percentage and absolute terms – in sufficient detail
to allow clear analysis and effective judgement in this section. As well as being based on a good
appendix, this script also integrates information brought forward from the AI with the new EP
information to provide excellent relevant context in this section (and throughout the report).
This section of the report starts by providing a succinct analysis of overall revenue: “Total
revenue increased by £356k/8.5% (see Appendix 1). This was driven significantly by an increase in
overall tonnage processed by 9.3%. Revenue growth has been slower than previous year’s growth of
20.9% but higher than the industry forecast of 4.9%”. The analysis of the all-important tonnage
changes was a recurring theme in this candidate’s commentary when considering changes at
each level. There was commentary on mixed waste revenue, third party and the SEWCO
business line revenue as well as general waste. The revenue analysis concluded by bringing in
the key yardsticks presented in the AI: “Overall tonnage has shown a shift towards mixed waste
increasing the ratio of mixed waste from 39.4% to 40.0%. This means it seems that R4 may have met its
own target ratio of 40% as well as the local authority ratio of 40% for this year.” It is a well-constructed
section with clear references to the qualitative changes in the individual business lines
The analysis of GP is similarly focused at the right level: it does not delve into unnecessary
detailed analysis, but picks up on the areas where no change has occurred and moves on – it
includes a good overview of issues tied into another AI target: “Mixed waste gross profit margins
have increased slightly but are quite stable at 24.4% (2016: 24.2%). R4 are closer to but have not met
their 25% target gross margin for mixed waste.”
The candidate also picks up on the majority of the issues surrounding the depreciation issue. “It
seems likely that current depreciation estimates are too low given the consistent losses …There is no
cash flow impact … It would therefore have no impact on R4’s ability to make its scheduled £3m loan
repayment. However, in the case that the loan needs renegotiating in 2019, as the loans are secured on
R4’s assets, a lower carrying amount may lead to less favourable negotiations”. Few candidates picked
up on this issue. Areas of omission were the materiality of the depreciation charge in R4’s
financial statements and whether the tonnage basis would achieve a full write-off, but otherwise
this discussion was clear.
The report has good judgement on the revenue analysis but is less strong on other sections.
Clearly competent conclusions followed the analysis with appropriate numbers. The
recommendations were sufficiently competent. This was a strong section of the report.
Evaluation of OB1 SEWCO proposal [Requirement 2]
The financial data analysis in this section is accompanied by Appendix 2, which provides the
appropriate calculations . In this section, the candidate provides good A&UI of the information
drawn from the appendix and elsewhere, together with comprehensive analysis and judgement
on those numbers “There is an overall gross profit of £2922k representing a margin of 20.9%. This is
better than the average 2017 margin of 15.7% but worse than the 2017 SEWCO margin of 30.8%”.
However, the A&UI relating to the wider context and the analysis and evaluation of assumptions
were not strong because no comparison with overall yardsticks was provided and the
provenance of the information was not questioned. In addition, the consideration of the impact
of this new proposal (30,000 tonnes) against total MRF capacity or previous levels of SEWCO
work was not clearly indicated.
The analysis and evaluation of the ethical and business trust considerations are focused and
also put in the relevant context of R4’s corporate ethos. They gained sufficient passing grades
in SP&S and clearly competent grades in AJ: “If [the fly tipping] is true then any relationship with OB1
may seriously damage R4’s reputation …This is a problem as R4 makes every effort to act responsibly in
relation to its local community and is involved in local matters. R4 has a strong corporate responsibility
framework which is threatened”

The conclusions in this section are good but although the recommendations relating to ethical
and business trust issues are adequate (under AJ), the other recommendations are too thin.
 identified the size of this contract against relevant criteria (SEWCO or overall revenue);
 identified the absolute tonnage involved and its impact on operations;
 considered the locations and exact timings of the OB1 SEWCO events;
 assessed the future opportunities with or without this OB1 work.
Evaluation of R4 LWC recycling contract [Requirement 3]
The candidate has provided an effective and accurate series of calculations and appropriate use
of the numerical information throughout this section to summarise the issue: “… the R4
processing contract is worryingly operating at a gross loss of approximately £4995k [per month]. This is
reasonably insignificant compared to R4’s total gross profits of £8.7m … However, based on a tonnage
processed for LWC in total in the year of 16,500, an estimated £1848k of revenue in total is from LWC
and a total gross profit of approximately £346k. The entirety of this revenue and gross profit is likely to be
lost in the event of R4 cancelling this one contract. LWC currently processes all its mixed waste with R4
and has historically been a good customer.” As a result of this and other commentary, this candidate
scores very well in the numerical boxes of A&UI, SP&S and AJ.
Unfortunately, despite the good numerical analysis, the operational and strategic analysis and
evaluation is almost totally absent.
The candidate recovers somewhat in the analysis of the ethical and business trust issues and is
particularly strong in the evaluation (including recommendations) relating to these “There is
already a confidentiality issue with the FP waste because paper is only partially shredded so information
remains readable … This is a security issue which may have legal implications for R4 … Discuss the
problem with LWC and explain the issue …Discuss the confidentiality issues with LWC and FP.
The conclusions cover all of the main issues but the recommendations (apart from the ethical
aspects) were not sufficient.
 analysed the operational and strategic issues (such as the overdependence on R4);
 identified R4’s own weakness in monitoring contracts;
 made the recommendations more appropriate: R4’s future site control and specific contract
monitoring.

Appendices
Appendix 1
analysis of the key figures from R4’s statement of profit or loss for 2017 compared with 2016
The analysis of movements between the years for revenue and GP is made in both absolute
and percentage terms and throughout this is a model of clarity and brevity. The only slight flaw
is that the difference in tonnage between the years is not calculated (although the percentage
change is). A short calculation relating to depreciation is included. In total this is an excellent,
focused piece of well-presented analytical work.
Appendix 2
This appendix relates to the OB1 SEWCO proposal’s calculations without and with exclusivity
and also included a brief sensitivity calculation. The candidate calculated the correct rvenue of
£14,010k the correct GP of £2,922k. This correct calculation and effective labelling of work
throughout the appendix meant that a reader could easily follow what the candidate was
intending to do. The sensitivity analysis was not strictly necessary because the consideration of
the proposal with and without exclusivity provided sufficient opportunity for reflective
consideration of this proposal in numerical and financial terms. This appendix was clearly
competent.
Appendix 3 – workings for R3
This set of short, relevant financial workings made use of information in Exhibit 19a and from
elsewhere in the EP and gave this candidate a clear base for the analysis and evaluation
discussed in the report. As a result of this numerical work, the candidate achieved top grades in
A&UI in this section of the report.
Overall paper
The majority of this script was easy to read, well-structured and followed a clear, logical format
in answering the detailed requirements. There were a few lapses in style and in legibility –
almost certainly a result of exam pressure and not ability – but it meant that a point was
dropped. In overall terms, the report was fully appropriate for the R4 board. It was balanced in
length between sections. Judgement varied but was consistently well above the cohort average.
The candidate obtained clearly competent grades across all Requirements and this reflected the
high standard of the script throughout.

To: The board of R4 Waste Collection and Recycling
Prepared by: Boyle Downer Chartered Accountants
Date: 08/11/2017
Title: Financial review and strategic opportunities and concerns
Disclaimer: This report has been prepared for the Board and should not be distributed to any other parties
without prior written consent. No liability can be accepted in the event of such distribution.
1.1 Review of 2017 performance
Overall revenue has increased by a pleasing £4356k/8.5% which is higher than the industry average
growth of 4.9%.
Mixed waste revenue has also increased by £1437k/7.6% due mainly to a £1103k/25.2% increase in 3 rd
party revenue. This has been influenced by a £6 increase in recyclate sales per tonne.
General waste revenue has increased by £2191k/9.1%.
Gross margins have stayed stable overall (15.7% compared to 15.8%) and also stable at a mixed waste
level (24.4% compared to 14.2%) and a general waste level (10.7% compared to 10.8%).
SEWCO mixed waste is the main area showing decline due to increased collection costs affected by bad
weather and a shift towards more general waste.
Changing depreciation would reduce gross margins to 14.8% and reduce the carrying amount of
tangibles.
However, it is recommended as it would improve the representativeness of the statements and minimise
future losses on disposal.
Recommendations include:
Investigate assumptions determining depreciation

Review SEWCO contracts to determine profitability individually
1.2 Evaluation of SEWCO proposal
The contract would be financially beneficial providing revenue of £14,010k and gross profit of £2922k at a
margin of 20.9%.
The net impact is a growth in revenue and gross profit (of £6051k and £777k) compared to 2017
assuming exclusivity is enforced.
The actual financial impact will depend on cost and recyclate sales assumptions with the fee fixed in
advance.
Caution is needed with regards to assumptions in particular, overall recyclate sales may be impacted by
changes in commodity prices and bad weather.
Additionally a 60% mixed wasted mix would be lower than the typical 75% SEWCO mix.
The main commercial considerations are that R4 are a SEWCO specialist and that the exclusivity deal
may damage good existing customer relationships permanently.
There are concerns as OB1 events have been suggested to have impacted the community and caused
illegal fly tipping problems.
Overall, R4 should proceed with the proposal.

Establish facts with regards to the fly tipping claims.
Negotiate the exclusivity term.
Establish the capacity of the MRF and trucks.
1.3 LWC contract
Based on the estimates, the LWC FP waste contract is operating at a worrying gross loss of £4995.
However this is fairly insignificant compared to R4 total gross profits of £8.7m.
Additionally, 16500 tonnes of 3rd party waste come from LWC and there is a risk of losing all the shared
revenue and gross profit which is significant (£1848k and £346k approximately respectively).
LWC are R4’s biggest 3rd party customer and it would be detrimental going forward to damage the
relationship and lose their business.
The MRF operates with mainly fixed costs so it would be an operational improvement to have LWC’s
significant tonnage.
Meeting the local authority’s targets is a key concern and the LWC contract is very beneficial towards
meeting them as there is minimal residual general waste.
The LWC contract brings an ethical concern due to potentially confidentiality and security issues relating
to FP information.
Overall, R4 should keep all LWC contracts as they are too important as a customer to lose.
Get legal advice with regards to the confidentiality issue.
Improve quality checks at the MRF
Produce educational material for FP offices with regards to coffee cups
Negotiate higher gate fees for problematic waste brought by LWC.
2. Review of 2017 performance
2.1 Revenue
Total revenue increased by £356k/8.5% (see Appendix 1). This was driven significantly by an increase in
overall tonnage processed by 9.3%. Revenue growth has been slower than previous year’s growth of
20.9% but higher than the industry forecast of 4.9%. There has been an increase in revenue for both
mixed and general waste as discussed below.
Mixed waste revenue has increased by £1437k/7.6% due to a £1103k/25.2% increase in 3rd party
revenue. This is partly due to an increase in recyclate sales by £6 per tonne. Additionally, gate fees were
kept constant to stay competitive meaning 3rd party tonnage increased.
However, concerningly, SEWCO revenues were down £708k/10.5% despite a fee increase being
negotiated and an increase in recyclate sales to £297 per tonne. This is due to the tonnage of SEWCO
waste collected dropping by 15.9% due to an increase in the ratio of general waste. There is still room for
further mixed waste growth as the MRF is only working at 75.0% capacity (2016: 67.5%).
General waste revenue has increased by a notable 9.1%/£2919k. This is due to an increase of 8.2% in
tonnage as fees per lift have remained constant.

Overall tonnage has shown a shift towards mixed waste increasing the ratio of mixed waste from 39.4%
to 40.0%. This means it seems that R4 may have met its own target ratio of 40% as well as the local
authority ratio of 40% for this year.
2.2 Gross profit
Overall gross profit has increased by a modest £641k/8.0%. This is slower than the growth in revenue as
cost of sales has increased by £3715/8.6% meaning that overall margin has fallen from 15.8% to 15.7%.
Note however that this margin is reasonably stable and there has not been significant change.
Similarly, the revenue mix is reasonably constant with 36.5% relating to mixed waste compared to 36.8%
in 2016.
Mixed waste gross profit margins have increased slightly but are quite stable at 24.4% (2016: 24.2%). R4
are closer to but have not met their 25% target gross margin for mixed waste.
The SEWCO margin has declined from 36.6% to 34.7% because of problems such as poor weather,
collection costs have increased to £315 per tonne from an average of £280 per tonne. There was also an
increased in residual general waste.
General waste margins are stable dropping slightly from 10.8% to 10.7%. Fees per lift have not changed
so collection costs must not have changed significantly.
2.3 Effects of depreciation
Increasing depreciation costs by £500k would increase cost of sales to £47,167k and therefore decrease
gross profit to £8,187. This would reduce the gross margin to 14.8% overall.
However, in future years, this change is likely to have a positive impact on profits as R4 is less likely to
incur losses on disposal going forward. It seems likely that current depreciation estimates are too low
given the consistent losses.
The change would also impact R4’s tangible assets on the statement of financial position by reducing
their carrying amount to £13,867k.
There is no cash flow impact or an increase in depreciation.
It would therefore have no impact on R4’s ability to make its scheduled £3m loan repayment. However, in
the case that the loan needs renegotiating in 2019, as the loans are secured on R4’s assets, a lower
carrying amount may lead to less favourable negotiations.
However, R4 should be transparent and adjustments should be made to assumptions and estimates if it
would be thought to make the statements more representative.
2.4 Conclusions
R4 has achieved a strong revenue growth of £4356k/8.5% which is better than industry average. Mixed
waste revenue grew by £1437k/7.6% and general waste revenue by £2919k/9.1% mainly due to tonnage
improvements and higher recyclate sales.
Gross margins have stayed stable overall at 15.7% compared to 15.8% in 2016. This is reflected in the
mixed waste margin of 24.4% (2016: 24.2%) and the general waste margin of 10.7% (2016: 10.8%). This
is due to consistent fees and collection costs other than for SEWCO.
SEWCO performance was disappointing with a £371k/15.1% decline in gross profit and a £708/10.5%
decline in revenue for mixed waste. This was caused by changes in fees and collection costs.
An increase in depreciation of £500k would reduce the gross profit margin to 14.8% and the carrying
amount of tangibles to £13,867 but may be more reflective.
2.5 Recommendations
Discuss the impact of the change in depreciation policy with the bank.

Investigate assumptions around depreciation to determine an appropriate change.
Consider the possibility of negotiating higher SEWCO fees again.
Review SEWCO contracts to determine if any are unprofitable.
Discuss the local authority target with them.
3 Evaluation of SEWCO proposal
3.1 Financial Evaluation
The total revenue from this contract would be £14,010k with the fee of £335 per tonne covering the £315
per tonne collection costs.
There is an overall gross profit of £2922k representing a margin of 20.9%. This is better than the average
2017 margin of 15.7% but worse than the 2017 SEWCO margin of 30.8%.
Due to the exclusivity terms, R4 would not be able to perform its existing SEWCO work. Therefore the net
increase in revenue compared to 2017 would be £6051k and the net increase in gross profit would be
£777k.
The actual financial impact will depend on the accuracy of the assumptions. The collection fee would be
negotiated in advance and so would remain fixed. See Appendix 2.
It would be useful to establish the payment terms as R4 does not have much capacity in its £1.5m
overdraft limit.
3.2 Assumptions
The assumption that 60% of waste will be mixed may be too low as typically based on past experience
R4 has seen a ratio of 75% with 75% mixed waste gross profit would increase by £580.5k and the margin
would increase to 23.4%.
The average recyclate sales revenue may not be correct as it will be impacted by fluctuations in
commodity prices and poor weather would reduce the quality of recyclates. Recyclate sales, especially
cardboard may be impacted by the Chinese ban on importing rubbish which is to be effective by the end
of the year (The Diplomat, 20 July 2017).
The fee may not be reasonable as it has been suggested by the organisers and there may be room for
negotiation. This is especially true as they were the ones to approach R4.
The MRF costs may be lower than £91 per tonne as they are mainly fixed costs which may reduce with
increased tonnage.
3.3 Commercial considerations
R4 is a specialist in SEWCO collections. Their experience is key to their success which is achieved by
tendering at a low fee to win the work and then by maximising recyclate sales. R4 therefore have all the
core competencies needed to be successful.
R4 needs to consider the capacity of its MRF. SEWCO work is very seasonal and this contract is no
exception with all events from April – September. R4 could struggle to meet the SEWCO demands on top
of its I&C client commitments. However, this is mitigated as the events are mainly at the weekends
whereas most I&C collections are during the week.
OB1 would require exclusivity. As well as the financial impact considered above, this may mean losing
their repeat contracts permanently. It is not clear whether this contract may be ongoing for years after
2018 or whether this would be a permanent detrimental affect on profits and revenues. R4 has built up a
good base of SEWCO customers previously.
Distance to the events is likely to be reasonably low as the organiser is based in Sheffield which is close
to Barnsley. This will make more events logistically easier.

3.4 Ethical considerations
OB1 and their waste contractor have been accused of fly tipping which is an illegal dumping practice
undertaken to boost profits. If this is true then any relationship with OB1 may seriously damage R4’s
reputation.
However, the full facts are not known as this is based on a news article which may not be reliable.
Additionally, OB1’s events may be having a detrimental impact on the local community due to the mess,
waste, traffic and bad behaviour problems caused. This has caused complaints and local opposition to
the events.
This is a problem as R4 makes every effort to act responsibly in relation to its local community and is
involved in local matters. R4 has a strong corporate responsibility framework which is threatened.
3.5 Conclusions
This contract would be financially beneficial when revenues of £14,010k and gross profits of £2922
expected. The proposal has a positive impact even after accounting for the cost of SEWCO work. The
margin is reduced at 20.9%.
Caution is needed with regards to the key assumption of recyclate sales as this will be dependent on
commodity prices and the impact of weather.
A key commercial issue is the loss of existing SEWCO customers which would damage relationships in
future.
There are ethical concerns due to allegations of illegal fly tipping.
Overall, R4 should proceed with the proposal as it has a positive impact financially.
3.6 Recommendations
Establish the facts with regards to the fly tipping claims.
Perform ethical due diligence on OB1.
Negotiate the exclusivity term.
Perform market research on the key assumption of recyclate sales.
Establish the capacity of the MRF and trucks.
Establish whether this would be a one-off or ongoing contract.
Get legal advice with regards to the fly-tipping issue.
4 LWC Contract
4.1 Financial Issues
Based on estimates calculated in Appendix 3, the R4 processing contract is worryingly operating at a

gross loss of approximately £4995k. This is reasonably insignificant compared to R4’s total gross profits
of £8.7m.
However, based on a tonnage processed for LWC in total in the year of 16,500, an estimated £1848k of
revenue in total is from LWC and a total gross profit of approximately £346k. The entirety of this revenue
and gross profit is likely to be lost in the event of R4 cancelling this one contract. LWC currently
processes all its mixed waste with R4 and has historically been a good customer.
Additionally, LWC has historically always paid promptly. This is good for R4’s cash flow especially in light
of its overdraft limit of £1.5m which R4 are close to and the upcoming loan repayment of £3m in April
2019.

Further, based on the new rules affecting local authority targets post Brexit, it seems likely that R4 would
face higher potential financial penalties for not meeting mixed waste targets.
4.2 Strategic and operational issues
R4 currently has a target of 40% mixed waste tonnage from its local authority and this is going to rise by
1% year on year to a maximum of 45%. This means it is crucial that R4 increases its mixed waste
tonnage. 3rd party contracts such as LWC are crucial as they do not increase general waste.
R4 have a strong relationship with LWC who are their biggest 3rd party customer. LWC are likely to bring
R4 increasing revenues in the future as R4 are their sole processor. R4 does not want to damage this
relationship and lose their work.
3rd party contracts do not limit R4’s capacity for I&C and SEWCO contracts as they do not require truck
usage so they are a good way of increasing revenues and tonnage.
Although the contract from FP is increasing processing time and costs, as the MRF was mainly fixed
costs, the impact of the contract may still be positive.
Note also that 10% general waste is in line with R4 averages for 2016 so is not necessarily a cause for
concern.
4.3 Ethical considerations
There is already a confidentiality issue with the FP waste because paper is only partially shredded so
information remains readable.
This is a security issue which may have legal implications for R4.
Additionally, there is an issue around coffee cup recycling. Currently only 1 in 400 coffee cups are
recycled and this is having a detrimental environmental impact due to landfill issues.
The general public are increasingly aware of the issues of landfill waste but public recycling rates are
falling.
Thérèse Coffey, the environment minister, is open to the idea of a 5p tax on coffee cups (The Times, 1
November 2017).
R4 has high ethical standards so these are big issues for them.
R4 has a corporate responsibility framework which it follows and aims to lead the way with sustainable
solutions for its stakeholders.
4.4 Conclusions
The key financial issue is the potential loss of all of the LWC work which is approximately £1848k,
annually in terms of revenue. However, currently the FP work is at a gross loss of approximately £4995.
Strategically, the LWC work is beneficial as it helps to improve the customer relationship with the biggest
3rd party customer.
Additionally, it helps R4 to meet local authority targets.
However, the FP work is impacting negatively on processing time.
There is an ethical concern due to confidentiality issues affecting FP security.
Overall, R4 should keep all LWC work as they are profitable overall and a major 3rd party customer.
4.5 Recommendations
Investigate the possibility of introducing a coffee cup recycling solution into FM offices.
Discuss the problem with LWC and explain the issue.

Negotiate higher gate fees for problematic loads.
Improve quality checks at the MRF and reject inappropriate mixed waste loads.
Discuss the confidentiality issues with LWC and FP.
Get legal advice in relation to the confidentiality issue.
Produce educational material for FP with regards to its coffee cups.
Confirm that the LWC contract is profitable overall.
Appendix 1 – Review of R4 performance
2017 2016 Change Change Mix 2017 Mix 2016

£’000 £’000 £’000 % % %
Revenue
I&C 8745 7703 1042 13.5
SEWCO 6005 6713 -708 110.5
3rd party 5473 4370 1103 25.2
Mixed waste 20223 18,786 1437 7.6 36.5 36.8
I&C 33177 31,103 2074 6.7
SEWCO 1954 1,109 845 76.2
General waste 35131 32,212 2919 9.1 63.5 63.2
Total 55,354 50,998 4356 8.5 100.0 100.0
Gross profit GP% 2017 GP% 2016

I&C 1830 1,478 352 23.8 20.9 19.2
SEWCO 2085 2,456 -371 -15.1 34.7 36.6
3rd party 1026 619 407 65.8 18.7 14.2
Mixed waste 4941 4553 388 8.5 24.4 24.2
I&C 3686 3455 231 6.7 11.1 11.1
SEWCO 60 38 22 57.9 3.1 3.4
General waste 3746 3493 253 7.2 10.7 10.8
Total 8657 8046 641 8.0 15.7 15.8
Total cost of sales 46,667 42952 3715 8.6
Tonnes
I&C mixed 31,492 28350
SEWCO mixed 9,654 11475 7821 -15.9
3rd party mixed 48,866 41,216
Mixed 90,012 81041 11.1
General 135,036 124785 8.2
Total 225,048 205826 9.3
Mixed as % of 120k capacity 75.0 67.5

Mixed tonnage/total 40.0 39.4
Depreciation
New cost of sales, £’000 47167

New gross profit, £’000 8187
New margin 14.8%
New NCA carrying amount, £’000 13,867

Appendix 2 – SEWCO opportunity
£’000
Collection fee 10,050

(£335 x 30,000)
Recyclate sales 3,960

(30,000 tonnes x 60% x £220)
Total revenue 14,010
Collection costs (9,450)

(£315 x 30,000 tonnes)
MRF costs
(30,000 tonnes x 60% x £91) (1,683)
Gross profit 2922
Lost SEWCO mixed revenue 6005

Lost SEWCO general revenue 1954
6959
Net increase revenue 6051
Lost SEWCO mixed gross profit 2085
Lost SEWCO general gross profit 60

2145
Net increase in gross profit 777
2017 SEWCO gross margin 30.8%

(2145/6959)
Sensitivity
If mixed tonnage increased to 75% of total tonnage then:
£’000
Increase in recyclate sales 990
(15% x £220 x 30,000 tonnes)
Increase in MRF costs (4095)

(£91 x 15% x 30,000 tonnes)
Increase gross profit 580.5
New margin 23.4%

580.5 + 2922
14010 + 990
Note Mixed tonnes = 60% x 30,000 = 18,000

Appendix 3 – LWC
Tonnes of problematic waste 300
Increased processing costs £4095

(£91 x 15% x 300 tonnes)
Gate fees £6000

(£20 x 300 tonnes)
Approximate recyclate sales (W1) £20,400
Total processing costs £31,395

(£91 x 15% x 300 tonnes)
Loss -£4995
(W1)
Composition Sale/cost Weighted

Per tonne
Paper 60% £80 48

Cardboard 30% £100 30
Cups 10% (£100) (10)
68
£68 x 300 tonnes = 20400
LWC revenue in total £1848k

5473 x 16500
48866
Gross profit at 18.7% £346k

SECOND ILLUSTRATIVE SCRIPT AND EXAMINERS’ COMMENTS – NOVEMBER 2017
the topics in the marking key. It should be read in conjunction with the review of the First
This script failed the exam. It is of average length – but as always this depends on the actual
handwriting. It was fully readable with very few crossings-out. This candidate achieved 18
competent grades (Clearly Competent (CC) and Sufficiently Competent (SC)) balanced across
the whole report. Some passing grades were obtained all three Requirements. The professional
skills grades (maximum 30) were as follows: in 4 out of 6 grade boxes for Assimilating and
Using Information (A&UI); in 4 out of 9 for Structuring Problems and Solutions (SP&S); in 2 out
of 9 for Applying Judgement (AJ); and in 1 out of 6 for Conclusions and Recommendations
(C&R). Significantly this candidate had 5 NAs across the script and only achieved sufficient
competent grades in the Requirement 2 (evaluation of OB1 SEWCO proposal).
In the original script the 12 pages of the main body of the report are split roughly equally
between the three Requirements – with Requirement 1 being slightly longer. There were
appendices for all Requirements, including a short appendix for Requirement 3.
This report starts with an appropriate title and disclaimer section – the report is from Boyle
Downer (BD). The executive summary (ES), which follows, has a clear structure and is split
fairly evenly between the three topics but it appears to be disproportionately long.
The summary of the financial analysis of the R4 management accounts contains some
appropriate numerical analysis covering revenue and GP and includes changes in tonnage
processed and the achievement of Local Authority 2017 recycling tonnage percentage target.
The references to the depreciation issue are acceptable and the recommendations include a
cash flow budget for the £3 million loan repayment. It is a logical summary of R4’s financial
performance but there are some obvious gaps.
The section dealing with the new OB1 SEWCO proposal contains correct numerical information
for the proposal without exclusivity – but not with it, although the recommendation not to
proceed is based on that issue. It does not provide any comparison with all R4 SEWCO work
(including tonnages). It does question the assumptions, and the recommendations are sufficient.
In the evaluation of the LWC recycling contract, the candidate identifies critical numerical factors
concerning the loss-making FP contract and indicates the overall importance of the LWC
contract in achieving recycling targets. The script includes appropriate commentary on
confidential waste but omits the coffee cup disposal issue. It is weak on the wider impact for R4
and the way forward.
The ES covered all three areas and used some numbers in all sections but without always
identifying the key financial points or the operational magnitude of the issues.
 identified the mixed waste tonnages or other key numbers relating to SEWCO in 2017;
 commented on the financial impact of exclusivity that OB1 proposed;
 concluded on the coffee cup issue and future monitoring of client activity.

Review of R4’s financial performance [Requirement 1]
The financial statement analysis in this section is accompanied by a clear appendix (see
requested – revenue and gross profit in both percentage and absolute terms – overall and in the
detail necessary for useful further review. The new EP information AI is accurately compared
with information from the AI.
This section of the report starts by providing a good analysis of overall revenue: “Total revenue
increased by £4,356k (8.5%) from £50,998k in 2016 to £55,354k, with an increase in total volume of
19,222 tones (9.3%) to 225,048 due to growth in both streams. The revenue growth exceeded the
forecast growth for the industry of 4.9% per annum for 2016 to 2020. The revenue for R4 for its recyclates
is dependent on its composition and commodity prices. (see Appendix 1)”. The overall and detailed
analysis included volume changes in mathematical terms but on occasions the story of
changing tonnages was followed through more speculatively than logically: “Revenue from
SEWCO experienced a fall of £708k (10.5%) with a reduction in volume of 1,821 tonnes (15.9%) and a
lower revenue mix of 10.8% (13.2%). The decline was due to R4 increasing its SEWCO fees by
£35/tonne but losing a number of contracts due to strict competition.” In fact, candidates are told in
Exhibit 17 exactly what has been happening with the SEWCO contracts (poor weather leading
to an increase in clearance costs, plus a change between mixed waste and general waste
proportions). This answer showed a lack of attention, by the candidate, to the information
supplied.
A similar weakness is evident in the analysis of 3rd party revenue, where the candidate states:
“Revenue from 3rd parties showed the highest increase among other mixed waste by £1,103k (25.2%) to
£5,473k in 2017. There was an increase in volume by 7,650 tonnes (18.6%) with a higher revenue mix of
9.9% (8.6%). This growth was due to increase in recyclate price per tonne as the gate fees remained at
£20 tonne similar to last year.” In fact, it is clear, both in the answer as written, and from the EP
that the major influence is the increase in mixed waste tonnage. This analysis of revenue is
varied in quality.
The analysis of GP is rather weak falling into the trap of unnecessary analysis where there has
been virtually no change and the incorrect discussion of volume changes: “G.P from mixed waste
increased by £388k (8.5%) to £4,941k and G.P margin increased by 2 basis pts from 24.2% to 24.4% in
2017. As most of the costs are fixed, the MRF is now operating at a profit due to increase in volume with
a profit of £1 per tonne.” In fact, the profit per tonne is caused by the increase in recyclate prices
from £86 to £92 as stated in Exhibit 17 and not apparently by volume changes.
The absence of any numerical information concerning depreciation in the appendix is also
reflected in the report. The candidate does not really answer the request for advice from the
board. This again emphasises that this candidate has not read the EP carefully enough and
does not fully understand the information being provided – in this instance merely repeating the
information provided but with no real additional insights. As a result, the candidate scored only
one bullet for SP&S and an NA for judgement. This was a significant weakness in this section
concerning a topic which had been heavily flagged in the AI.
The report has good judgement on the revenue analysis but was weak on other sections.
Conclusions and recommendations were insufficiently competent. This was not a strong section
of the report.
 integrated the information from Exhibit 17 into the analysis of gross profit;
 responded more accurately to the board’s request for advice concerning depreciation ;
 provided more relevant recommendations regarding future analysis and targets.

Evaluation of OB1 SEWCO proposal [Requirement 2]
The financial data analysis in this section is accompanied by Appendix 2 (see comment below),
which provides the appropriate calculations. In this section, the candidate provides good A&UI
of the information drawn from Appendix 2, making full use of all the information supplied. There
is also a very good SP&S relating to these calculations.
The analysis of assumptions is comprehensive, following a logical process, and is clearly

competent, while the related application of judgement (including provenance) is adequate: “OB1
has not provided any basis for the 30,000 tonnes of waste and it is possible it is inflated to make the
contractors keen to bid … There is no support for the projected mix of recyclates …”
However, elsewhere there is an absence of wider business context and no analysis or

discussion of this OB1 contract against the current SEWCO numbers. Despite having done a
calculation in the appendix the candidate makes no reference to the issue of exclusivity in the
body of the report (although this issue is in the conclusion to this section). The issue of MRF
capacity is not considered.
The analysis and evaluation of the ethical and business trust considerations is weak or almost
totally absent, with only a light mention of possible R4 implications.
The conclusions in this section are good and include relevant figures: “The contract will generate
total revenue of £14,010k with a gross profit of £2,922k and G.P margin of 20.9%. The key assumptions
are the proportion of the mix and high costs of MRF despite the substantial increase in volume”.
However, the recommendations are weak and are insufficiently demonstrated.
 identified the size of this contract against relevant criteria (SEWCO or overall revenue);
 identified the impact of the suggested tonnage on MRF operations;
 assessed in detail the ethical and business trust details provided;
 considered the future implications for R4 with or without this proposal.
Evaluation of R4 LWC recycling contract [Requirement 3]
The candidate has provided some relevant calculations in the related appendix and makes
appropriate use of numerical information throughout this section: “The increase in processing
costs of 15% for this contract is a major concern and the increase in general waste on truckloads is
contributing to the financial loss on the contract … If R4 terminates this contract, it could lose the 16,500
tonnes of mixed waste which is necessary to achieve the mixed waste %age target of 40% by the Local
Authority”. As a result of this and other commentary, this candidate scores very well in the
numerical boxes of A&UI, SP&S and AJ.
Unfortunately, despite the good numerical analysis, the operational and strategic analysis is
weak and the application of judgement is totally absent.
A similar criticism can be applied to the analysis and evaluation of the ethical and business trust
issues, with an absence of analysis and only some passing references to achieve just one bullet
on Applying Judgement and one relevant recommendation.
Conclusions were insufficiently competent and the recommendations were insufficiently

demonstrated.

 analysed the operational and strategic issues (such as possible capacity constraints and the
overdependence on R4);
 assessed the business trust and ethical issues in more detail – addressing the confidential
waste and the responsibility for solving the shredding problem;
 made the recommendations more appropriate: R4’s financial review of all contracts and the
need to ensure future compliance with recycling targets.
Appendices
Appendix 1
analysis of the key figures from R4’s statement of profit or loss for 2017 compared with 2016.
The analysis of movements between the years for revenue and GP is made in both absolute
and percentage terms overall and then in detail using the categories provided. It is clear and
accurate. The difference in tonnage between the years is not calculated. There is no calculation
relating to depreciation but this is a clearly competent piece of work.
Appendix 2
This appendix relates to the OB1 SEWCO proposal’s calculations without and with exclusivity. It
is an accurate and understandable appendix which identifies the key figures for decision-making.
There is effective labelling of work throughout the appendix and a reader could easily follow what
the candidate was intending to do. This appendix was clearly competent.
Appendix 3 – workings for R3
These financial workings made use of information mainly in Exhibit 19a and gave this candidate
a base for the analysis and evaluation discussed in the report. There was an obvious omission
in the calculation relating to gate fees, which meant that loss on the contract was exaggerated
but the logic of this numerical work enabled the candidate to analyse this issue effectively in the
report.
Overall paper
The majority of this script was easy to read, well-structured and followed a clear, logical format
in answering the detailed requirements. There were some lapses in grammar and legibility,
which meant that one bullet was not achieved. In overall terms, the report was appropriate for
the R4 board. Although it was almost balanced in length between sections, there were some
areas within sections which were not addressed – this may have been a function of poor
planning in addressing the requirements. Judgement was weak throughout and conclusions and
recommendations within each section were not always adequate.
The basic weakness in this script was that of not using appropriately the information in the EP
and therefore not developing the analysis or applying judgement to the facts actually provided.

R4 Limited
Report to the Board of Directors of R4 Limited
Disclaimer of liability:
This report has been prepared by Boyle Downer for the sole purpose of the R4 Board. No liability is
accepted in the event of unauthorised disclosure to any other party without our express permission.
Section 1: Executive Summary
1.1 Review of management accounts
Total revenue increased by £4,356k (8.5%) from £50,998k in 2016 to £55,354k, with an increase in
total volume of 19,222 tonnes (9.3%) to 225,048 due to growth in both streams. Revenue from
mixed waste increased by £1,437k (7.6%) to £20,223 with increase in volume of 8,971 tonnes
(11.1%) to 90,012 tonnes meeting the Local Authority target of 40% mixed waste processing.
Revenue from general waste increased by £2,919k (9.1%) to £35,131k in 2017 with increase in
volume by 10,251 tonnes (8.2%) to 135,036 tonnes due to volume growth.
Total G.P increased by £641k (7.9%) from £8,046K in 2016 to £8,687k due to increase in revenue
mix of general waste and fall in SEWCO mixed waste mix and higher costs declining the stream’s
G.P in 2017. Depreciation has no effect on cash flow and increase in depreciation charge will affect
the operating profit in profit and loss statement and balance sheet.
Total revenue growth of £4,356k (8.5%) has outgrown the industry’s forecasted growth of 4.9%. R4
has met the local Authority’s target of 40% with a utilisation of 75% of its MRF which now is
operating at a profit of £1/tonne. SEWCO profitability declined from last year due to increase in
costs due to poor weather.
The board should:
1) Review SEWCO bid pricing and work on reducing the clearance costs.
2) Prepare a cash flow budget for repayment of £3m loan in April 2019.
1.2 SEWCO Proposal from OB1
The overall contract revenue will be £14,010k with a total gross profit of £2,922k with G.P margin of
20.9% which is lower than a standard SEWCO contract of 30.7%.
The estimated recyclate price is £220/tonne which is significantly lower than 2017 average of £297.
The proportion mix is different than standard SEWCO contract where the aluminium proportion is
reduced by half to 20% only.
Also the MRF costs have been assumed to remain the same despite the substantial increase in
volume which should decrease its costs per tonne.
The situation of school dumping can affect the future viability of the whole contract for R4 therefore
roles and responsibilities need to be clear for both parties.
The concerns for local residents should be catered for by awareness campaigns by OB1 for
benefits of recycling.
Conclusions and recommendations:
The contract is supposed to generate revenue of £14,010k with a G.P of £2,922k. R4 should not
proceed with the contract due to key assumptions being questionable and exclusivity clause which
might affect other business relationships.

The board should:
1) Obtain further supports for all assumptions

2) Ensure contract is clear about rates and responsibilities of both parties
1.3 LWC new client contract
The contract is currently generating a loss of £26.2k with a negative G.P margin of 38.5%. For the
two years, annual loss is expected to be £104.8k.
Termination of contract by R4 will affect the mixed waste target of 40% and affect business
relationships with LWC.
Extra supervision is causing extra time management and likely to affect other contracts.
R4 has strong reputation and quality of collection service is likely to get affected due to extra
workload.
Conclusion and recommendations:
The contract is currently loss making however as the penalties by local Authority and future
restrictions is high risk, the contract should not be terminated despite operational issue.
The board should:
1) Negotiate prices further with LWC

2) Obtain legal advice regarding confidential papers being readable at Fairleigh.
Section 2: Review of management accounts
Total revenue increased by £4,356k (8.5%) from £50,998k in 2016 to £55,354k, with an increase in total
volume of 19,222 tones (9.3%) to 225,048 due to growth in both streams. The revenue growth exceeded
the forecast growth for the industry of 4.9% per annum for 2016 to 2020. The revenue for R4 for its
recyclates is dependent on its composition and commodity prices. (see Appendix 1)
a) Revenue
Revenue from total mixed waste increased by £1,437k (2.6%) to £20,223k with an increase in
volume of 8,971 tonnes (11.1%) to 31,492 tonnes, with a higher mix of 15.8% (15.1%). The growth
was due to increase in recyclate revenue per tonne being increased by £6/tonne (7%) to £92 per
tonne.
Revenue from SEWCO experienced a fall of £708k (10.5%) with a reduction in volume of 1,821
tonnes (15.9%) and a lower revenue mix of 10.8% (13.2%). The decline was due to R4 increasing
its SEWCO fees by £35/tonne but losing a number of contracts due to strict competition.
Revenue from 3rd parties showed the highest increase among other mixed waste by £1,103k
(25.2%) to £5,473k in 2017. There was an increase in volume by 7,650 tonnes (18.6%) with a
higher revenue mix of 9.9% (8.6%). This growth was due to increase in recyclate price per tonne as
the gate fees remained at £20 tonne similar to last year.
Revenue from general waste increased by £2,919k (9.1%) to £35,131k in 2017 with an increase in
volume by 10.251 tonnes (8.2%) to 135,036 tonnes. Revenue per lift remained the same as in
2016 hence the increase was volume driven.
b) Gross Profit: (G.P)
Total gross profit increased by £641k (7.9%) from £8,046k in 2016 to £8,687k but there was a
slight fall in G.P margin from 15.8% to 15.7%. This is due to increase in revenue mix of general
waste with lower G.P margin of 10.7% and a fall in revenue mix of SEWCO mixed waste with
higher margin.

G.P from mixed waste increased by £388k (8.5%) to £4,941k and G.P margin increased by 2 basis
pts. from 24.2% to 24.4% in 2017. As most of the costs are fixed, the MRF is now operating at a
profit due to increase in volume with a profit of £1 per tonne. SEWCO G.P margin fell due increase
in clearance costs by 35/tonne.
G.P from general waste also increased by £253k (7.2%) to £3,746k and G.P margin fell from
10.8% to 10.7%. This was due to fall in G.P margin from SEWCO as R4 kept its bid prices low due
to market conditions and competition.
c) Depreciation
The R4 board has raised a concern over the significant depreciation charge of £1,940k. Included in
this is a charge for £1,359k due to the MRF which has been correctly done as per the estimated
useful life of the asset.
A concern regarding the losses on disposal of its non-current assets due to vehicles being replaced
for operational purpose suggests that the useful life for depreciation calculation might not be
correct.
If estimates are changed due to high depreciation charge is increased it will affect the operating
profit in the profit and loss statement with no effect on revenue and gross profit. A similar affect will
be a decline in the book value of non-current assets in the balance sheet. As it is a non-cash item,
there will be no effect on the cash flow statement and hence will not have an impact on R4’s ability
to make the scheduled repayment of its £3m loan.
Conclusion
Total revenue increased by £4,356k (8.5%) to £55,354k with increase in total volume by 19,222
tonnes (9.3%) exceeding the forecasted growth of the industry of 4.9% per annum.
Mixed waste revenue increased due to I/C and 3rd party revenue streams with R4 meeting the local
Authority mixed waste target of 40%. The GP was increased by £641k (7.9%) due to increase in
recyclate price by £6/tonne which was offset by the increase in costs for SEWCO contracts due to
poor weather.
The depreciation calculation has an effect on the R4’s operating profit and any change in
estimation of its charge will not affect R4’s ability on loan repayment.
Recommendations
1) Review SEWCO bid pricing for future contracts

2) Work on getting more contracts from mixed waste to improve MRF profitability
3) Review the mixed waste fees per lift for potential increase
4) Urgently prepare a cash flow budget for repaying the loan in April 2019.
Section 3: SEWCO Proposal from OB1
R4 is required to bid for a SEWCO contract by OB1 for a number of events in summer months of 2018. In
the year 2017, there was a decline in the profitability in R4’s SEWCO stream due to poor weather for
which R4 has to take actions to improve. Attendance at the events may fall in 2018 with the continuing
decline in real wages which are down by 0.5% in Q2 2017 [ONS].
a) Contract revenue and gross profit
Total revenue from the contract will be £14,010k with a total gross profit of £2,922k with a G.P
margin of 20.9% [see Appendix 2]. The profit on recyclates will be £3,322k (58.6%) with R4 earning
£600k (5.9%) on collection, crushing and transportation.
b) Assumptions
1) Revenue price

The SEWCO contract fee of £335/tonne is higher than 2017 price of £325/tonne due to an
anticipation of lower mixed waste %age than the average. The estimated recyclate price of
£220/tonne is significantly lower than the 2017 average of £297/tonne.
2) Revenue volume and mix:
OB1 has not provided any basis for the 30,000 tonnes of waste and is possible it is inflated to
make the contractors keen to bid. OB1’s claim of 60% is slightly lower than 2017 average of
60% mixed waste but is significantly lower than the 2016 average of 75%.
There is no support for the projected mix of recyclates and the proportion of Aluminium is
reduced from 40% to 20% in the current estimate causing the overall recyclate price to go
down.
3) Costs:
The collection costs of £315 per tonne is similar to 2017 average. However, 2017’s cost was
increased due to bad weather as one-off event, hence the collection costs seem to be higher
than a sample contract suggesting problems in waste collection and bad weather forecast.
4) MRF costs:
MRF costs have been assumed similar to 2017 at £91 per tonne. However, the volume
expected from the contract is supposed to reduce the cost per tonne due to volume increase
suggesting the estimation of this is high.
c) Business trust implications
A large sum of waste has been dumped on a school field which arose from a music festival
organized by OB1 which is a health and safety issue. Fines are also likely to be imposed on all
parties with future events being likely cancelled.
Music festival are assumed to create revenue opportunity for local shops contributing to the
economic growth but it affects the daily routine, such as traffic congestions and shortage of goods
along with rude behaviour. Local residents feel the event organisers have to educate regarding the
negative outcomes of the waste.
Conclusions:
The contract will generate total revenue of £14,010k with a gross profit of £2,922k and G.P margin
of 20.9%. The key assumptions are the proportion of the mix and high costs of MRF despite the
substantial increase in volume.
The exclusivity will just create an additional G.P of £734k, however as 2017 cost were high due to
poor weather the G.P could be more in 2018. Hence, R4 should not proceed with OB1’s contract
as it will also affect the relationship with current customers.
The dumping of waste in school field is a medium-risk to R4 as it was not involved before, however
the fines and withholding of permission is high risk for the future of this contract with OB1.
The local residents concerns are low risk to R4 but its Corporate Responsibility Framework asks to
promote the benefits of recycling and hazards of waste.
Recommendations:
The Board should:
1) Obtain supports for all inputs for the model, especially the proportion mix.
2) Negotiate the terms regarding exclusivity with OB1
3) Negotiate the price of recyclates further.
4) Ensure that contract terms are clear regarding the roles and responsibilities for both parties
5) Ask OB1 to promote education campaign for its future events.
Section 4: LWC new client contract

R4 is currently processing a mixed waste collection contract on behalf of LWC at a fixed price. The
contract has raised concerns regarding its profitability and cancelling this contract might have a future
impact on business from LWC as it is currently the largest 3rd party customer of R4.
a) Financial issues:
The contract is currently generating a loss of £26.2k (see Appendix 3) and with a negative G.P
margin of 38.5%. This is against all other contracts in the year 2017 as the MRF was functioning at
a profit of £1/tonne.
As it is a two-year contract the loss for the next full year will be around £104.8k.
The increase in processing costs of 15% for this contract is a major concern and the increase in
general waste on truckloads is contributing to the financial loss on the contract.
If R4 terminates this contract, it could lose the 16,500 tonnes of mixed waste which is necessary to
achieve the mixed waste %age target of 40% by the Local Authority.
R4 can also be financially sued in case the confidential information in Finer Properties Limited is
leaked out which will result in extra legal costs and fines.
b) Operational and strategic issues
The collection is from various buildings in the area of Leeds which not entirely close to its MRF in
Fairleigh. This would result in extra time on routes and can potentially affect other client’s
collections.
Extra staffing and costs is involved due to additional security and supervision resulting in efficient
time management.
The inclusion of coffee cups in the waste collection is a lot and hence can cause difficulty and extra
time of staff in sorting affecting other collection from customers.
The extra truckloads per week can cause wear and tear of the vehicles at a higher rate than
standard also resulting in more frequent replacement of trucks and affecting cash flow.
R4 has a strong reputation in the market and hence has to provide quality customer service with
reliability on its collections and this contract would affect it.
The relationship with LWC is important for R4 to meet its local targets and any future restrictions
which may occur, hence it should continue with the contract with modifications in pricing to be
negotiated with LWC.
c) Business trust issues:
UK government is likely to be strict on its targets and hence the Local Authorities will impose
financial and more strict target penalties on waste collection and processing organisations. This
could also restrict the areas of operation of R4 in the future if targets are not met.
A new organisation SignaCups is promoting the breakthrough of coffee cups recycling which
currently seems very difficult. This would be solved by using special coffee cup bins but this
requires still heavy investment by recycling organisations or charging extra to its clients which is
usually resisted.
Conclusions and recommendations:
The contract is currently generating a gross loss of £26.2k (-38.5%) which is against normal 2017
contracts operating at a profit. It is requiring extra staffing costs and time management. The extra
truckloads per week will be likely to result in more frequent vehicle replacement thereby affecting
cash flow.
The penalties by local Authorities is high risk to R4 as it could significantly affect its operations and
profits.

The coffee cups recycling campaign by SignaCups is low risk to R4 as it is directly related to the
client.
The board should:
1) Negotiate the price for contract with LWC

2) Ask advice from a legal firm regarding potential issues on confidential documents being
readable at Fairleigh.
3) Not cancel the contract with LWC, in order to avoid implication of financial penalties.
4) Ask LWC to contact FP for segregation of coffee cups in a better way.
Appendix 1:
2017 2016 Change

£000 £000 £000 %
(1) Total revenue 55,354 50,998 4,354 8.5%

Gross profit (GP) 8,687 8,046 641 7.9%
G.P% 15.7% 15.8%
2017 Change
£/tonne £ %
(2) Recyclate revenue 92 +6 7.0%

MRF costs 91 0 -
SEWCO collection 325 +35 12.1%
% mixed waste 40%
Change
(3) 2017 2016 £000 % 2017 mix 2016 mix
Revenue:
Mixed
I/C 8,745 7,703 1,042 13.5% 15.8% 15.1%

SEWCO 6,005 6,713 (708) (10.5%) 10.8% 13.2%
3rd party 5,473 4,370 1,103 25.2% 9.9% 8.6%
20,223 18,786 1,437 7.6%
General
I/C 33,177 31,103 2,074 6.7% 59.9% 61.0%

SEWCO 1,954 1,109 845 76.2% 3.6% 2.2%
35,131 32,212 2,919 9.1%
2017 2016 £000 % Margin Margin

2017 2016
Gross profit
Mixed:
I/C 1,830 1,478 352 23.8% 20.9% 19.2%

SEWCO 2,085 2,456 (371) (15.1%) 34.7% 36.6%
3rd party 1,026 619 407 65.7% 18.7% 14.2%
4,941 4,553 388 8.5% 24.4% 24.3%
General
I/C 3,686 3,455 231 6.7% 11.1% 11.1%

SEWCO 60 38 22 57.9% 3.0% 3.4%
3,746 3,493 253 7.2% 10.1% 10.8%

Gross Profit mix
2017 2016
Mixed 56.8% 56.6%

General 43.2% 43.4%
Appendix 2:
£000
SEWCO Fees
(A) Revenue [335 x 30,000] 10,050

(C) Costs [315 x 30,000] (9,450)
G.P 600
G.P margin 5.9%
(B) Recyclates revenue [30,000 x 220 x 60%] 3,960

(D) MRF costs [30,000 x 60% x 91] (1,638)
G.P 2,322
G.P margin 58.6%
Total revenue (A + B) 14,010

Total costs (C + D) (11,088)
Total G.P 2,922
G.P margin 20.9%
Sample SEWCO contract [G.P margin] 30.7%
Exclusivity impact: (on G.P)
2017 SEWCO [proj. to 2018] – [2,085 x 1.049] 2,188k

OB1 G.P earned 2,922k
£734k
Appendix 3:
Revenue composition/sales prices
% per tonne £/tonne £
Paper 60% 80 48
Cardboard 30% 100 30
90% 78
Non-recyclable 10% (100) (10)
100% 68
Total revenue [1,000 x 68] = £68k
MRF costs [£91 x 900 x 1.15] = £(94.2k)
£(26.2)k

(4 HOURS)
CASE STUDY
CANDIDATE NUMBER
page;
examiners.
ICAEW USE ONLY
@ICAEW 2018 244793

BLANK PAGE
ICAEW/CS/J18
July 2018 Case Study: Sequin Cinemas Limited
List of exhibits
1 About you, Leo Malcolm; your employer, Kendall & Vincent ICAEW Chartered
Accountants (KV); and your client, Sequin Cinemas Limited (Sequin)
2 The UK cinema industry
3 The UK cinema industry business model: the small, independent cinema
4 Sequin: history and overview
5 Email dated 20 July 2017 from Lisa Thorn to the Sequin board: Review of the business
for the three years ended 31 May 2017
6 Sequin: management accounts for the three years ended 31 May 2017
7 Sequin: business operations
8 Film Facts (1): Distribution and release
9 Film Facts (2): Cinema catering
10 Film Facts (3): Cinema advertising
11 Sequin: website extracts
12 Sequin’s newest cinema: Hull
13 Sequin: strategic review and risk management
14 Media articles
15 Email dated 25 July 2018 from Stephanie Cousins to you: Sequin
16 Sequin: draft management accounts for the year ended 31 May 2018
17 Email dated 25 July 2018 from Lisa Thorn to Stephanie Cousins: other information
18a Email dated 23 July 2018 from Lisa Thorn to Stephanie Cousins: Derby
18b Note from Terry Nunn-Smith dated 21 July 2018: Proposal for cinema opening in Derby,
together with blog extract
19a Email dated 24 July 2018 from Rosannah Chan to Stephanie Cousins: Conferences and
events
ICAEW/CS/J18 Page 1 of 15
BLANK PAGE
Sequin Cinemas Limited: Case Study requirement
You are Leo Malcolm, a final-year trainee ICAEW Chartered Accountant working at Kendall &
Vincent (KV), a firm of ICAEW Chartered Accountants that has operations throughout the UK.
You work in KV’s business advisory unit, reporting to the partner, Stephanie Cousins. One of
the firm’s clients is Sequin Cinemas Limited, a company operating a chain of UK cinemas.
Requirement
You are required to prepare a draft report for the Sequin board, as set out in the email dated
25 July 2018 from Stephanie Cousins to you (Exhibit 15). Your report should comprise the

Marks allocation

90%
100%
BLANK PAGE
EXHIBIT 15
EMAIL
From: Stephanie Cousins

To: Leo Malcolm
Subject: Sequin
Date: 25 July 2018
The Sequin board is preparing for the next stage of the company’s development and it has
asked for our advice in this connection. I am attaching the following:
 Sequin’s draft management accounts for the year ended 31 May 2018 (Exhibit 16)
 An email from Lisa Thorn: other information (Exhibit 17)
 An email from Lisa Thorn about a proposed new cinema opening in Derby (Exhibit 18a),
together with a note from Terry Nunn-Smith and a blog extract (Exhibit 18b)
 An email from Rosannah Chan about plans to enter the conferences and events market
(Exhibit 19a), together with related media articles (Exhibit 19b).
Please draft for my review a report addressed to the Sequin board. The report should
comprise the following.
1. A review of Sequin’s management accounts for the year ended 31 May 2018 in
comparison with the year ended 31 May 2017.
Your review should be based on the management accounts as set out in Exhibit 16.
It should cover admissions and occupancy, revenue, gross profit and operating profit,
referring as necessary to the table and commentary in Exhibit 17. You should also
advise the board on the action that it should take in respect of the Grimsby catering
issue (Exhibit 17).
2. An evaluation of the proposal to open a cinema in Derby, as set out in Exhibit 18a.
Using the information in Exhibit 18a and Exhibit 18b, you should determine whether the
Derby cinema is expected to break even for the first year after opening, based on
Sequin’s usual criteria. You should assess the adequacy of the assumptions and advise,
with reasons, on whether Sequin should proceed. You should also respond to the
request for our views on the proposed student membership scheme (Exhibit 18a).
3. An evaluation of Sequin’s plan to enter the conferences and events market (Exhibit 19a).
You should evaluate the financial, operational and strategic issues relating to the plan,
together with any ethical and business trust considerations, including those arising from
Exhibit 19b. Your evaluation should cover all aspects of the plan, including catering.
Please provide supporting calculations.
BLANK PAGE
EXHIBIT 16
Sequin: draft management accounts for the year ended 31 May 2018
31 May
2018
Note £000
Revenue 1 7,138
Cost of sales (2,533)
Gross profit 4,605
Operating expenses – cinemas 2 (2,339)
Administrative expenses – Head Office (1,670)
Financial income 12
Financial expense -
Income tax expense (122)
Non-current assets
Property, plant and equipment 3 400
400
Current assets
Trade and other receivables 4 221
Cash and cash equivalents 1,451
1,672
TOTAL ASSETS 2,072
Equity and liabilities

Ordinary shares 150
1,486
Current liabilities
Trade and other payables 5 464
Tax payable 122
586
TOTAL LIABILITIES 586
TOTAL EQUITY AND LIABILITIES 2,072
Statement of cash flows 31 May
2018
£000
Cash flows from operating activities
Operating profit for the period 596
Adjustments for:
Depreciation 304
(Profit)/loss on disposal of property, plant & equipment 14
914
957
Tax paid (157)
Net cash generated from operating activities 800

Acquisition of property, plant and equipment (102)
Proceeds from disposal of property, plant and equipment 6
Interest received 12
(84)
Cash flows from financing activities

Interest paid -
Net cash generated from financing activities -
Net change in cash & cash equivalents 716

Cash and cash equivalents at start of period 735
Cash and cash equivalents at end of period 1,451
1 Revenue
£000
Box office 5,884

Food and drink 728
Advertising 526
7,138
2 Operating expenses – cinemas £000
Staff 1,162
Marketing 216
Premises 961
Pre-opening costs -
2,339
3 Property, plant and equipment
Leasehold Furniture, fittings TOTAL

improvements and equipment
£000 £000 £000
Cost
At 31 May 2017 822 373 1,195
Additions 71 31 102
Disposals (55) (12) (67)
At 31 May 2018 838 392 1,230
Depreciation
At 31 May 2017 385 188 573
Disposals (30) (17) (47)
Charge for the year 209 95 304
At 31 May 2018 564 266 830
Carrying amount
At 31 May 2018 274 126 400
4 Trade and other receivables £000
Trade receivables 117

221
5 Trade and other payables £000
Trade payables 331

Accruals 133
464
6 Performance data
Admissions (thousands) 653

Films shown in year (number) 114
Customer satisfaction rating (%) 93%
BLANK PAGE
EXHIBIT 17
EMAIL
From: Lisa Thorn
To: Stephanie Cousins
Subject: Other information
Date: 25 July 2018
Table and commentary: Occupancy, admissions and revenue by cinema for the
year ended 31 May 2018
Revenue Revenue Operating

Occupancy Admissions Box office Food/drink expenses
% No. (000) £000 £000 £000
Leicester 32.9 205 1,855 244 (690)
Nottingham 31.0 129 1,150 146 (555)
Grimsby 28.7 209 1,919 226 (654)
Hull 35.3 110 960 112 (440)
31.4 653 5,884 728 (2,339)
1. We again kept our ticket prices unchanged throughout the year. There was also no
change in the number of screens, weekly screenings or seats at any cinema.
2. We held a family festival at all four cinemas in January, showing 10 new children’s films
from our distributor Probe. This generated £200,000 of extra box office revenue.
3. We increased by 10% the average amount of advertising before each screening.
4. On 1 March, our rival Quantum opened a four-screen cinema close to our Nottingham
cinema, after our objection was overruled. Our admissions at Nottingham for the period
1 March – 31 May were 25% lower than for the same period last year. We spent a total of
£55,000 in March/April on extra marketing and recruitment (as several staff left to join
Quantum).
5. Hull cinema has rapidly become a focal point for students, with higher midweek occupancy
than at our other sites. We appointed a student marketing manager on 1 December. Hull’s
customer satisfaction rating was 98%, the highest figure ever for any of our cinemas.
6. In July 2017, we paid a one-off staff bonus to mark 1.5 million admissions since Sequin
opened. The total cost was £60,000 for cinema staff and £75,000 for Head Office staff.
Grimsby catering issue
In reviewing our catering fees from Jewel for the month of May 2018, we discovered that the
fees from Grimsby were lower than we would have expected, based on the usual figures for
Grimsby and for our other sites. This was also confirmed by our big data analysis of Sequin
admissions and customer spending patterns for all our cinemas.
Further enquiries and discussion with the Jewel manager at Grimsby revealed that he had
adjusted the detailed split of Jewel’s revenue in his monthly return to Sequin for May 2018 to
show lower counter sales and higher restaurant sales. He said that he was following what the
previous manager, whom he had replaced in April, had noted as the best operational policy
for the cinema. The previous manager had also told him that it did not look good for Jewel to
be selling so much confectionery and soft drinks, especially to children – and at a time when
there was a heightened media focus on junk food.
EXHIBIT 18a
EMAIL
From: Lisa Thorn
Subject: Derby
Date: 23 July 2018
We are now considering an opportunity (see Exhibit 18b) to increase our portfolio by opening
our fifth cinema (including a ‘Jewel’ restaurant) in Derby, a city in the East Midlands which is at
least 20 kilometres from Leicester, Nottingham, Grimsby and Hull. As with our existing cinemas,
this is an old cinema that we would be redeveloping under the Sequin name.
There will be three screens: 50, 100 and 200 seats – a total of 350 seats. Each screen will have
20 screenings per week.
As well as fitting in with our expansion plans, this gives us an opportunity to try out a new
style and décor, which we believe will enhance admission numbers and use of the restaurant.
We need to evaluate this opportunity, using our usual breakeven criteria, for the first 12 months
after opening. My assumptions are set out below.
Assumptions
1. Average occupancy rate 30%

2. Ticket prices See below
3. Gross profit margin on box office revenue 57.5%
4. Catering revenue (fees from Jewel) £150,000
5. Pre-opening costs £60,000
6. Operating expenses – cinema (including rent and depreciation of fit-out costs) £435,000
7. Administrative expenses – Head Office £140,000
8. Fit-out costs (leasehold improvements, fixtures and fittings) £225,000
Development work will begin on 1 October 2018 and take two months to complete, enabling the
cinema to open on 1 December 2018.
With regard to ticket prices, we will use Derby as a pilot for our proposed new tariff, as follows:
Monday – Thursday Friday, Saturday & Sunday

Adult £8 £14
Concession £8 £8
Of total tickets sold, we estimate that 80% will be at £8 and 20% at £14.
Student membership scheme
After one year, if Derby has broken even, we would like to use it as a pilot for a membership
scheme specifically for students. For a fixed £100 annual fee, members will be entitled to see
20 films in the year, with priority booking for new releases. We would welcome your views on:
1. the likely impact of the scheme on occupancy;

2. the capability of our box office system Tickbox to implement and operate the scheme; and
3. the data that Tickbox could capture to enable Sequin to evaluate the scheme’s success.
EXHIBIT 18b
Proposal for cinema opening in Derby (prepared by Terry Nunn-Smith, 21 July 2018)
We have been looking for some time for another site that fits in with our philosophy and is
located in an area with a suitable demographic profile.
An opportunity has now arisen with an old cinema in Derby called Flick. Originally built in the
1930s, Flick closed down in 2011 as the owners were not prepared to spend the money to
modernise it or to adapt it for digital cinema, which might have provided competition for the
nearby multiplex. There was an outcry from the large local student population, who felt
deprived of a local venue that had relied heavily on the custom of young cinema-goers for
several decades. In the meantime, the multiplex began giving free tickets to students on
Mondays.
Taylor Stone approached me to see if we would be interested in redeveloping Flick (which has
good all-day parking facilities and is close to local bus routes). The local authority has told
Taylor Stone that it will grant permission for the site to be redeveloped and converted into a
modern cinema.
Sequin would have to agree to pay Taylor Stone an annual rent of £110,000 for five years from
the date of opening, in exchange for full operational responsibility.
I said that I would discuss the proposal with my fellow directors, we would evaluate it using our
normal financial criteria and come back with an answer by the end of July. After the first year, if
the breakeven target has not been met, we will consider the position and conduct any further
marketing or remedial action required.
While we still need to do our normal business planning, I am confident – based on social
media comment (see examples below) – that Derby can be an excellent addition to our
portfolio – and to the local entertainment scene.
Indy-cine Blog, 20 July 2018
Are you – like me – tired of the lack of options for us film enthusiasts in Derby? I mean, how
many blockbusters are we expected to watch in a month? What are we students supposed to
do with our time? Will we soon see the day when the University Film Club exists only
virtually, with members watching their favourite films on handheld devices and never getting
together to enjoy what was always a great social occasion?
-----
JT comments: I couldn’t agree more, my friend!
----
Tom L comments: There’s a rumour that the old cinema Flick might soon be reopening. If so,
I can’t wait …
---
Film Phil comments: All my friends at the college agree that we need a cinema that shows
not just blockbusters but also niche foreign language films and other specialist titles.
EXHIBIT 19a
EMAIL
From: Rosannah Chan
Subject: Conferences and events
Date: 24 July 2018
We are considering a plan to enter the conferences and events market, initially on a trial
basis for one cinema only (Nottingham), for six months (1 December 2018 – 31 May 2019).
The events would all be one-day corporate events (conferences, product launches,
presentations, workshops/seminars). They would typically start at 9.00 and end at 22.00. If
the trial is successful, we would extend it to other cinemas.
Our initial estimates are set out below.
Number of events 13
Number of delegates per event (average) 125
Revenue and costs per event (average) £
Revenue (conference fee) 10,000
Event costs
Share of revenue paid to caterer (2,500)
Other costs (1,000)
Gross profit 6,500
Administrative and operating expenses (4,000)
The cinema screens will be the main locations but we will also use other parts of the building,
especially the restaurant.
We will need to discuss this with Jewel as it would be the converse of our normal catering
arrangements: we will be paying Jewel a share of the overall event revenue (conference fee)
rather than receiving a monthly fee from Jewel. Alternatively, we could consider using a
separate catering subcontractor for conferences.
Clients will pay 50% of the total fee on booking and the other 50% one week before the event.
We will hold all events on Tuesdays or Wednesdays. We will be governed by the dates chosen
by clients, which in turn will often be determined by regular calendar slots. For all events, the
building (cinema screens and restaurant) will not be available to the general public throughout
the event, but it will be available for normal use until the end of the previous day and from the
start of the next day.
We already have one expression of interest. I met yesterday with Theo’s sister Helen Young,
CEO of a large clothing manufacturer in the East Midlands. She committed to two one-day
events by 31 May 2019. As part of the agreement, she wants us to give each of her 250
employees two free tickets for a film at a Sequin cinema. I said that the board would need to
discuss this.
RECENT MEDIA ARTICLES
EXHIBIT 19b
Cinema chain reaps rewards of diversification (East Midlands Monthly, July 2018)
After a period of steady decline, caused by strong competition from a nearby multiplex,
Fulword Films is now on the way back.
In the three months to 30 June 2018, Fulword held six one-day events at one of its cinemas.
Revenue and margins have varied considerably, depending on delegate numbers (which
have ranged from 50 to 250) and the type of event. The average operating margin so far has
been 15%.
Fulword’s cinemas all have restaurants, which Fulword runs itself. However, for conferences
and events, Fulword is using an outside caterer (an international company specialising in this
type of catering).
Fulword’s Head of Business Development, Gerry Sadler, commented that the timing of
events hasn’t always been ideal. Fulword missed out on the chance to capitalise on a major
blockbuster because it was released during a week when two corporate events had been
booked several months in advance.
Sadler had also not realised how much time would be involved in the initial set-up of the new
events activity. This included winning clients, adapting to a different catering arrangement
and liaising with distributors (who were not at all happy about Fulword’s new strategy, saying
that it contravened the terms of their standard agreements). He also stressed the importance
of having watertight contracts with all parties. “It will have been worth it if the clients come
back for more, but at present it is hard to predict how much repeat business we will get.”
Conferences: the pitfalls and the perils (Workplace Weekly, June 2018)
Can any company decide to hire out its premises for use by other organisations?
A simple question, you might think – but the answer is far from simple. Take, for example, the
case of a cinema. It exists primarily to show films, and it may well also have a restaurant. It
will probably have all the necessary licences and permissions to carry out these activities, eg,
to keep sound levels at a reasonable limit and to serve food.
But if a cinema decides to extend its activities – for example, to host office parties for local
businesses into the early hours of the morning or to stage company seminars – it may not be
covered by existing licences.
If you are not sure, read the small print. Failing to check could be very costly indeed.
Contents
Page
Introduction 2
Exam requirements 10
Requirement 1: Review of Sequin’s financial performance 15
Requirement 2: Evaluation of Derby cinema proposal 16
Requirement 3: Evaluation of conference/events plan 16
Part 4: Appendices
Appendix 1: Financial statement analysis: Sequin’s financial performance 18
Appendix 2: Financial data analysis: Calculation of breakeven for Derby cinema 20
Working for Requirement 3: Calculations for conference/events plan 21
Part 5: Marking key

Introduction
Attached to this report are two appendices plus a further attachment entitled ‘working’. These give examples of
the sort of financial analysis that candidates did, or might have done. The two illustrative scripts offer further
insights into this area.
candidates showcased their higher skills and used the four hours effectively. They produced methodical, well-
balanced, relevant scripts that answered each component of each requirement and contained high-quality
financial analysis; sound judgement; commercial recommendations; and succinct, focused executive
summaries. They were able to assimilate the case material into a report, demonstrating business awareness
and appropriate professional scepticism. They had clearly prepared well, making the necessary effort to
master the Advance Information for themselves and to hone their exam technique.
The subject of the case is Sequin Cinemas Limited, a company operating a chain of four cinemas in the UK.
Revenue for the year ended 31 May 2017 was £6.6 million. The candidate is in the role of Leo Malcolm, a
final-year trainee ICAEW Chartered Accountant working in the business advisory unit of Kendall & Vincent
(KV), a firm with operations throughout the UK, and reporting to the partner, Stephanie Cousins.
1. An analysis of Sequin’s admissions, occupancy, revenue, gross profit and operating profit for the year
ended 31 May 2018 by comparison with 2017, together with the evaluation of an ethical issue.
2. An evaluation of the proposal to open a new cinema and a subsequent new membership scheme.
Candidates had to undertake calculations, assess the adequacy of assumptions and make a decision.
3. An evaluation of Sequin’s plan to enter the conferences and events market, covering financial,
operational, strategic, ethical and business trust issues and including supporting calculations.
Each requirement contained several parts, and candidates had to identify these and then tackle them in an
orderly manner.
Candidates who failed included those managing their time badly, which led to unbalanced scripts (incomplete
Requirement 3; rushed executive summary). The three main sections of the report were equal in importance:
candidates overrunning on Requirement 1 inevitably jeopardised their chances on the other sections. They would
have benefited from planning at the outset the structure for each part – an important discipline for this exam. The
Examiners reiterate their advice to candidates to tackle the requirements in the order set. For Sequin, this would
have enabled them to use the output from their financial analysis at R1 to evaluate the assumptions at Requirement
2 and as context for assessing the impact of the plan at Requirement 3 on Nottingham.
Another cause of failure lay in the quality of candidates’ recommendations. The lower end of the cohort was
characterised by an inability, across all three requirements, to offer appropriate, commercial advice (which,
after all, is what the client would ultimately be paying for) based on their work.
Assimilating and Using Information (A&UI): Candidates provided good evidence of competency under this
heading. At Requirements 1 and 2, they integrated effectively the financial information in the AI and EP. At
Requirement 3, the numerical work – which is less predictable in its scope – was less well done. For all three
requirements, candidates demonstrated the ability to articulate the business issues and wider context.
Structuring Problems and Solutions (SP&S): Many displayed excellent analytical skills in their number-work
for Requirements 1 and 2, and for their initial work on the student membership scheme (Requirement 2) and

the ethical issues at Requirement 3. At the other extreme, fewer than half of candidates gained passing
grades for identification of the Grimsby issue at Requirement 1. Fewer still did so for their opportunity cost
calculations or for their discussion of operational and strategic issues at Requirement 3.
Applying Judgement (AJ): AJ was again poor across all three requirements (though on this occasion slightly
better than C&R). At Requirement 1, candidates did well in the first two boxes. For box 3 – consistently with
the performance at SP&S – evaluation of the Grimsby issue, and related recommendations, were less well
done. For Requirement 2, candidates struggled to evaluate the output from their breakeven calculations.
They were much better at evaluating the assumptions. Only a minority evaluated the membership scheme
well or provided appropriate recommendations. For Requirement 3, box 3 was poorly done, candidates
finding it difficult to evaluate the ethical points they had identified, especially on one particular issue.
Conclusions and Recommendations (C&R): There was a polarised performance here, with the overall outcome
that for this session it was the weakest skill. At each of the Conclusions boxes, more than half of candidates
gained a passing grade; but only a minority did so on each of the Recommendations boxes. For Requirement 1,
recommendations were adequate in some areas but not others. For Requirements 2 and 3, they were sparse,
uncommercial or inappropriate (or some combination of these), with only market research – a favourite of Case
Study candidates – featuring prominently at both.
Requirement 1 was, in one tutor’s words, “conventional” in testing financial statement analysis skills. Candidates
should have been well prepared for a review of the 2018 management accounts. The challenge was to integrate
the additional financial and non-financial data at Exhibit 17 into a coherent narrative on Sequin’s performance by
working through the information systematically – and without spending too much time on excessive analysis.
Many covered the principal items in the accounts with correct calculations and developed their work into more in-
depth analysis. The Grimsby issue proved to be a differentiator: weaker candidates did not evaluate it well. A few
suggested that Sequin should terminate the Jewel contract. There was also some evidence of overemphasis on
the ‘junk food’ aspect.
Requirement 2 was well answered. The vast majority of calculations were correct, indicating that candidates had
familiarised themselves with the template at Exhibit 12. Having done their calculations, they were expected to
go on and look at the key assumptions and comment with due professional scepticism on each. The basic
evaluation was in fact well done. Many also flexed their figures to show, for instance, the impact of a lower
occupancy rate. The main weaknesses at Requirement 2 were in failing to evaluate and advise on the student
membership scheme, which required more original thinking, and in overall recommendations.
Requirement 3 again yielded the lowest scores of the three requirements. Candidates found it challenging
and many did not leave time for sufficient analysis. Although they did well in their initial financial analysis of
the plan, candidates struggled with producing sensible opportunity cost calculations. Weaker ones also
ignored the specific request to address catering issues in their discussion. Better candidates displayed a
strong awareness of the AI and the wider context – in the case of catering, the final section of Exhibit 9 and
the initial article about Sequin’s rival Fulword Films (Exhibit 14d). Evaluation of ethical issues was poor.
Many automatically assumed that Helen Young’s request for free tickets constituted a bribe.
In summary, the Sequin case dealt with an industry that was within candidates’ personal experience and with an
appropriate level of numerical content for students on the verge of qualifying as ICAEW Chartered Accountants.
Tutors noted that “there was nothing … that should have caused candidates concern … and they were not asked
to do anything unfair or outside their capabilities”; that “the exam contained no unexpected twists or hidden
subplots .... Time management and careful selection of calculations in Requirement 1 will be pivotal to success”;
and that “the July 2018 exam paper is very much in line with recent case sittings ...” The Examiners concur with
all these assessments.

The case relates to Sequin Cinemas Limited, a company operating a chain of four cinemas (a total of 12 screens)
in the East Midlands region of the UK. Around 82% of revenue comes from ticket sales (box office), the rest from
screen advertising and fees received from Jewel, to which Sequin subcontracts the food and drink (F&D) activities
in each cinema. Revenue for the year ended 31 May 2017 was £6.6 million (up 51.8% on 2016), generating gross
profit and operating profit of £4.3 million and £0.8 million respectively (both also significantly up on 2016). The
increases reflect the impact of growth in capacity, two of the four cinemas having opened in the past 18 months.
Sequin uses a single company (Taylor Stone – TS) to identify suitable sites and then develop them in line with its
requirements. TS takes on the ownership of the sites: Sequin operates them and pays TS an annual rent. Formed
in 2012, Sequin has built up slowly to its current portfolio: its target is to reach 12 cinemas / 30 screens by 2022.
The candidate is in the role of Leo Malcolm, a final-year trainee ICAEW Chartered Accountant working in the
business advisory unit of Kendall & Vincent (KV), a firm with operations throughout the UK, and reporting to
the partner, Stephanie Cousins.
series of exhibits relating to Sequin and the industry in which it operates, comprising:
1 About you, Leo Malcolm; your employer, Kendall & Vincent ICAEW Chartered Accountants (KV); and
your client, Sequin Cinemas Limited (Sequin)
2 The UK cinema industry
3 The UK cinema industry business model: the small, independent cinema
4 Sequin: history and overview
5 Email dated 20 July 2017 from Lisa Thorn to the Sequin board: Review of the business for the three
years ended 31 May 2017
6 Sequin: management accounts for the three years ended 31 May 2017
7 Sequin: business operations
8 Film Facts (1): Distribution and release
9 Film Facts (2): Cinema catering
10 Film Facts (3): Cinema advertising
11 Sequin: website extracts
12 Sequin’s newest cinema: Hull
13 Sequin: strategic review and risk management
14 Media articles

of Sequin and the industry, using facts and figures from across the material. Candidates should be aware of
(Additional examiner commentary is given in this font, with emphasis on links between exhibits.)
Exhibit 1 sets the context and summarises Leo’s work. Exhibit 2 provides background to the UK cinema
industry. It contains a brief overview, explaining the ranges in size of cinema (including the ‘big three’ chains),
developments in technology and recent market performance (underlying growth). It offers definitions of some
key terms, notably the three key revenue streams – box office, food and drink, advertising (consistent with
Sequin) – and the interrelationship between them. It also considers the different genres of films and the
differences in tastes and demographics of cinema audiences.
Exhibit 3 builds on this by drilling down into the business model of the small, independent cinema – the category
in which Sequin belongs – under the headings ‘demand forecasting’, ‘premises’, ‘catering’, ‘advertising and
marketing’ and ‘industry requirements’. This exhibit offers a flavour of some key features of the industry, to be
developed in later exhibits (to which it is cross-referenced). The section on demand forecasting in particular
requires attention: it gives an illustration of the build-up of admissions, occupancy and box office revenue for an
example company operating two cinemas, supplemented by an explanation of the typical micro-seasonality in
cinema admissions (60-70% at weekends).
(These topics all give the broader backdrop against which Sequin can be viewed. The exhibits between them provide context
for the case and create a ‘level playing-field’ so that candidates do not have to carry out extensive research of their own.)

Exhibit 4 documents Sequin’s history, key personnel, current position and some important features.
 Sequin was formed in 2012 by three arts enthusiasts, to be a ‘destination of choice’ for cinema-goers,
especially young professionals, families with young children and over-55s (cf demographic data at Exhibit 3).
 Sequin engaged a property development company, Taylor Stone (TS) to find an old, disused cinema in the
East Midlands. TS would purchase the site, while Sequin would pay the fitting-out costs and an annual rent.
 The first cinema, Leicester, opened on 1 June 2013 with 2 screens (600 seats) and a restaurant. This also
became Sequin’s headquarters. The core box office activity was a success but not catering: Sequin only just
broke even in year 1 (31 May 2014). As a result, it outsourced all catering to another company (Jewel).
 The second cinema, Nottingham (2 screens, 200 seats), opened on 1 June 2014, followed by Grimsby (4
screens, 700 seats) on 1 December 2015 and Hull (2 screens, 300 seats) on 1 June 2016.
 All cinemas have 20 weekly screenings per screen, all are on 5-year leases and all have Jewel restaurants.
 Sequin seeks to achieve breakeven for the first 12 months of opening, roughly equating to 30% occupancy.
 Ticket prices, unchanged since 1 June 2015, are in two tiers: £12 (adults at weekends) and £8 (adults on
weekdays and ‘concessions’ – effectively all other customers – on any day).
 The directors are the founders – Lisa Thorn (Finance/IT), Alastair McBride (Sales/Marketing), Theo Demetriou
(Legal/Technical) – plus Rosannah Chan (Business Development) and Terry Nunn-Smith (Property/Facilities).
(This sets the scene for the next two exhibits, as well as linking ahead to the detail in later case material.)
Analysis of Exhibit 5 (business review) and Exhibit 6 (May 2017 management accounts, with comparatives for
2015 and 2016) would reveal the following. (Note: The analysis below is a synthesis of these two exhibits, together with
some additional calculations based on their contents. It should be readily apparent that the two documents are to be reviewed
in conjunction with each other; looking at either of them in isolation would tell only part of the financial story.)
Exhibit 5 begins by explaining each of the key captions in the statement of profit or loss. Important points are:
 Box office and catering revenue is presented for each cinema; screen advertising, for the whole business.
 Cost of sales = distribution fees on box office revenue. There is no cost of sales for catering or advertising,
so box office gross margin is seen as a more useful performance measure than overall gross margin.
 Operating expenses are higher for larger cinemas but the correlation is not directly proportional with size.
 Administrative expenses tend to be semi-variable, increasing whenever a new cinema opens.
The business review for each year is accompanied by a table showing occupancy, admissions, revenue and
operating expenses by cinema.
Statement of profit or loss – revenue, gross profit, admissions and occupancy
 After rising by 47.4% to £4,332k in 2016, total revenue grew by a further 51.8% in 2017, to reach a total of
£6,577k (box office: £5,447k; F&D: £675k; advertising: £455k). (These figures highlight the fact that Sequin is
still very much in a growth phase and has not yet reached a steady state.)
 The revenue increases were similar across the three streams – hence the mix has remained relatively constant,
reflecting the close interrelationship between them, both for Sequin and the industry as a whole (Exhibit 2). Box office
accounts for the vast majority (82-83%) of revenue. F&D reflects the outsourcing of catering for the full 3-year period.
 Box office revenue increases reflect the rise in absolute admission numbers (2015: 289k; 2016: 400k; 2017:
606k) and overall occupancy (2015: 27.8%; 2016: 28.5%; 2017: 29.1%). With Sequin’s tariff unchanged since
2015, the revenue increase is therefore due to volume rather than price. However, there is some variation because of
mix in ticket sales: the share of £12 tickets can be worked out algebraically as 25.3% in 2016 and then 25.8% in 2017.
 In 2017, record box office revenue reflects “a greater range of films than in the past” – linking partly to the
figure for films shown in the year at note 6 (up from 99 to 107).
 Advertising revenue in 2015 “was slightly below the budgeted amount (8% of total box office revenue)”.
(This budgeted figure is consistent with the benchmark of 5-10%: see Exhibit 10 below.)
 Gross profit rose by £941k (49.6%) to £2,836k in 2016 and then by £1,497k (52.8%) to £4,333k in 2017.
 Overall gross profit margin has risen steadily, reaching 65.9% for 2017. Gross margin on box office revenue
(the “more useful performance measure”) has also gone up gradually over the period, standing at 58.8% for 2017.
 The changes in gross margin are explained by a series of comments at Exhibit 5: (2015) “Families were
also enticed by our decision to show more mainstream films”; (2016) “… expansion put us in a better
negotiating position with our distributors”; (2017) “The “further improvement … reflects the effect of showing
fewer mainstream films”. These comments link to Exhibit 7 (re distribution and release) and also reinforce the
primacy of box office gross margin over overall gross margin.
 A ‘Bollywood Festival’ and ‘Retro Month’ generated £240,000 at box office. As well as the revenue impact,
these further explain the improvement in gross margin as they will have involved non-mainstream films.

The commentary below focuses on the four cinemas individually.
Leicester
 The figures show steady increases in admissions/occupancy. In 2016, Leicester reached 30% occupancy
– the critical industry benchmark (Exhibit 3) – then in 2017 the milestone of 200,000 admissions in a year.
 F&D needs to be rationalised as it is not directly comparable following the outsourcing of catering at the start of 2015.
For 2015 onwards, it represents a weighted average of 10% and 20% on Jewel’s revenue (Exhibit 7). Thus, if Sequin’s
2015 revenue is grossed up by (say) 15%, it would correspond to Jewel revenue of £193k / 0.15 = £1,287k – a significant
increase on Sequin’s 2014 in-house revenue (£929k – Exhibit 4), even after adjusting for the rise in admissions. This
reinforces the comment (Exhibit 5) that ‘the reputation of the rebranded restaurant helped raise the profile of the cinema
itself, especially to family groups’.
Nottingham
 The 2015 commentary states: “The audience mix (higher proportion of children and senior citizens) meant
that we achieved lower average ticket revenue per admission than Leicester. In addition, these young and
old visitors spent less per head on food and drink than other age-groups.” This needs to be rationalised:
o Dividing box office revenue by admissions gives average ticket price of £8.44 vs Leicester’s £8.51. Ticket
prices are lower for ‘concessions’ (including children and senior citizens), so the differential is explained.
o Similarly, F&D revenue per admission can be calculated as £0.99 vs. £1.05 for Leicester.
Candidates would be expected to carry out such analysis for each cinema to understand the key revenue drivers.
 Developing this for the next two years would show average ticket price rising to £8.85 in 2016, £8.88 in 2017; F&D
revenue to £1.09 and £1.12. The big increase in average ticket price for 2016 largely reflects the increase in actual
prices at the start of that year (Exhibit 7); the general upward trend reflects further variations in the admissions mix.
 In its third year – just as Leicester did – Nottingham reached the important landmark of 30% occupancy.
Grimsby
 Grimsby’s first-year revenue “was boosted by a higher number of £12 admissions than at our existing sites”.
Carrying out similar analysis to that for Nottingham (above) would confirm a much higher average ticket price (£9.12).
This partly offsets the impact of lower occupancy – highlighting the important interaction between price and volume.
 “Grimsby had a strong first two months (December–January), with some judicious marketing through social
media and local radio.” This suggests that, with low occupancy overall (for a half-year that included the busy
Christmas season), the figures for the following four months were poor.
 Full-year 2017 figures were more than double those from the six months in 2016. Occupancy also went up.
Although it remains below that for other cinemas, the higher concentration of £12 customers – average ticket price is
now £9.15 – more than compensates for this shortfall.
Hull
 “There was an excellent performance by Hull in its first year. As expected, a significant number of the
admissions … have been students.” Once more, the statements would be confirmed by further analysis. In
addition, the later schedule on Hull (Exhibit 12 – see below) would be a crucial companion document.
Statement of profit or loss – operating expenses, administrative expenses and operating profit
Operating expenses are classified in two different ways in the AI – by category (note 2 to the management
accounts) and by cinema (analysis in Exhibit 5).
 Roughly in line with revenue and the expansion of the cinema portfolio, operating expenses rose by £518k
(56.2%) to £1,439k in 2016 and by £669k (46.5%) to £2,108k in 2017.
 Three of the four categories (staff, marketing and premises) went up. The fourth (pre-opening expenses)
depends directly on whether any cinemas are developed in the year: for the three-year period, only in 2016
(Grimsby and Hull) were any such costs incurred – Hull £51k and Grimsby (by deduction) £45k.
 The full-year figures for 2017, with all cinemas open for the whole 12 months, reflect the earlier comment:
“Operating expenses are higher for larger cinemas but the correlation is not directly proportional with size.”
 “Grimsby had a strong first two months (December–January), with some judicious marketing through social
media and local radio.” This explains the proportionately high operating expenses for the first (six-month) period.
 Administrative expenses rose less drastically, by £276k (32.1%) to £1,137k in 2016 and by £305k (26.8%)
to £1,442k in 2017 – reflecting the semi-variable nature of these costs.
 As a result of all these changes, operating profit increased sharply over the period, doubling in 2016, then
trebling in 2017: 2015: £113k; 2016: £260k; 2017: £783k (margins of 3.9%, 6.0% and 11.9% respectively).

 The 2017 commentary states: “We exercised good control over administrative expenses .... In particular,
our fixed staff and marketing costs at Head Office can now be spread more effectively; we would expect to
see continuing improvement in the operating margin – a good reference-point for any 2018 analysis in the exam.
 Property, plant and equipment has moved up and down across the three years – in line with changes to the
portfolio. For 2016, there were additions of £611k, as both Grimsby (much bigger than Sequin’s other cinemas) and Hull
were both fully developed in that period. Additions in 2015 and 2017 were much smaller as there were no new cinemas
in either year. Depreciation has moved in line with the expansion.
 Trade and other receivables (including amounts due from Jewel and advertisers) have moved steadily in line
with revenue growth. As this is a cash/card business, amounts due from customers will always be relatively low.
 Similarly, trade and other payables (amounts due to suppliers of goods and services) have risen in line with
the expansion of the business.
 The cash balance has fluctuated over the period: 2014: £(296k); 2015: £(90k); 2016: (£259k); 2017: £735k.
 With working capital relatively low, there is little difference between operating profit and cash from operations.
 The main driver of any changes between profit and cash is therefore the level of capital expenditure. This was
especially apparent in 2016, featuring the development of Grimsby and Hull; and 2017, when the overdraft
was finally cleared in a year with no major capital spend and four cinemas open for a full 12 months.
Other analysis
 Sequin’s website was relaunched in 2017, achieving record numbers of visits and online bookings. This
may be a contributor to the general growth in admissions during the year.
 The commentary on 2017 mentions one of Sequin’s items of performance data – customer satisfaction
ratings – with specific reference to Leicester and complaints about the excessive length of adverts. This
could suggest the need to reduce the amount of advertising. (See Exhibit 7 below – re marketing – and Exhibit 10.)
 Exhibit 5 ends with Sequin’s ‘future developments’, in particular its 2018 goals (30% occupancy, £6 million
box office revenue). This information is likely to be relevant to any analysis of the 2018 management accounts.
could then analyse the results by cinema as well as highlighting the issues likely to be important in carrying out such
analysis, whether for the company as a whole or for individual cinemas.
Exhibit 7 expands on the key features of Sequin’s business operations.
Film distribution and exhibition (see Exhibit 8 below for context)
 Sequin works with four distributors, whose fees vary with the type of film shown and week of the film’s run.
 At any one time, cinemas will be showing films at different stages in their runs.
 About two-thirds of admissions occur at weekends; the remainder are evenly spread across the other four
days of the week. This is an important point that links back to the information seen earlier at Exhibit 3.
The exhibit goes on to present the profile of a typical mainstream film at Hull over its four-week run. It shows
numbers of screenings per screen and admissions by ticket price, enabling revenue, gross profit, occupancy
and average revenue per admission to be calculated. This table brings together information from across the rest of
the AI. In particular, candidates can see how the key figures in the management accounts are built up for Sequin overall.
Booking, ticketing and technology
 Tickets can be bought by phone; online (via Sequin’s website/app); or at the cinema.
 The new box office and ticketing system, Tickbox, generates sales/admissions data plus other useful
management/financial information.
Catering
 The Jewel agreement is renewable on 1 June 2019; there are also separate agreements for each cinema.
 All four restaurants have the same menu and prices (frozen until 1 June 2019), but vary in size. (Thus F&D
revenue per admission between years should be roughly comparable.)
 Some people come to eat or drink without seeing a film – another reason for the F&D:admissions ratio fluctuating.

 Jewel buys all the food and drink and pays all catering operating expenses (notably staff costs) – the reason
why there are no costs of sales associated with catering.
 Sequin’s fee, based on monthly data and payable within 28 days of month-end, comprises a fixed 10% of
restaurant F&D revenue, 20% of revenue from counter sales of confectionery/drinks. (See Exhibit 9 below.)
 Sequin checks catering sales against cinema admissions: it would like independent verification in future.
 Jewel managers receive a bonus based on restaurant operating profit.
 Different demographic groups spend different amounts (eg, students spend less in restaurants, more on
confectionery/drinks). (This corroborates the analysis of F&D revenue in Exhibit 5, above.)
Screen advertising
 Sequin and its two advertising partners ensure that adverts shown are suitable for the intended audience.
(A potential ethical issue: see Exhibit 10 re CAA.)
 The current terms have applied since 1 December 2015. (So revenue between years should be roughly comparable.)
Site selection and development
 Sequin works with Taylor Stone (TS) to identify and develop suitable sites (former cinemas). It does not
open a new cinema within 15 kilometres of an existing Sequin cinema.
 Initial market research is developed into a business plan giving expected ‘Year 1’ revenue and costs (a
good indicator of future success). If breakeven is projected for Year 1, Sequin proceeds. (See Exhibit 12.)
 In 2015, Sequin rejected a proposed site (Mansfield) following unpromising market research. (See Exhibit 14c
– problems with another old cinema unsuccessfully revived by one of Sequin’s rivals.)
Marketing, staffing, maintenance and refurbishment
 Sequin mainly relies on its website, enabled for smartphone/tablet use; social media; and its database.
 The database is currently limited; plans are in progress to upgrade it to capture better information (eg, film
preferences), enabling improved scheduling and more focused marketing. (See above re Tickbox.)
 Regular online customer surveys generate an overall satisfaction rating. Sequin overall has not yet achieved
its 95% target but individual cinemas have. (See note 6 to the management accounts at Exhibit 6.)
 Each cinema has 8-12 staff. (This variation partly explains variations in operating expenses between the cinemas.)
 Where full closures for maintenance are needed, they are usually for only a few days midweek, but they
lead to lost revenue and profit (including catering and advertising), possibly also lost audience goodwill.
This is a crucial exhibit, building on the introductory material at Exhibit 4 and accounts plus commentary at Exhibits 5/6.
Exhibits 8-10 provide further industry context to each of Sequin’s three business streams.
Distribution and release
 Distributors and cinema operators negotiate agreements stating the fee that each cinema will pay per film
shown, usually a percentage of box office takings.
 Fees differ between films and over time. They are usually higher at the start: a distributor of a mainstream
film may receive 50% of sales in weeks 1 and 2, reducing to 40% in weeks 3 and 4. (See Exhibit 7 above.)
 The first weekend can account for 30% of total takings, the first week for 50%. (Illustrated in the Exhibit 7 table.)
Catering
 All cinema operators that offer food must decide which of three formats – counter sales of soft drinks, popcorn
and confectionery; small café; full-scale restaurant – to choose. (Sequin offers the first and third at all cinemas.)
 Any of the formats may be either run directly by the cinema itself (Sequin’s original arrangement) or
subcontracted to an external caterer (the current arrangement with Jewel).
 A common subcontracting payment method is the management fee: the subcontractor pays the cinema
operator a fixed agreed percentage of catering revenue and is responsible for the full service (including the
purchase of all food and drink and employment of all catering staff). The rate varies: for restaurants, 10% is
typical; for drinks/confectionery, 20% or more. (This is consistent with the Sequin-Jewel arrangement – see above.)
 If the contract is running badly, managing it can be time-consuming, but any decision to terminate it early
should not be taken lightly as any change can be expensive and disruptive. (A warning for candidates if they
have to deal with any change to the Jewel arrangement – the contract expires in 12 months’ time.)
 Some cinemas are used for conferences and other events, which invariably involve catering. This differs
from normal cinema catering (eg, type of food, fixed meal times). Where it is subcontracted, the payment

model also differs: the cinema collects a fee from the client and passes a proportion to the caterer. (At
Exhibit 14b, a representative of a rival chain stresses the importance of catering for a successful conference operation.)
Advertising
 Advertisers generally buy advertising in weekly blocks. The minimum time unit is usually five seconds; the
price per unit depends on when the advert is shown and the popularity of the film that follows it.
 A typical independent cinema generates 5–10% of its total revenue from on-screen advertising (cf Exhibit 5).
 All cinema adverts must be cleared before production. New rules on adverts for high fat, salt and sugar
(HFSS) food and drink – colloquially referred to as ‘junk food’ – came into effect in cinemas on 1 July 2017.
Exhibit 11 comprises extracts from Sequin’s website, partly reinforcing information already provided but also
giving some further insights into the company’s activities.
(As well as in its content, this exhibit in its style offers a further flavour of the company and the image it seeks to present.)
Exhibit 12, a one-page synopsis of Hull, Sequin’s newest cinema, explains: its previous ownership; TS’s role;
and the opportunity afforded by Hull’s choice as ‘UK 2017 City of Culture’. It sets out the breakeven criteria now
being adopted by Sequin to appraise any new cinema, with a table of figures comparing those in the business
plan for Year 1 and those that actually transpired. A series of footnotes clarifies the basis for some of the figures.
(This exhibit links between the management accounts and the operational data on which Sequin is run: the ‘actual’ figures for
Hull can be directly reconciled to Exhibits 5/6. It notes that “Hull managed to break even overall” – but without showing the
calculation: candidates must prove the assertion themselves. All actual figures can be seen to differ from those in the business
plan: these differences will be for a variety of reasons, which can largely be deduced from the rest of the case material.)
Exhibit 13, prepared by the board in August 2017, sets out the context for Sequin’s future development;
describes its expansion plans; explains the company’s desire to use big data analysis and to review its catering
arrangements; identifies (without any financial data) eight ‘other opportunities’; and summarises the ‘key risks
facing the business’, split between two headings: ‘revenue and admissions’ and ‘distribution fees and other costs’.
(As with any Case Study, the company’s strategy and future plans should be digested carefully as they will inevitably be a
reference-point in the exam. Candidates should have found that the opportunities and risks listed link back to other case
facts – whether in relation to the wider industry, Sequin itself or both – or that they are logical extensions of these facts.)
The AI concludes with a series of media articles (Exhibits 14a-f). The first gives some recent industry statistics.
It is followed by shorter items touching on a range of topics addressed earlier in the AI: the launch of conference
activities by a local rival (Exhibits 9/13); cinema advertising (Exhibit 10); the potential problems associated with
redeveloping and reopening an old cinema (Exhibit 4 [Mansfield]); and big data analysis (Exhibit 13).
(Such articles in the AI shed more light, and offer a different perspective, on issues mentioned elsewhere, “thus reinforcing
the importance of these issues” – tutor comment).
Overall, in one tutor’s words: “The AI provided candidates with the opportunity to develop a comprehensive
understanding of the company and industry. Most would have had some prior understanding of the basic
issues facing the industry … The AI ensured that all were coming into the exam on a level playing field.”

15 Email dated 25 July 2018 from Stephanie Cousins to you: Sequin

16 Sequin: draft management accounts for the year ended 31 May 2018
17 Email dated 25 July 2018 from Lisa Thorn to Stephanie Cousins: other information
18a Email dated 23 July 2018 from Lisa Thorn to Stephanie Cousins: Derby
18b Note from Terry Nunn-Smith dated 21 July 2018: Proposal for cinema opening in Derby, together with blog
extract
19a Email dated 24 July 2018 from Rosannah Chan to Stephanie Cousins: Conferences and events
Exam requirements
Please draft for my review a report addressed to the Sequin board. The report should comprise the following.
1. A review of Sequin’s management accounts for the year ended 31 May 2018 in comparison with the
year ended 31 May 2017.
Your review should be based on the management accounts as set out in Exhibit 16. It should cover
admissions and occupancy, revenue, gross profit and operating profit, referring as necessary to the
table and commentary in Exhibit 17. You should also advise the board on the action that it should
take in respect of the Grimsby catering issue (Exhibit 17).
2. An evaluation of the proposal to open a cinema in Derby, as set out in Exhibit 18a.
Using the information in Exhibit 18a and Exhibit 18b, you should determine whether the Derby cinema is
expected to break even for the first year after opening, based on Sequin’s usual criteria. You should
assess the adequacy of the assumptions and advise, with reasons, on whether Sequin should proceed.
You should also respond to the request for our views on the proposed student membership scheme
(Exhibit 18a).
3. An evaluation of Sequin’s plan to enter the conferences and events market (Exhibit 19a).
You should evaluate the financial, operational and strategic issues relating to the plan, together with any
ethical and business trust considerations, including those arising from Exhibit 19b. Your evaluation
should cover all aspects of the plan, including catering. Please provide supporting calculations.
For Requirement 1, they should then have begun a more detailed review, enabling them to assess Sequin’s
2018 results in light of their analysis of 2017 carried out in preparation for the exam and the new information
(Exhibit 17). For Requirement 2, it was essential to read Exhibits 18a and 18b carefully to identify all critical
assumptions and other issues to be discussed. Finally, for Requirement 3, candidates had to relate Exhibits
19a/19b to relevant material within the case – notably the ongoing problems with Nottingham, Sequin’s
strategy and the mechanics of catering.
 After strong increases in both 2016 and 2017, revenue growth slowed as there were no new openings,
while anticipated new local competition was posing a threat to the established cinema at Nottingham
 The decisions about the new Derby cinema and about the conferences plan both depended on a range of
factors, both financial and non-financial.
 There were extra items to address at both Requirement 1 (Grimsby catering) and Requirement 2 (student
membership scheme). Ignoring either or both of these in their answers was likely to be a high-risk strategy.

Candidates should have recognised that, for the first part of Requirement 1, they were to address both
financial and non-financial data (admissions, occupancy, revenue, gross profit and operating profit) – but
appreciating that these were closely connected. They should have realised the importance of making relevant
use of the additional information provided at Exhibit 17 and how this linked to foregoing material in the AI.
Comparing the 2018 management accounts and ‘other information’ (Exhibit 17) against the original 2017
management accounts (Exhibit 6) and business review (Exhibit 5) would then reveal that:
 After strong growth in 2015 and 2016, revenue is up by a much more modest 8.5%, from £6,577k to £7,138k.
 The smallest component (advertising) has registered the biggest % increase (15.6%) – partly the result of a
10% increase in advertising time before films – but this has little impact on mix, which is broadly unchanged.
 Box office revenue has fallen short of the £6 million target but occupancy has exceeded its target of 30%.
 All cinemas show increases in admissions, occupancy and revenue (both box office and F&D) but there has
been a recent downturn at Nottingham after a rival opened nearby.
 Gross margin on box office has fallen back to previous levels, partly because of a children’s film festival.
 Operating and administrative expenses have risen by more than revenue, partly to combat the ongoing
threat at Nottingham and also because of a one-off bonus paid to all staff.
 The overall impact of revenue and cost changes is a reduction in operating profit margin from 11.9% to
8.3% and – more worryingly – in the absolute operating profit, from £783k to £596k.
 There are issues with the catering at Grimsby. The facts and explanations need to be disentangled.
(Candidates will have expected to analyse the 2018 management accounts and to make use of admissions/occupancy data:
these were all well signposted in the AI and were clearly key business drivers. They will have been relieved to see all these
figures provided in a familiar table format and even more relieved that no cinemas had opened or closed in 2018, enabling
them to make an immediate comparison between the two years. Despite this, there was plenty of new information to analyse.)
For Requirement 2, Exhibit 18a is an email from Lisa Thorn (Director of Finance & IT). It explains that a new site
has been identified at Derby, within the same size range as Sequin’s other sites and within the same region but at
an acceptable distance from them. It is an area with a lot of students – like Hull. It is another former cinema that
has been neglected. The cinema will be used to trial a new style and décor – as well as a change to the existing
tariff (adult weekend prices will be £14 rather than £12) and it will include a Jewel restaurant. Figures are given –
in the same format as for Hull at Exhibit 12 – to enable candidates to determine whether Derby will meet Sequin’s
Year 1 breakeven criteria. If Derby does achieve breakeven, Sequin will pilot an annual membership scheme for
students there: Lisa asks Kendall & Vincent for its advice on certain aspects of the scheme.
Exhibit 18b provides more information about the proposal, including extracts from a student blog. Key points are:
 There is a nearby multiplex which gives free tickets to students on Mondays.

 The annual rent to Taylor Stone would be £110,000 for five years from the date of opening.
 Sequin has to give an answer by the end of July.
 Students are excited about this cinema reopening, especially because of the range of films it will be showing.
(These exhibits gave candidates a clear set of data with which to work for the three parts of the requirement: calculation;
assessment of assumptions; and review of proposed student membership scheme. An initial read should have revealed
that: a logical approach was needed for the calculation, using the Hull example at Exhibit 12; there were numerous
assumptions to query; and there were several issues affecting the choice to be made. As well as the calculation, many of
the points raised should have echoed other exhibits in the case material, including the media articles.)
Exhibit 19a is an email from Rosannah Chan (Director of Business Development), supplemented by two
recent media articles (Exhibit 19b). It provides candidates with the following information for Requirement 3:
 Sequin is considering entering the conferences and events market, initially on a trial basis at Nottingham,
for six months (1 December 2018 – 31 May 2019). The events would all be one-day corporate events
held on Tuesdays and Wednesdays.
 Initial estimates assume 13 events in the period, each generating revenue of £10k, gross profit of £6.5k
and operating profit of £2.5k.
 Catering will be on a different basis from the usual arrangement and needs to be discussed with Jewel.
 Clients will pay 50% of the total fee on booking and the other 50% one week before the event.
 Theo Demetriou’s sister Helen Young, CEO of a large local company, has committed to two one-day
events, but she wants free tickets for her 250 employees as part of the pricing.

 Fulword’s venture into this market has been a success overall (six events in three months, operating
margin 15%), but it has lost out on blockbusters because of timing clashes; set-up has been more
complex than expected; and distributors claim that agreements have been breached.
 Cinemas that extend their activities (eg, hosting office parties or staging company seminars) may not be
covered by existing licences. Failing to comply could be expensive.
(With proper preparatory work on the AI, candidates should have been able to respond to a requirement of this type. The
challenge lay in integrating the new information with that previously seen, particularly in Exhibits 8, 11 and 14b, and
planning the structure of their answers so as to cover all parts of the requirement, including supporting calculations.)
The EP develops a number of features of Sequin’s business from the AI, each needing a different technique
 Requirement 1 entails a clear focus on financial statement analysis, covering all the items specified,
together with the evaluation of a business trust issue
element of professional scepticism, and the evaluation of a new scheme.
familiarity with Sequin’s strategy and the wider scenario is needed.
As one tutor stated: “There was nothing in the content that should have caused candidates concern. Overall,
the content of the exam requirements was clear and not unexpected. There was plenty of information in the
Exam Paper for candidates to use in their discussions and they were not asked to do anything unfair or outside
their capabilities.” Another noted that it “provided a fair test of candidate’s professional skills and knowledge of
the information provided in the AI. The exam contained no unexpected twists or hidden subplots … Time
management and careful selection of calculations in Requirement 1 will be pivotal to success.” A third tutor
added that it was “very much in line with recent case sittings.”
Grades were awarded under five topics: Executive summary; Review of Sequin’s financial performance; Evaluation
of Derby cinema proposal; Evaluation of conference/events plan; Overall paper. For each topic, under each of the
Competent); IC (Insufficiently Competent); ID (Insufficiently Demonstrated); NA (Not Attempted). The number of

Executive summary 1 2 1 2 6
Review of Sequin’s financial performance 2 3 3 2 10
Evaluation of Derby cinema proposal 2 3 3 2 10
Evaluation of conference/events plan 2 3 3 2 10
7 11 10 8 36
Overall paper – Report: structure, style and language 2
Overall paper – Appendices: content and style 2
40

In each of the three main requirements, there were two skills boxes available under A&UI, the first for use of
numerical information in the case and the second for referring to Sequin’s business issues and wider context.
For box 1 at Requirements 1 and 2, most candidates achieved passing grades. For those who did not, the
main omissions at Requirement 1 were mix and occupancy. At Requirement 2, there were no recurring errors.
For Requirement 3, where box 1 rewards numerical workings, many presented the figures too briefly and so did
not receive full credit.
For the second box, the themes to be identified for each requirement had to be contextualised and integrated into
the report with a meaningful link to their impact on Sequin. Throughout the paper, most candidates referred back
to Sequin’s strategy document, so marks were gained in each section. In Requirement 1, the business issues
were covered well, with most candidates again achieving a passing grade. The points most often overlooked were
Sequin’s expectation of higher operating profit (Exhibit 5) and the customer satisfaction ratings. Requirement 2
also resulted in good grades: here, the items missed most often were the need for a response by the end of July
and the IT risks associated with Tickbox. In Requirement 3, candidates did not recognise the importance of
dealing with the decline at Nottingham. They also did not do justice to the catering aspects, failing to refer to the
forthcoming renewal of the Jewel contract or Jewel’s lack of expertise in conference catering.
Candidates generally displayed excellent SP&S skills, with a majority of passing grades being earned in most
boxes. This is largely because they followed the instructions.
Box 1 at Requirement 1 (revenue/admissions/occupancy) was answered well, though weaker candidates did
not give a reason for the increase in revenue. Candidates were less good at dealing with changes in costs
(whether by cinema or by category) or the profit lines (box 2). Some just covered staff or marketing costs or
total operating expenses. Fewer than half gained passing grades for box 3 (identification of Grimsby issue).
At Requirement 2, most candidates scored a passing grade for boxes 1 (Derby calculation) and 2 (identifying
assumptions). At box 2, the assumptions most often omitted were those relating to operating or administrative
expenses; while very few discussed the 80:20 split, probably because they had not calculated the current split
of 75:25 at Requirement 1 (see Appendix 1). Most candidates obtained a passing grade for box 3 (student
membership scheme).
Box 1 for Requirement 3 produced the lowest SP&S marks for this session. Many did not include opportunity
cost calculations in their considerations. Those who did attempt them often just stopped at revenue. Where
they continued beyond this, more went to gross profit than operating profit. Fewer than half gained a passing
grade at box 2, failing to recognise the hidden costs of the conferences plan or the different pricing/payment
arrangement for events catering. For box 3, most identified some ethical and business trust issues, so gained
at least an IC.
AJ was again poor across all three requirements (though on this occasion slightly better than C&R) and was
a differentiator among marginal candidates. Many failed to develop what was often satisfactory analysis work.
At Requirement 1, candidates did well in the first two boxes. Many extended their work on the headline figures
from the management accounts into a more detailed evaluation covering the data provided at Exhibit 17. Better
ones also articulated the reasons for, and implications of, changes in costs, especially the one-off bonuses and
the additional outlays on Nottingham. For box 3 – consistently with the performance at SP&S – evaluation of the
Grimsby issue, and related recommendations, were less well done. Still, most candidates mentioned the
possibility of fraud/manipulation and suggested to discuss with Jewel and/or to implement controls.
For Requirement 2, candidates struggled to evaluate the output from their breakeven calculations, for example
by failing to compare their figures with those achieved by Hull in Year 1 or with Sequin’s existing operating profit
margin. They were much better at evaluating the assumptions: many compared the occupancy rate or gross
profit margin with the current (or Hull) situation taken from the analysis in Requirement 1. Only a minority
evaluated the membership scheme well or provided appropriate recommendations.

For Requirement 3, box 1 rewarded those who had done some opportunity cost calculations and who then
developed them. Among these, common steps were to compare the operating margin with Fulword’s and to
identify the positive cashflow impact. Candidates generally did not consider the size of the plan relative to
Sequin’s existing business or the fact that delegate figures given were only averages and could range in size
(like Fulword’s). Most obtained a passing grade in box 2, with all items on the marking key identified to a
greater or lesser extent. Box 3 was poorly done, candidates finding it difficult to evaluate the ethical points
they had identified, especially those relating to Helen Young.
There was a polarised performance here, with the overall outcome that for this session it was the weakest skill.
At each of the Conclusions boxes, more than half of candidates gained a passing grade; but only a minority did
so on each of the Recommendations boxes.
For Requirement 1, where candidates were marked down for their conclusions it was generally because they
did not provide a reason for the changes in figures, or they just said (for example) that revenue had gone up
because box office revenue had gone up or because Hull revenue had gone up, without saying what had
driven these specific increases. Recommendations were adequate in relation to the Grimsby issue but not so
good in other areas (such as the need to monitor Nottingham’s performance). The most common one was to
consider increasing ticket prices.
For Requirement 2, conclusions should have followed logically from candidates’ analysis and judgement work. In
the event, most did conclude on most aspects; weaker candidates tended to miss discussing the assumptions.
Recommendations were sparse, uncommercial or inappropriate (or some combination of these), with only market
research – a favourite of Case Study candidates – featuring prominently.
It was very similar for Requirement 3. Candidates again concluded on the key points (impact of the 6-month trial
on F&D was the one most usually excluded) and, again, the most frequent advice was to do market research.
Executive summary
Overall, marks and the number of passing grades were fairly consistent between the three columns on the
marking key. A positive feature was that a majority of candidates brought forward their key figures into the
executive summary and also made at least one recommendation at each requirement.
As is now established practice, the executive summary section of the marking key offered considerable flexibility.
Thus, candidates could have discussed either overall or box office gross profit at Requirement 1, evaluated any
cost assumption at Requirement 2 and commented on any operational or strategic issue at Requirement 3. The
key included the specific point that the examiners considered to be critical, namely the decline at Nottingham (for
both Requirement 1 and Requirement 3).
In Requirement 1, weaker candidates just brought in the figures for their financial analysis without giving a
reason for the movement. Plenty simply used the admissions figure to explain the revenue increase, so did not
delve into the causes of the admissions increase. A significant number focused on advertising revenue (which
showed the biggest % increase) but failed to recognise that the overall effect was minor by comparison with
box office revenue. The 30% occupancy benchmark was used well throughout candidates’ scripts. The most
common recommendation was for a suggestion about ticket prices. There was little reference to the problem
at Nottingham in R1, even among those who had clearly identified it in the requirement itself. Most made a
sensible comment on the Grimsby issue.
In Requirement 2, the vast majority of candidates gave a figure for breakeven in R2 box 1. Most discussed
revenue/GP assumptions but not usually cost assumptions. Weak candidates gave broad statements such as
“Key assumptions in this calculation are the occupancy levels, the ticket prices and the operating expenses. If
these assumptions change then the breakeven position with also change” – or even blander: “The calculations
contain assumptions that may change”. Very few commented on the size of Derby relative to Sequin’s existing
business. Most advised Sequin to proceed – except the occasional candidate who had calculated a loss
(usually by including the fit-out costs). Most also recommended that Sequin adopt the student membership
scheme, though some had reservations about whether it would turn out to be beneficial.
In Requirement 3, most candidates brought a number into their summaries (usually the £130k revenue). Many
did not think to note the importance of addressing the decline at Nottingham here, although recognising it
elsewhere in their script. Most candidates recommended going ahead with the conference proposal; when it
was caveated, it was usually pending market research. A small minority did not state the way forward, possibly

because they ran out of time. On ethical issues, very few mentioned the Helen Young issue. Those who did so
tended to assume that bribery was involved.
As always, the weakest and/or least well organised candidates ran out of time, leading to a very short
summary – or none at all. In some cases, parts were excluded altogether. Candidates must ensure that they
allocate sufficient time across the entire paper to avoid missing out on these (relatively straightforward) marks.
Requirement 1: Review of Sequin’s financial performance
In one tutor’s words, this was “a conventional analysis of the Sequin income statement [sic] down to operating
profit … Candidates also had to … consider various factors to ensure that they answered the requirement set
and not the one they might have wanted.”
Candidates should have been well prepared for a review of the 2018 management accounts. The challenge
was to integrate the additional financial and non-financial data at Exhibit 17 into a coherent narrative on
Sequin’s performance by working through the information systematically – and without spending too much time
on excessive analysis. Candidates also had to leave themselves time to address the Grimsby issue. Another
tutor neatly encapsulated the challenge: “Candidates needed to ensure that they structured their analysis
appropriately and covered all of the items requested by the client in a balanced and controlled manner. Good
planning would be essential to their success.”
Candidates were presented with a table of information by cinema in the same format as they had seen in the
AI (for each of three years). If they had spent the necessary time studying these tables and the accompanying
narrative (see Part 2 above), they should have come to the exam fully equipped to tackle a requirement of this
nature. In addition, some of the footnotes to the table should have rung bells from elsewhere in the AI (rival
opening in Nottingham, change in length of adverts). Others could not have been so easily anticipated and
needed careful thought.
With four cinemas and three revenue streams, candidates had to decide how best to structure their answer.
The vast majority of produced good-quality analysis of the main numbers in their appendix and report. Many
tended to discuss either the streams or the cinemas but not both (or they covered just one element, such as
box office revenue for each cinema). Better ones were able to explain the reasons for changes in admissions
and occupancy changes at individual cinemas, and to relate the decline in box office gross profit to the higher
number of mainstream films. If they undertook further calculations (eg, food and drink revenue per admission),
they were rewarded both here and in their discussion of the Grimsby issue – and it would also have been a
good reference-point for their evaluation of assumptions at Requirement 2 – reinforcing the benefit of tackling
the requirements in order. Finally, better candidates applied their professional scepticism and did not take
facts at face value. For example, they recognised that although the 2018 festival had generated £200k of
revenue, this was less than the 2017 festivals (and at a low margin).
Better candidates also made appropriate comparisons to Sequin’s own 2018 targets and to recent industry
data, and made use of other (non-financial) figures whose significance eluded many candidates, even though
equivalents had been provided in the same format in the AI, eg “A common complaint among cinema-goers is
that adverts can run for too long. Judging by the increase in customer satisfaction ratings (from 91% to 93%),
that has not been Sequin’s experience”; “The total number of films shown in the year was 114, up from 107
(so still around two per week). Average revenue per film was up slightly, from £50.9k to £51.6k.”
Some candidates, including those who otherwise demonstrated good awareness of the AI, failed to remember
that box office gross margin was a more useful measure than overall gross margin. Weaker ones did not do
sufficient analysis of costs (eg, giving one or two of the numbers or making only brief reference to the bonuses).
Grimsby catering issue
This was the weakest section of Requirement 1. Some candidates launched straight into a proposed solution
without evaluating the issue in its various dimensions. A few suggested that Sequin should terminate the
Jewel contract. There was also evidence of overemphasis on the ‘junk food’ aspect. However, most kept the
issue in perspective and appreciated the need for a full investigation. While this was principally a discursive
part of the requirement, better candidates made use of their calculations of average food and drink revenue
per admission to illustrate their points. They were also measured: “Management will need to approach this
carefully with Jewel as it may be easy to sour the good working relationship through accusations.”

Requirement 2: Evaluation of Derby cinema proposal
Requirement 2 produced good results at this session. As one tutor commented, candidates “had been given
very clear instructions [at Exhibit 12] in the AI on the figures that should (and shouldn’t) be included when
performing this breakeven calculation”, expressing the hope that they “will have carefully reviewed these
instructions as part of their preparation for the exam and applied the criteria accordingly on the day”.
The vast majority of candidates did indeed fulfil these hopes, producing a methodical calculation with the
intended outcome (see Appendix 2 below) – namely, that Derby would break even on the figures provided.
Errors were gratifyingly rare: the most common was to deduct the fit-out costs, even though these had already
been taking into account via depreciation within operating expenses. Other, less frequent, mistakes were to use
57.5% as cost of sales instead of the gross profit margin or to work out one week of revenue but deduct one
year of costs!
As a result, the area of differentiation was in addressing the assumptions and in flexing the critical numbers.
Better candidates identified and discussed all of the main assumptions. They thought laterally, for example by
noting that the pro-forma calculation did not include advertising revenue, which in Derby’s case could have
doubled the operating profit. They also made sensible use of their analysis at Requirement 1, for example by
using food and drink revenue per admission as a benchmark.
Weaker candidates tended to focus on the revenue-related assumptions, paying little attention to the costs,
even though there was plenty that could be said about them. This partly depended on how much analysis of
costs had been done for Requirement 1. The occasional candidate took assumptions at face value rather than
questioning them: “The developers will take only 2 months, which is great as usually it takes 2-3 months.”
Some candidates flexed figures such as the occupancy rate. However, those who did this generally left the
figure for food and drink revenue unaltered, which would not have been realistic (see Appendix 2) – especially
where they had pointed out that an implied figure of £1.37 food and drink revenue per admission was already
very high.
Student membership scheme
Like the Grimsby issue at Requirement 1, this was intended mainly as a discussion topic involving only brief
illustrative calculations. There were hints at a possible membership scheme in the AI, as well as several references
to Tickbox and to data collection: the skill was to bring everything together into a coherent discussion answering the
three points requested. As one tutor prophetically stated, “there will no doubt be some candidates who approach
this section of their report in an unstructured manner, writing in a stream of consciousness and hoping for the best”.
Most candidates covered occupancy. Better ones made good attempts at thinking of the sort of data that Tickbox
should be collecting. Weaker ones often just considered the £5 tickets and the alignment with strategy or said that
revenue would be lost, without giving details. A significant proportion worried about the peripheral problem of
students sharing their cards: “Members can lend cards to other people. So, Tickbox is not going to stop this. Sequin
needs extra staff to check the card and the movie booked.” Some candidates omitted the scheme altogether.
Overall, tutors felt that Requirement 2 was “very fair … Candidates will have been able to benefit from any
preparatory work that they had done” and “straightforward … only the ‘twist’ of the student membership
scheme a possible cause of concern to candidates”.
Requirement 3: Evaluation of conference/events plan

One tutor remarked: “The grand finale of this exam asked candidates to evaluate plans to enter the conferences
and events market. This potential strategy had also received a notable amount of coverage in the AI, giving the
candidates an opportunity to consider this possibility beforehand.”
Requirement 3 again produced the lowest scores. As with Requirements 1 and 2, there were several elements:
candidates needed to address the financial, operational and strategic issues, as well as ethical and business trust
issues, relating to the plan. Candidates found it challenging and many did not leave time for sufficient analysis.
In line with all recent sittings for Requirement 3, candidates had to include supporting calculations. There were
several numerical/financial aspects. They were expected to consider (a) the overall revenue and profit from the
plan; (b) the opportunity cost of proceeding with it; and (c) the impact of Helen Young’s request for free tickets.
In the event, the majority of candidates did include some computations for (a). However, about half did not
consider (b) at all. Those who did attempt a calculation tended to limit themselves to the effect on box office

revenue and did not reflect on the food and drink impact. And even those who did this did not always make best
use of existing information (eg, percentage of admissions occurring on a typical Tuesday/Wednesday).
Other candidates were sidetracked by other points, such as this (clearly worried) nearly-qualified ICAEW
Chartered Accountant: “Also as the news articles suggest the conferences could be booked far in advance
effectively leaving complicated accounting for deposit income received before the event.”
It wasn’t only in the calculations that candidates overlooked food and drink – despite being told (Exhibit 15) that
their evaluation should cover all aspect of the plan, including catering. While they could achieve reasonable
grades by focusing on the new material at Exhibits 19a/19b, better candidates displayed a strong awareness of
the AI and wider context – in the case of catering, the final section of Exhibit 9 and the initial article on Sequin’s
rival Fulword Films (Exhibit 14d). A balanced assessment would have considered Jewel’s suitability as a partner
for this type of catering, especially in view of the ongoing issues at Grimsby and the contract renewal in 2019.
Candidates did better than is often the case on operational and strategic issues. As one tutor said, there were
many such issues and “candidates will have also had plenty of opportunities to demonstrate their knowledge of
relevant points from the AI.” The two linked articles about Fulword Films were key here. Candidates generally
recognised the diversification benefit and that this new revenue stream could address Nottingham’s problems.
Ethical and business trust issues
As one tutor noted, “some candidates found identifying the ethical issues in this requirement challenging”. Over
half the cohort scored an SC or CC for SP&S but, as usual, evaluation of ethical issues was poor.
Many candidates automatically treated Helen Young’s request for free tickets as a bribe rather than as a
reasonable commercial bargaining tool (for a client booking two events at once, some sort of discount might be
considered to be in order), albeit with the complication that it involved a related party. (In fact, as one astute
candidate observed, it was Rosannah Chan who had held the meeting with Helen Young, “offering further
independence.”) Most candidates recommended not providing any free tickets at all, rather than considering that
they had no real cost implication (at current 31% occupancy) and that it could be a good idea to secure the
business; or that Sequin should negotiate down the number of free tickets. They just assumed that it must be
wrong. Some candidates did not mention Helen Young at all, instead focusing their ethical lens on the more
straightforward issues of distributor/advertiser relationships and licences.
Appendices on the whole were clear and well laid out. The first, relating to Requirement 1, was mostly well done
and at a sufficient level of detail, showing key movements, with both absolute and percentage figures. Where
lower grades were awarded, this was usually because calculations for occupancy were not shown. A small
minority of appendices were extremely thin and did not reflect the key features of the cinema business.
For the second appendix, the vast majority of the cohort gained a passing grade, setting out their numerical
work clearly. Where candidates scored less, it was mainly because they had not flexed their Derby calculation.
The majority achieved passing grades for the two boxes here. Under ‘structure’, some again failed to number
their pages or to include sufficient appropriate headings. For style and language, most candidates correctly
included a disclaimer of liability. Tactlessness was prevalent, especially when discussing the free tickets at
Requirement 3: “This appears a crucial part of the agreement but could be viewed as extortion”; “Theo owns
1/3 of Sequin and may make a decision without stakeholders’ interest in mind.”

PART 4: APPENDICES
APPENDIX 1: FINANCIAL STATEMENT ANALYSIS: Analysis of performance
Revenue and profit 2018 2018 2017 2017 Change Change

Share % £000 Share % £000 £000 %
Box office 82.4 5,884 82.8 5,447 437 8.0
Food and drink 10.2 728 10.3 675 53 7.9
Advertising 7.4 526 6.9 455 71 15.6
Revenue 100.0 7,138 100.0 6,577 561 8.5
Cost of sales (2,533) (2,244) (289) (12.9)
Gross profit 4,605 4,333 272 6.3
Gross profit (box office only) 3,351 3,203 148 4.6
Operating expenses (2,339) (2,108) (231) (11.0)
Administrative expenses (1,670) (1,442) (228) (15.8)
Operating profit 596 783 (187) (23.9)
GP% 64.5% 65.9%
GP% (box office only) 56.9% 58.8%
OP% 8.3% 11.9%
Admissions & 2018 2017 2018 2017 Change

occupancy Occ Occ Adm Adm
% % 000 000 %
Leicester 32.9 32.1 205 200 2.5
Nottingham 31.0 30.3 129 126 2.4
Grimsby 28.7 26.0 209 189 10.6
Hull 35.3 29.2 110 91 20.9
31.4 29.1 653 606 7.7
Revenue 2018 2018 2017 2017 Change 2018 2017 Change

Share Box Share Box
of total office of total office F&D F&D
% £000 % £000 % £000 £000 %
Leicester 31.5 1,855 33.1 1,802 2.9 244 233 4.7
Nottingham 19.6 1,150 20.5 1,119 2.8 146 141 3.5
Grimsby 32.6 1,919 31.8 1,729 11.0 226 207 9.2
Hull 16.3 960 14.6 797 20.5 112 94 19.1
100.0 5,884 100.0 5,447 8.0 728 675 7.9
Operating expenses 2018 2017 Change Change

£000 £000 £000 %
By category
Staff 1,162 1,054 108 10.2%
Marketing 216 147 69 46.9%
Premises 961 907 54 6.0%
2,339 2,108 231 11.0%
By cinema
Leicester 690 646 44 6.8%
Nottingham 555 484 71 14.7%
Grimsby 654 603 51 8.5%
Hull 440 375 65 17.3%
2,339 2,108 231 11.0%

Other analysis 2018 2017 2018 2017

Average Average F&D F&D
ticket ticket revenue revenue
price price per adm per adm
£ £ £ £
Leicester 9.05 9.01 1.19 1.16
Nottingham 8.91 8.88 1.13 1.12
Grimsby 9.18 9.15 1.08 1.09
Hull 8.73 8.76 1.02 1.03
9.01 8.99 1.11 1.11
Working: Admissions by price band
2018 2017
Admissions Revenue Share Admissions Revenue Share
000 £000 % 000 £000 %
£8 488 3,905 74.7% 456 3,649 75.3%
£12 165 1,979 25.3% 150 1,798 24.7%
653 5,884 100.0% 606 5,447 100.0%
Working: Box office revenue per release
2018 2017
Box office revenue (£000) 5,884 5,447
Films released in year 114 107
Box office per release (£000) 51.6 50.9
Note: This ignores the effect of releases straddling year-ends

APPENDIX 2: FINANCIAL DATA ANALYSIS: Calculation of breakeven for Derby cinema
(i) Base calculation
Screenings per screen per week (A) 20

Thus: screenings per year (B = A x 52) 1,040
Seats (C) 350
Capacity (D = B x C) 364,000
Occupancy rate (E) 30%
Admissions (F = D x E) 109,200
at £14 (G = F x 20%) 21,840
at £8 (H = F x 80%) 87,360
Revenue – tickets £
at £14 (I = G x £14) 305,760
at £8 (J = H x £8) 698,880
Total (K) 1,004,640
Gross margin @ 57.5% (L) 577,668
Revenue (gross margin) – food/drink (M) 150,000

% of box office 14.9%
Total revenue (N = K + M) 1,154,640
Total gross margin (O = L + M) 727,668

Pre-opening costs (60,000)
Operating expenses – cinema (435,000)
Net result 92,668
Operating profit % 8.0%
Ave. ticket revenue per admission * 9.20

Ave. food and drink revenue per admission 1.37
* Note: This could also be used as an alternative to calculate the box office revenue:
Average ticket price = (£8 x 80%) + (£14 x 20%) = £9.20 x 109,200 admissions = £1,004,640 (as above)
(ii) Sensitivity analysis (occupancy = 25%, food and drink revenue reduced in proportion)
Revenue – box office (as above x 25/30) 837,200

Gross margin (as above x 25/30) 481,390
Revenue (gross margin) – food/drink 125,000

(as above x 25/30)
Total revenue 962,200

Total gross margin 606,390
Pre-opening costs (60,000)
Operating expenses – cinema (435,000)
Net result (28,610)

WORKING FOR REQUIREMENT 3: Calculations for conferences and events plan

(i) Summary revenue and profit figures
One event 13 events (6 months)

£ £
Revenue 10,000 130,000
Gross profit 6,500 84,500
Operating profit 2,500 32,500
OP % 25% 25%
(ii) Helen Young’s expression of interest
 Two events as above:
Revenue = 2 x £10,000 = £20,000

Operating profit = 2 x £2,500 = £5,000
 Free tickets: 250 x 2 x £12 (max) = £6,000
(iii) Opportunity cost (box office)
Nottingham admissions are 25% down on 2017 (Requirement 1). Total for 2017 was 126,000, so expected
annual admissions are now 126,000 x 75% = 94,500. Around 8% of admissions take place on Tuesday and on
Wednesday, and all admissions on those days are @ £8. Thus:
Per event For 13 events

Admissions per Tuesday/Wednesday = 94,500 / 52 x 8% 145 1,885
Revenue per Tuesday/Wednesday = admissions x £8 £1,160 £15,080
Operating profit per Tuesday/Wednesday = revenue x 596/5,884 * £117 £1,521
* Fraction represents Sequin’s 2018 operating profit/box office revenue
(iv) Jewel
Sequin fee from Jewel (2018) at Nottingham = £146k; at a weighted average rate of (say) 15%, this would mean
around £1m catering revenue to Jewel, or £1m x 0.1 / 52 = £2k per weekday.

July 2018 - Sequin Cinemas Limited
First Marking
DATE CANDIDATE NO.
TIME MARKER NUMBER
CC
SC
IC
ID
NA
Total 6 10 10 10 4 40
Abbreviations
adm admissions N Nottingham
occ occupancy L Leicester
F&D food and drink G Grimsby
HY Helen Young H Hull
BO Box office
HFSS High fat, salt and sugar
TEAM CHECKER
LEADER SIGNATURE
Changes made? c
Executive summary
REQUIREMENT 1 - Review of Sequin's financial performance REQUIREMENT 2 - Evaluation of Derby cinema proposal
w Total revenue: comment on change with reason (fig) w BE/profitable in year 1 (fig)
w Total adm/occ: comment on change with reason (fig) w Significant increase / comment on relative size
w Total/BO GP/GP%: comment on change with reason (fig) w Evaluates revenue/GP assumptions
w Total OP/OP%: comment on change with reason (fig) w Evaluates cost assumptions
w N decline cause for concern w Concludes on way forward
w Comment on performance v strategy eg £6m / 30% occ / students w Concludes/recommends on membership scheme
w Concludes/recommends re Grimsby business trust issue w Concludes/recommends on impact of scheme on Tickbox
w Other commercial recommendations w Other commercial recommendations
REQUIREMENT 3 - Evaluation of conference/events plans
w Impact of 6-month trial on rev/GP/OP (fig)
w Impact of 6-month trial on F&D / Jewel
w Comment on operational/strategic issues
w Important to address decline at N
NA ID IC SC CC
w Concludes/recommends on HY issue
w Concludes/recommends on other business trust issues
NA ID IC SC CC
CC
SC
IC
ID
NA
Total 6
REQUIREMENT 1 - Review of Sequin's financial performance
Uses AI / EP information (report / appendix) Financial analysis: revenue/admissions/occupancy (report)
w Overall revenue: up £561k AND 8.5% w Box office: up £437k/8.0% AND in line with ind/adm growth
w Overall GP: up £272k AND up 6.3% w F&D: up £53k/7.9% AND in line with box office/adm growth
w Overall OP: down £187k / down 23.9% w Adverts: up £71k/15.6% AND due to (10%) inc in advert time
AND
Overall OP%: down 8.3% v 11.9%
w Change in revenue by cinema (fig)
w Overall admissions: up 47k AND 7.8%

AND w Adm/occ: exceeds (30%) target / changes by cinema (fig)
Overall occupancy: up 31.4% v 29.1%
w Revenue/GP mix: by stream/cinema (fig) w Ave tkt price (fig) / ave F&D spend (fig) / ave rev per adm (fig)
Identifies business issues and wider context Financial analysis: GP/GP% and OP/OP% (report)
w Strategy: rev £6m / students / new cinemas / occ 30% w Box office GP: up £148k/4.6% / GP% down 57.0% v 58.8%
w Benchmark GP% 57.5% / expected OP% improvement w Change in operating expenses by cinema (fig)
w Industry: Q1 2018 growth (8%) / ave advert 5-10% of rev w Staff costs: up £108k/10.2%
w Ticket prices static / F&D prices static w Mktg costs: up £69k/46.9%
w N competition from Quantum / L lease due for renewal w Premises costs: up £54k/6.0%
w Customer satisfaction % (fig) w Admin exps: up £228k/15.8%
Identification of Grimsby business trust issue
w Reliant on relationship with Jewel / based on trust
w Switch from 20% to 10% reduces S's revenue/GP
w Currently no controls over data from Jewel
w Identified by big data analysis / ave F&D spend £1.08 v £1.10
w Manager says doing what predecessor did / HFSS excuse
w Apparent financial motive (bonus)
NA ID IC SC CC
Evaluation of revenue/admissions/occupancy Draws conclusions (under a heading)
w Lower growth than 2017 because no capacity increase w Total revenue: comment on change with reason (fig)
w F&D: reason for change by cinema w Total adm/occ: comment on change with reason (fig)
w Adverts price increase / comment on satisfaction rating % w Total/BO GP/GP%: comment on change with reason (fig)
w Comparison between cinemas (rev/adm/occ) w Total OP/OP%: comment on change with reason (fig)
w Reason for change by cinema eg Quantum, mktg mgr w Concludes on Grimsby business trust issue
w Impact: festival (£200k) / no of films (114) / 75:25 split
Evaluation of GP/GP% and OP/OP% Makes recommendations
w Box office GP%: more mainstream/Probe films w Monitor N performance / address Quantum issue
w OP/OP% reduction: indicates poor cost control w Investigate expenses increases / implement cost control
w Staff cost: one-off bonus (£60k) / mktg mgr w Review feasibility of increasing ticket prices
w Mktg costs: one-off for N (£55k) w Renegotiate distributor rates (eg joint with other cinemas)
w Premises: eg depreciation, business rates, refurbs w Review feasibility of increasing future advertising time/price
w Admin exps: partly due to one-off bonus (£75k) w Other commercial recommendation
NA ID IC SC CC
Evaluation/recs of Grimsby business trust issue
w Important to deal with issue / re-establish business trust
w Investigate facts / establish extent

NA ID IC SC CC
w Tighten Jewel T&C / replace mgr / implement controls
CC
w Take legal advice / seek redress
SC
w No "public" scrutiny of figures so HFSS excuse invalid IC
ID
w Potential fraud / lack of integrity NA
Total 10
NA ID IC SC CC
REQUIREMENT 2 - Evaluation of Derby cinema proposal
Uses AI / EP information (report / appendix) Breakeven for Derby cinema (report / appendix)
w Capacity: 364k (20 x 350 x 52) w Admissions: 109k (30% x 364k)
w Adm: £8 87,360 (80%) AND £14 21,840 (20%) / £9.20 w Box office: £1,004k (109k x ticket price own fig)
w Advertising revenue not included in calc w F&D £150k
w Box office GP: £578k (57.5% x own box office figure) w Calculates OP: £93k (own GP - £60k - £435k - £140k)
Describes business issues and wider context Assumptions
w Growth target: 8 cinemas/20 screens by 2020 w Occupancy (30%) could be optimistic
w Meets criteria: >15km / parking / transport w (80:20) split could be wrong
w Trial for new ticket pricing / trial for new décor w GP% (57.5%) could differ
w Large local student population / film club / blog w F&D revenue (£150k) could be optimistic
w Sufficient cash for refurb / response by end of July w Time (2 mths) could be short / pre-op costs (£60k) could differ
w Impact of GDPR on membership data / IT risk w Opex (£435k) could be low / admin exps (£140k) could be high/low
Comments on student membership scheme
w Annual fee £100 for 20 films / ticket £5 / priority for new releases
w Cash upfront for Sequin / equiv to 13 x £8 tkt sales / £60 discount
w In line with strategy eg to target students / membership schemes
w Tickbox: need to adapt systems to reflect scheme
w Tickbox: record new attendance data / show expiry approaching
w Tickbox: monitor take-up/usage/popularity of scheme
NA ID IC SC CC
Evaluation of breakeven analysis Draws conclusions (under a heading)
w Yr 1 BE: BE/profit in yr 1 / previous indicator of success w BE/profitable in year 1 (fig)
w Significant increase in capacity / calc of relative size w Evaluates assumptions
w OP% (8.0%) lower than existing OP% (8.3%) w Concludes on way forward
w OP% (8.0%) higher than Hull actual/budget in year 1 w Concludes on membership scheme
w Including advertising revenue will improve figures further
w Any change in assumptions will impact BE calc/decision
w Occ: comparison / free multiplex tkts / higher prices w Market research on local catchment area
w Split: comparison / more incentive to go midweek w Benchmark ticket prices against competition
w GP%: comparison / better distrib rates / film mix w Need breakdown/backup for costs
w F&D: £1.37 v actual £1.11 / students may spend less w Liaise with Jewel about restaurant
w May miss Xmas / new décor / cost comparison eg H w Extend deadline with Taylor Stone
w Opex comparison eg to H / admin exp arbitrary split by HO w Other commercial recommendations
NA ID IC SC CC
Evaluation/recs: student membership scheme
w Priority: only issue at 100% occ / if could sell at £14
w £100 outlay may be prohibitive / generous discount

NA ID IC SC CC
w Market at start of academic yr / may increase F&D sales
CC
w Tickbox: cost of changes / compliance with GDPR
SC
w Tickbox: use big data eg to plan films / send renewal alert IC
ID
w Tickbox: if successful extend to other sites
NA
Total 10
NA ID IC SC CC
REQUIREMENT 3 - Evaluation of conference/events plans
Uses AI / EP information (report / workings) Financial calculations (report / workings)
w Single event: revenue £10k AND OP £2.5k w Uses 8-10%
w 6m: rev £130k AND OP £32.5k w Calculates lost box office revenue / GP (fig)
w OP% 25% w Calculates lost F&D revenue (fig)
w Workings well presented and clearly derived w Calculates lost advertising revenue (fig)
w Calculates lost OP (fig)
w N suffering from competition / in decline w Diversification / lowers risk
w Events in line with stated strategic objectives w Negative impact on core business
w Fulword: successful events / reported problems w Frequency consistent with Fulword experience
w Sequin / Jewel have no events experience w May be extra costs eg planning/mktg/training/staff/other
w Jewel renewal 2019 / ongoing Grimsby issue w F&D will be different eg food/staff/meal times/numbers
w HY: expression of interest in two events w Different F&D pricing/payment arrangement required
w HY: sister of director
w HY: £20k revenue / £5k OP
w HY: wants (500) free tickets
w HY: free tickets maximum lost revenue £6k
w Distributors/Advertisers: damage relationship / breach T&Cs
w Licences: may not cover new arrangements
NA ID IC SC CC
Evaluation of financial issues Draws conclusions (under a heading)
w Calculates relative size of event revenue/OP (fig) w Impact of 6-month trial on rev/GP/OP (fig)
w Lost revenue important to include in any analysis w Impact of 6-month trial on F&D
w OP% (25%): > 2018 (8.3%) / > Fulword (15%) w Concludes on ethical/business trust issues
w Figs don’t allow for diff size events (delegates/duration) w Concludes on way forward
w Positive impact on cashflow
w Change in estimates will change results/decision
w May address N's decline / delegs may become customers w Market research / analyse local competition
w Loss of customer goodwill / take up mgt time w Prepare detailed costings / obtain backup for estimates
w Weekdays so not too disruptive / no. of events is estimate w Develop operational plan / recruit events manager
w Sufficient cash available to fund events w Liaise with Jewel / search for new F&D supplier
w Jewel will need to adapt / use specialist events caterer w Manage customer goodwill (eg pre-announce closures)
w Conflict between F&D suppliers / 6-month trial inefficient w Other commercial recommendations
NA ID IC SC CC
w HY: potential conflict of interest / not arm's length

NA ID IC SC CC
w HY: clarify nature of 'commitment' / not a firm booking
CC
w HY: only a problem if taking seats of paying customers
SC
w HY: limit free tickets to weekday films / negotiate T&Cs IC
ID
w Distributors/Advertisers: discuss plans / review T&Cs
NA
Total 10
w Licences: apply as appropriate / legal advice / fines
NA ID IC SC CC
w Well presented table of £s AND %s w Sufficient appropriate headings (incl appendix)
w Analysis of admissions AND occupancy w Legible
w Analysis by stream AND cinema w Appropriately numbered pages
w Well presented, labelled and numbers clearly derived w Disclaimer of liability AND report from K&V
w Calculates revenue w Formal language for the board
w Calculates OP/BE w Tactful / ethical comments
w Flexes calculation w Reasonable spelling / grammar
CC
SC
IC
ID
NA
Total 4
offering sound commercial advice where applicable.
across the script. Of these: 4 (maximum 6) were for the Executive Summary; 3 (maximum 4) in
the Appendices and Overall; and the remainder spread fairly evenly over the three main sections.
out of 9 for Applying Judgement (an exceptionally high figure for any script at any session); and 3
out of 6 for Conclusions and Recommendations.
The script is shorter than average, with little irrelevant material. This indicates a candidate who
was focused on the task at hand and who knew the Sequin case well. For the main body of the
report, the section on Requirement 1 is the longest, followed by Requirement 2 and then
Requirement 3. The overall report, together with the appendices, demonstrates sensible
planning and careful thought.
The executive summary covers the three requirements evenly, in all cases providing a synopsis
of key issues, relevant numbers and commercial recommendations. The candidate uses £ and
% analysis throughout to provide precision and focus to the commentary.
In respect of financial performance, the candidate has presented the main figures in comparison
with 2017 as well as the market and the growth achieved in the previous year. He/she has also
measured them against the targets for box office revenue and occupancy.
The results are drilled down by cinema, with specific reference to two of the venues. For Grimsby,
the candidate shows a good understanding of the business model (“… did not cross 30% threshold
but is compensated by highest Avg Ticket price”); while for Nottingham he/she makes the astute
observation that the “full effect of competition will be felt in the next year’s results”. He/she also
succinctly explains: the increase in advertising revenue; the movement in the customer
satisfaction KPI; the fall in gross profit margin (reproducing the error from the main section on
Requirement 1 – see below); and the decline in operating profit. He/she goes on to provide two
relevant recommendations on the Grimsby catering issue and recommendations on other issues.
On Requirement 2, the main numbers are again stated clearly at the start. Referring to Sequin’s
past record, the candidate casts doubt on the occupancy assumption, following this with a neat
reference to sensitivity. He/she also challenges the assumption for food and drink revenue, by
calculating the figure per admission and comparing it with that achieved in 2018, but does not
address any of the cost assumptions. The overall proposal is cleverly linked to Sequin’s strategy
– though mention of £6m box office revenue is misguided as that was a 2018 target: no figure is
given for 2019. The comment on the student membership scheme is too brief to attract credit.
Coverage of Requirement 3 is also good, with numerical analysis again to the fore. This includes a
figure for lost box office revenue, as well as one for food and drink revenue, an aspect overlooked by
most others. The candidate correctly observes that revenue depends on the number of delegates.
Despite a number of reservations, the candidate advises Sequin to proceed, recognising the need to
address the decline at Nottingham. Ethical and business trust issues are mentioned only briefly
(licences). Recommendations are appropriate.

Review of Sequin’s financial performance [Requirement 1]
This part of the report earned passing grades in three of the four skills, notably AJ. The weakest
area was C&R. It is divided into seven sections: total revenue; box office revenue; other revenue;
gross profit and operating profit; Grimsby catering issue; conclusions; recommendations. Such a
structure ensures that all the principal parts of the requirement will be covered. In general, the
candidate has used a disciplined approach to avoid spending too long on this requirement.
Under A&UI and SP&S, the script addresses the headline results, with a full selection of figures in
both report and appendix (see below). The candidate makes sensible use of business issues and
the wider context, for example: the revenue (£6m) and occupancy (30%) targets, the industry growth
rate and norms for advertising – all aptly integrated into the narrative rather than being presented as
a standalone opening section.
Overall revenue is concisely compared to the industry and the prior year’s performance, with the
brief but pertinent rationale: “There were no new cinemas open this year.” Explanations are given for
movements in admissions, occupancy and revenue, both in the three revenue streams and for
individual cinemas, recognising that Grimsby now generates the highest box office revenue. The
candidate shows a good understanding of the business model, with such observations as: “This
growth is closely correlated to the increase in admissions numbers which is expected as ticket prices still
remain unchanged since Jul 15”; “The full effect of the competition [at Nottingham] will be felt next year and
this should be addressed now; “The strategy to make students the 4th target audience appears to be working.”
When considering advertising revenue, the candidate realises that there is still an underlying rise
after the 10% increase in advert lengths is taken into account. The figure is also linked to customer
satisfaction and to industry norms – both showing good knowledge of the AI. He/she also applies
sound professional scepticism to the customer satisfaction figure (“this may just be caused by the
large increase at Hull which makes customer dissatisfaction at other cinemas”). However, food and drink
revenue is discussed only briefly.
On gross profit, the candidate correctly picks up on the reference to the distributor Probe (in
connection with the children’s film festival) as affecting not only revenue but also margin. (There is
a small error in the calculation of box office gross profit margin, which is perpetuated later in the
script.) On operating profit, he/she refers back to the expectation (Exhibit 5) that this would improve
in 2018, gives the reasons why this has not happened and astutely provides an adjusted figure to
eliminate some of the one-off costs. However, the individual costs are not itemised (within the
report or the appendix), either by category or by cinema.
The candidate has covered the Grimsby catering issue in adequate detail. While he/she has not
articulated the full facts (for example, not noting that Jewel managers receive a bonus or that
Sequin itself has not been applying the necessary control), the recommendations are incisive.
Under ‘conclusions’, the candidate has provided figures for each item but only in some cases does
he/she give a reason for the movements – this is a real weakness given the strength of the
foregoing analysis. Also, while some items on the list of recommendations that follow are relevant,
others are too general and/or unrealistic and/or misguided. For example, “Review mix at mainstream
vs non-mainstream to determine if more non-mainstream could be shown to lower distribution costs”, rather
than advising Sequin to renegotiate distributor rates.
Overall, this part of the report indicates a candidate with strong business awareness, full familiarity
with the case material and an ability to give logical explanations for movements in financial
statements.

Evaluation of Derby cinema proposal [Requirement 2]
spread across the four skills, reflecting a logical pathway through the various elements of the
requirement. The candidate has appreciated the critical importance of Exhibit 12 (Hull) to the
scenario, which in particular gives an anchor for the critique of the Derby assumptions.
The script is structured with the headings ‘financial issues: gross profit and revenue’, ‘assumptions’,
‘commercial consequences’, ‘student membership scheme’, conclusions’ and ‘recommendations’.
Again, this has generally ensured that all the key components of the task were completed (although
in fact there was no requirement to address ‘commercial consequences’).
The section begins with a strong, clear restatement of the results of the candidate’s calculations,
and an indication of Derby’s potential impact on Sequin’s results. (The reference to the £6 million
box office revenue target is misguided as that was for 2018; no figure is given for 2019.) This is
followed by a summary sensitivity analysis, which shows that the new site would only just break
even if occupancy were set at a more realistic 25%: “The key assumption is occupancy and it should be
noted that no Sequin cinema has made 30% in first year. Hull did achieve close to this at 29.2%, however is a
smaller cinema (50 seats less).”
The candidate goes on to assess the assumptions in more depth. As well as occupancy, he/she
considers: food and drink revenue (cleverly analysed by reference to 2018 data and the influence of
a large student presence); the new tariff and 80:20 ratio; pre-opening costs; and gross profit margin.
As with many other candidates, the other costs (operating and administrative expenses) are not
discussed here. There is also no comparison of the operating profit margin with Sequin’s actual
figure for 2018 and no mention of the impact of advertising revenue on the breakeven calculation.
The section headed ‘Commercial consequences’ offers some general observations on the new
cinema, linking it to Sequin’s targets (expansion; more students) and its distance / access criteria.
However, there is no mention of other important factors, such as the new décor being trialled, the
available cash balance or the need for a response to Taylor Stone by the end of July; while the
reference to Leicester’s lease is rather tenuous.
On the student membership scheme, the candidate has included some relevant numbers in
discussing occupancy but there is very little on the Tickbox aspects of the requirement.
The conclusions are thorough, with an appropriate mix of figures and comments and the succinct
advice to proceed (with one small caveat). As for Requirement 1, the recommendations could have
been more direct and feasible (the Leicester lease puts in another irrelevant appearance).
In summary, this was a good section of the report. It could have been improved by a fuller
evaluation of the assumptions for Derby and by a more detailed assessment of the student
membership scheme and its IT implications.
Evaluation of conference/events plan [Requirement 3]
Requirement 3 achieved a majority of passing grades – again, across all four professional skills.
The candidate has used the headings ‘financial issues’, ‘strategic and operational issues’, ‘ethics
and business issues’, ‘conclusions’ and ‘recommendations’, thereby enabling comprehensive
coverage of the key topics. This method suggests that the candidate has spent time planning the
answer and its structure.
Under ‘financial issues’, the candidate restates the results per event but fails to extrapolate these
for the whole six-month period – which also means that there is no comparison with Sequin’s
overall revenue. He/she compares the expected operating margin with Sequin’s 2018 figure but not
with that of its rival Fulword’s (arguably more relevant) figure for conferences. He/she then goes on
to consider opportunity cost, tackling this better than many candidates. The starting-point (typical
admissions of 16% for Tuesdays/Wednesdays) reveals good AI knowledge. This was also one of
only a few candidates to assess lost food and drink revenue: consideration of this from Jewel’s

viewpoint was especially striking. However, the figures could have been better labelled and the
outcome of the calculations (“Increase in Revenue & profit could be used to better market Nottingham
and compete against Quantum”) is questionable.
Coverage of strategic & operational issues is sporadic. The candidate assesses the effect on
Sequin’s business (reversing the Nottingham decline), customer goodwill and the benefit of
holding events on weekdays rather than at weekends. However, he/she does not identify the
extra costs that might be involved or the cashflow impact. Similarly, the food and drink aspects
are not sufficiently developed (there is no mention of the different catering model).
For ‘ethics and business issues’, the main focus is on Helen Young, though this is not explored
in sufficient detail (eg, no suggestions as to how the free tickets request might be varied). The
issue of licences is mentioned only within conclusions and recommendations, while the need to
liaise with distributors and advertisers is not mentioned at all.
The conclusions are again comprehensive (the six-month revenue and operating profit made a
belated appearance), including references to the catering aspects and to ethical issues, and
again they culminate in clear advice (“Overall you should pursue the conferencing proposal to help
keep Nottingham alive”).
Recommendations here are the best of the three requirements, including the suggestion of
“Dedicated staff to run events and free up management time” – which many candidates overlooked
even though it should have been a logical extension of the Hull student manager concept.
Overall, this was among the stronger answers to Requirement 3. It could have been enhanced
by a wider discussion of operational matters (especially catering) and a more complete
coverage of the ethics and business trust issues.
The candidate has included three appendices, one for each requirement. (As always, the
appendix for Requirement 3 is assessed in the marking key section for Requirement 3.)
terms and as percentages, as well as revenue mix and performance data. It also includes analysis
of revenue (both box office and F&D) and admissions by cinema, which is then extended into the
relevant figures per admission – thereby providing a springboard for more developed commentary.
The calculations at Appendix 2 are set out neatly, with appropriate labelling. They are in £000, which
saves writing time and also reduces the risk of careless slips. The candidate has worked out the
weighted average ticket price under the new tariff as a shortcut to calculating box office revenue. At
the foot of the appendix is a simple ratio of F&D revenue per admission – which can then be
compared to the candidate’s own calculated figures in Appendix 1 to challenge the Derby
assumption for catering revenue.
For Requirement 3, the candidate has not included the basic revenue and profit figures for the
proposal (which are instead given in the body of the report). The appendix has been used to show
the opportunity costs.
The script is well structured. Clear headings are used within each requirement, mostly serving
as an aide-mémoire to address each main component. Overall, it has more than met the main
requirements and demonstrates a strong commercial understanding of the case scenario. There
are, however, numerous instances of the second person “you” (sometimes in the same
sentence as the third person), several other cases of informal language, as well as poor spelling
and grammar.

Title & Disclaimer
To: The board of Sequin
Prepared: 25 July 2018
By: Kendall & Vincent ICAEW Chartered Accountants
Subjects: Review of financial performance and recent developments
This report has been prepared for the board and should not be distributed. No liability can be
accepted in event of distribution.

1.1 Financial Performance
Total revenue increased by £561k (8.5%). This was slightly above industry average for
last 3 months of 8%. It is significantly lower growth than last year as expected due to no
more cinemas opening.
Box office revenue grew by £437k (8%). The target of £6m was not hit but total occupancy
was 31.4% avg across four cinemas. Only Grimsby did not cross 30% threshold but is
compensated by highest Avg Ticket price, and now has the biggest Admissions & Box
office revenue.
Nottingham as expected struggled and only grew 2.2% which is the lowest of the 4. This
full effect of competition will be felt in the next year’s results.
Advertising revenue grew by 15.6% even though amount only increased by 10% so was a
favourable increase in price. May have a poor result on customer satisfaction, it increased
by 2% to 93% but may have masked dissatisfaction by Hull’s strong performance.
Gross profit on box office declined from 58.8% to 56.6%, likely as a result of the power of
distributors.
Operating profit was disappointing at 8.3%. Was expected to improve from last year’s
11.9%. Caused by increase marketing spend in last two months to combat competition at
Nottingham.
Jewel will need to provide exact revenue reconciliations and compensations for lost profit
if relations to continue. Could also consider bringing catering back in house.
Recommendations
 Verify food & drink sales at all cinemas retrospectively

 Examine viability of Nottingham as marketing spend not sustainable
 Review ticket prices against competitors
1.2 Derby Cinema & Student Scheme
If the cinema achieves 30% occupancy it will generate £1,005k in Box office revenue and
will have a break-even profit of £93k. however there are concerns that this has never been
achieved before in first year opening. At 25% occupancy the cinema would still break-
even but barely.
Opening a new cinema will help Sequin attain the goal of 8 cinemas by 2020 and could
also help increase Sequin’s negotiating power with distributors. It will also help target
students as an audience group as high student population.
The calculations are based on estimates and are likely to change. Food and drink revenue
of 150k is likely to be optimistic as this is £1.37 per admission and higher than all other
cinemas, especially considering this is a student area and they spend less.
The student scheme will increase revenue by £100 per student which equates to 12.5
student tickets. Should examine current database to see average movie number student
seen in year.

Overall the cinema should be approved as it will also give increased bargaining power
with Taylor Stone and help Sequin reach their goal of £6m in box office. As long as there
are no factors which affect customer access.
Recommendations
 Market research on popularity by student

 Examine reasonableness of food & drink assumption
 Discuss lease negotiations with Taylor Stone on Leicester should this be offered
1.3 Conferencing proposal
This will increase revenue from Nottingham by 130k should all 13 estimated be achieved.
Also dependent on average price which will likely vary. It will result in operating profits of
£32,500 which is at a margin of 25%, far higher than 2018.
There will be lost box office revenue in the region of £23k, this is quite low as
conferencing will only be on Tues or Wed and these days account for 8% each of weekly
revenue from box office.
There will also be lost food & drink revenue in the region of £3k. Financially speaking the
conferencing is more lucrative. However as management have never done this before it
may take up their time resulting in other areas suffering.
Jewel should be fairly happy with the proposal as they would earn £32,500 which is likely
more than normal. However it is unclear whether they have the ability to cater to this style.
Ultimately this should be pursued as it will help Nottingham which is struggling with
competition and will likely get worse next year.
Recommendations
 Discuss feasibility of Jewel being able to cater for conferences.

 Warn customers in advance of closures
 Examine licenses for ability to host conference.
2. Financial Performance
2.1 Total Revenue
Total revenue for the year increased by £561k (8.5%). This is a strong performance as
industry growth for the 3 months to March 18 was expected to be 8%. Growth in the
previous year was 51.8%. However there were no new cinemas open this year.
Total admissions rose by 47k to 7.8% which was driven by above industry average growth
at Grimsby (10.8%), Hull (21%).
2.2 Box office Revenue
Box office revenue grew by £437k (8%). This was just shy of the £6m box office target
disappointedly. This growth is closely correlated to the increase in admissions numbers
which is expected as ticket prices still remain unchanged since Jul 15.
Leicester grew by £53k (2.9%) and this cinema saw a decreased growth rate and this is
likely due to it being a more mature venue. Overall occupancy grew to 32.9% which is still
above their goal of 30%.

Nottingham had significantly lower growth than prior year at just £31k (2.8%). This is lower
growth than Leicester and much lower than industry. This is likely caused by the Quantum
cinema opening 3 months ago. The full effect of the competition will be felt next year and
this should be addressed now.
Grimsby now generates the highest Box office revenue of the 4. It grew by £190k (10.9%)
and still has the highest average ticket price of £9.18.
Could expect Grimsby growth to decrease as it becomes more mature.
Hull saw the biggest growth at 20.5% (163k). This is due to its popularity with students as
can be seen in its customer satisfaction at 98%. Also growth could be due to the award in
student magazine.
The strategy to make students the 4th target audience appears to be working.
2.3 Other revenue
Advertising revenue has increased by 15.6% (£71k). This was due to an increase in
advert lengths of 10%. Also appears that price has been negotiated on positive terms.
This now makes up 7.4% of Sequin’s revenue. The industry average is 5-10% so this is
right in the middle. However this could inversely impact customer satisfaction like you
have seen before.
The customer satisfaction rose by 2% to 93% but this may just be caused by the large
increase at Hull which makes customer dissatisfaction at other cinemas. This should be
monitored as especially in Nottingham as it might cause people to go to Quantum.
Food & Drink revenue increased by 7.9% (£53k) which is almost exactly the amount
admissions rose. Saw small increases in spend per admission at Leicester & Nottingham
but decreases at Grimsby & Hull.
As you stated there is a clear discrepancy with Grimsby which due to the key audience of
full paying adults would expect this to generate one of the higher admissions spend.
2.4 Gross profit & operating profit
Gross profit from box office increases by £128k (4.0%). This is lower increase than
revenue and as a result the gross margin has decreased from 58.8% to 56.6%.
This could be due to the power of the distributors and having to renegotiate on
unfavourable terms. Also could be due to the festival in Jan in part which showed films
provided by Probe which will have a higher margin than foreign films for example which
may have been replaced by the festival.
Operating profit was the most disappointing result at a decrease of 23.9% (£187k). This
gave an operating profit margin of the year of 8.3%. Considering the operating margin of
11.9% was expected to increase it may indicate inefficiencies in cost control.
There were extra marketing costs needed this year for Nottingham to combat the
competition by Quantum. Would need to consider if this will continue at this rate as that
was only for two months and admissions were still down 25%.
A one-off staff bonus will have had a significant impact on this as well of £135k. if this was
stripped out the operating profit on normal activity be 10.2%. Which means next year
should be higher without this.

2.5 Grimsby catering issue
This has potentially cost Sequin a lot on lost revenue & gross profit. It is unclear whether
this was the managers at Grimsby acting alone or whether Jewel has advised them to act
this way.
Jewel must surely check the revenue being reported and noticed discrepancies
themselves. Either that or they may have weak internal controls.
Sequin places a lot of reliance on Jewel and the previous attempt to run the catering
yourselves was unsuccessful, however this may be a case of business trust and if Jewel
were aware of this they may be cutting corners elsewhere.
Some cinemas generate as much revenue from food & drink as they do from box office
and it may be time to reconsider it.
Would recommend that you approach Jewel with evidence and request an explanation
and back revenue to account for the manipulation.
Should also ensure that they agree to provide monthly revenue reconciliation to you so
that it can be seen exactly how much is spent in the restaurant & confections at each
cinema.
If you believe this is widespread manipulation is Jewel per the response we would
recommend ceasing business relations.
2.6 Conclusions
Total revenue increased by £561k (8.5%), much lower growth than last year’s 51.6% but
no new cinemas were opened. Box office revenue failed to make £6m target but
occupancy was higher than 30% at 31.4% for first time.
Gross margin fell from 58.8% to 56.6%, likely a result of recognition on unfavourable
terms or more Probe / Rumble films being shown ie the festival.
Operating festival margin was disappointing at 8.3% as It was expected to improve from
11.8% last year.
Need to consider the likelihood that Jewel management were implicit in the manipulation
and if so consider replacements.
2.7 Recommendations
 Arrange independent verification at food & drink sales at Jewel

 Review ticket prices against competitors as no increase from 2015 is likely unusual
in industry
 Evaluate continued sustainability of Nottingham in light of Quantum
 Review customer feedback in relation to advert lengths
 Review mix at mainstream vs non-mainstream to determine if more non-
mainstream could be shown to lower distribution costs.

3 Derby Cinema Opportunity
3.1 Financial Issues: Gross profit & revenue
If Derby cinema can achieve 30% occupancy in the first year the box office revenue will
be £1,005k. This would be a 17.1% increase on 2018 figures reported. This would almost
certainly make Sequin cross the £6m Box office threshold.
At this occupancy it will add £578k to the gross profit from box office, to a 57.5% margin.
A break even with a profit of £93k is expected.
However if occupancy was only 25% per the sensitivity you could still be predicted to
break-even but profit would be £92k lower.
The key assumption is occupancy and it should be noted that no Sequin cinema has
made 30% in first year. Hull did achieve close to this at 29.2%, however is a smaller
cinema (50 seats less).
3.2 Assumptions
It should be noted that these calculations are based on uncertain estimates and any
change will effect the calculated totals.
As discussed occupancy of 30% has never been attained in the first year so it may be
likely that it will be lower here than 30%.
Food & Drink is predicted to be £150k. This works out at £1.37 per admissions. This is
considerably higher than Leicester’s at £1.19 per admission. This also has a large student
population who have historically spent less on food & drink i.e. Hull is currently at £1.02. It
is therefore unlikely this amount will be reached.
It is estimated that 20% of the tickets sold will be full price at £14. In Hull’s first year only
had 19% full price and any variation in the average ticket price forecast will greatly impact
profitability.
Pre-opening costs are higher than all cinemas bar Leicester even though this is quite
small. This may be appropriate to account for the state of the cinema.
The gross profit margin on box office is expected to be 57.5%. However only 56.6% has
been attained in 2018. Unless Derby will show more foreign films it may be unlikely to
attain this.
3.3 Commercial consequences
This is in line with Sequin’s desire to open 8 cinemas by 2020 and without this it may be
unlikely to do so
It will further the relationship with Taylor Stone and could help renegotiate the lease on
Leicester which is due to expire in Aug 18.
This is 20km away from other cinemas which is within the guidance of Sequin to only
open cinemas more than 15k away.
It will also help Sequin reach their goal of targeting students as a fourth target group. The
implications of this being lower average ticket price which could impact profitability.
The site would have to be examined for ease of access as this can be incredibly disruptive
if parking/public transport not easily available i.e. the Tunnel cinema.

There is also a multiplex in the area which start aggressively pricing at the sign of new
competition.
3.4 Student membership scheme
This will very likely increase occupancy of the cinema and will therefore have a beneficial
result on food & drink revenue and perhaps even advertising.
It would also guarantee Sequin revenue of £100 per every student who signs up. This
would be the equivalent of 12.5 cinema visits.
However if every student fully utilises the 20 films in the year this would result in lost
revenue of £60 per student. However it may be unlikely that they would visit that often
without it.
They also would have preferential booking which might mean little seats available for full
price tickets in popular movies.
At present Tickbox only captures certain data. With the scheme you could ask for students
opinion on certain movies to help better forecast showings.
3.5 Conclusion
The key to this proposal is the occupancy being 30%, however could still fall to 25% and
break even with £1k profit.
This is consistent with the strategy to open 8 cinemas by 2020 and to target students as
the 4 key demographic.
The food & drink revenue of £150k is likely to not be attained as average spend per
admission is unusually high.
Overall Sequin should progress with opening the cinema as long as sufficient ease of
access.
The loyalty scheme will increase the occupancy in Derby and will have a positive impact
on food & drink. However average ticket price will drop.
As this will give Sequin the equivalent revenue of 12.5 student tickets guaranteed at the
start of the year and increase information that can be tracked on admissions it should be
implemented as planned.
Recommendations
 Do due diligence on the access arrangements to cinema

 Discuss with Taylor Stone the possible discounts on Leicester lease should they
go abroad
 Examine local population compared to Hull to see likelihood of attaining 20% full
price ticket sales
 Examine likelihood of 150k from food and drink.

4 Conferencing Proposal
4.1 Financial Issues
For the 6 months from Dec 2018 – 31 May 19 the 13 estimated conferences will add
£10,000 revenue to Nottingham per event. This will be at a gross profit of £6,500 and an
implied margin of 65%. The operating profit will be £2,500. The operating margin for these
is 25% which is considerably higher than the 8.3% achieved this year.
However for the days that this will be open the cinema will be shut to the public and as a
result there will be decreased box office revenue of c. £23k and reduction in GP from box
office of 13k. Assuming that Tues & Wed account for 16% of the weekly revenue. So
much more is earned from conferencing.
Also means there will be lost food & drink revenue of c. £2.9k based on avg spend per
customer. The impact on Jewel would be much larger and they could expect to lose
between £14.5 – 29.5k. The increase in Revenue & profit could be used to better market
Nottingham and compete against Quantum.
4.2 Strategic & operational issues
This would be in line with Sequin’s goal of using cinemas for conferencing and this was a
potential lifeline for Fulwood Films who had a decline in performance until conferencing
implemented.
Fulwood however uses on international company for this catering. As you would be
remaining with Jewel you would need to examine if they are capable of Catering for
conferences.
Jewel are also unlikely to be happy about the loss in revenue they could potentially
receive if cinemas where to be open, which would appear to be a great deal larger than
what they would get under conferencing.
As Sequin do not have experience organising these events it may result in a

disproportionate amount of management time being spent compared to other areas of the
business and they could suffer.
Also so far there is just one interested party in the events so the likelihood of getting more
will depend on management’s efforts.
This seems to have a good fit for Nottingham as it could boost revenue. The competition
from Quantum will likely continue next year and admissions will be likely much lower and
therefore lower box office & food and drink revenue.
It is also good that the conferences will only be on Tue/Wed and lost for one day as if they
were at the weekend it would impact revenue significantly more.
Might be limiting the customers that are interested as some may require different
weekdays or want it at weekends.
They may also be local competition in the area in the form of other conference venues
that compete with Sequin.

4.3 Ethics and business issues
Theo’s sister Helen Young is the CEO of the business interested in using Sequin for
conferencing. The would constitute a related party transaction and the free tickets and
revenue received would be disclosed in the accounts.
The free tickets in themselves would constitute £2,500 lost box office revenue and could
completely wipe out any benefit.
This may be an inappropriate business relationship and the directors would need to
examine if this was in Sequin’s best interest.
Conclusions
The conferencing would generate £130k in extra revenue. At an operating profit of

£32,500 which is an operating margin of 25%, considerably higher than 2018 of 8.3%.
Jewel would have to be consulted to ensure they are capable but they should be willing to
this proposal as it is likely to earn them more than if cinema was open.
The related party transaction should be examined to see if it is in Sequin’s best interest as
will lost revenue on box office sales from free tickets. Also other businesses may demand
the same deal if made public.
The licenses would have to be examined to ensure there is no health & safety breaches.
Overall you should pursue the conferencing proposal to help keep Nottingham alive.
Recommendations
 Discuss with Jewel to ensure they are capable

 Make sure customers are aware of closures well in advance
 Examine licenses for possible breaches
 More detailed analysis on competition in area
 Dedicated staff to run events and free up management time.

Appendix 1
2018 2017 Change Change Per admissions

£000’s £000’s £000’s % 2018 2019
Box office 5,884 5,447 437 8.0%

Food & Drink 728 675 53 7.9%
Advertising 516 455 71 15.6%
Total Revenue 7,138 6,577 561 8.5%
Sales Mix % %
Box office 82.4 82.8
Food & drink 10.2 10.3
Advertising 7.4 6.9
Performance data
Admissions # 653 606 47 7.8%
Films shown # 114 107 7 6.5%
Occupancy 31.4% 29.1%
Avg. ticket price £ £9.01 £8.99 0.02 0.22%
Customer satisfaction 93% 91%
Gross margin – box office

Box office rev 5,884 5,447 437 8.0%
Cost of sales 2,533 2,244 289 12.9%
Box office GP 3,331 3,203 128 4.0
Gross margin % 56.6% 58.8%
Operating profit
Operating expenses 2,339 2,108 231 10.9%
Admin expenses 1,670 1,442 228 15.8%
Operating profit 596 783 (187) (23.9%)
Op profit % 8.3% 11.9%
Box office
Leicester (L) 1,855 1,802 53 2.9% £9.05 £9.01
Nottingham (N) 1,150 1,119 31 2.8% £8.91 £8.88
Grimsby (G) 1,919 1,729 190 0.9% £9.18 £9.15
Hull (H) 960 797 163 20.5% £8.72 £8.76
Admissions
L 205 200 5 2.5% 32.9% 32.1%
N 129 126 3 2.4% 31.0% 30.3%
G 209 189 20 10.6% 28.7% 26.0%
H 110 91 19 21% 35.3% 29.2%
Food & drink

L 244 233 11 4.7% 1.19 1.17
N 146 141 5 3.5% 1.13 1.12
G 226 207 19 9.2% 1.08 1.10
H 112 94 22 23.4% 1.02 1.03

Appendix 2
Breakeven calculation Business plan Sensitivity
Screenings per week 20

Seats 350
Capacity per week 7,000
Occupancy 30% 25%
Admissions per week 2,100 1,750
Admissions per year 109,200 91,000
Average ticket price
(14 x 20% + 8 x 80%) £9.20 Same
Box office revenue £1,500k £837
Gross margin 55.7% Same
Box office gross profits £578k £481
Food & drink 150k Same
Pre-opening costs (60k) Same
Operating expenses (435k) Same
Admin expenses (140) Same
Breakeven position £93k £1k
Food & drink per admission 150

= £1.37
109.2
Appendix 3
Lost box office revenue
# of events 13
(each a day long)
Lost box office revenue
Nottingham box office in 2018 £1,150

Relating to Tue & Wed = 16% 184 (assumes 8% per day)
Remove days closed
13/104 23k (lost box office revenue)
Gross profit on box office

2,341k @56.6% 13k
Food & drink
Occupancy in 2018 129,000

Relating to Tues & Wed 20,640
Remove lost days (#admissions)
20.6 x 13/104 2,575
Avg spend 1.13
Lost revenue food & drink £2,990
Jewel lost revenue

@20% 14,550
@10% 29,100

The commentary below follows the order and numbering of the script, with reference to the topics
in the marking key. It should be read in conjunction with the review of the First Illustrative Script
and full Examiners’ Report for this session.
This script failed the exam. Although it addresses some of the key issues and contains some good
sections, it has not gained enough passing grades (Clearly Competent (CC) and Sufficiently
Competent (SC)).
In overall terms, the candidate earned 22 passing grades. Of these, 4 (from a total of 4 available)
were achieved on the back page of the marking key (Appendices and Overall). For the rest of the
script, only in the executive summary and Requirement 2 were sufficient passing grades obtained;
Requirements 1 and 3 did not display the necessary breadth and depth. In terms of professional
skills (maximum 30), passing grades were achieved in 5 out of 6 boxes for Assimilating and Using
Information (A&UI); 4 out of 9 for Structuring Problems and Solutions (SP&S); 4 out of 9 for
Applying Judgement (AJ); 2 out of 6 for Conclusions and Recommendations (C&R). The report is
fairly evenly balanced between the three requirements, but there is in general not enough focused
analysis or evaluation.
Executive summary
overall review followed by a brief set of recommendations. One passing grade has been obtained for
each requirement.
For Requirement 1, the candidate has included figures for revenue, gross profit and operating profit,
as well as selected figures by revenue stream and cinema. However, the selection is not always
appropriate (eg, commenting on changes in the two smaller streams) and explanations given for
movements are not sufficiently focused (it is not “more films” on their own that have caused the drop
in gross margin – it is more films from mainstream distributors). Similarly, the paragraph dealing with
Nottingham misses the point that on an ongoing basis that cinema is in decline. Recommendations
(focused mainly on the Grimsby issue) are appropriate.
Coverage of Requirement 2 is the best part of the executive summary. The candidate has brought
forward the (correct) outcome of the breakeven calculation and rightly questioned the assumptions for
occupancy and for food and drink revenue. However, there is no mention of the cost assumptions or
an indication of Derby’s impact on Sequin’s existing revenue. Conclusions and recommendations,
including those on the student membership scheme, are apposite.
Requirement 3 starts with the headline figures and assesses operational and strategic factors.
However, there is no mention of opportunity costs. The candidate has also not commented on the
potential to address the problems with Nottingham – perhaps an inevitable consequence of not
appreciating the situation at Requirement 1. The other key omission here is the Helen Young issue.
Otherwise, the conclusions and recommendations are appropriate.
Review of Sequin’s financial performance [Requirement 1]
This was weaker than Requirement 1 answers for most of the cohort. Although the key areas are
addressed, and there is a clear, detailed appendix (see below), coverage is superficial in places.
The candidate has scored well for A&UI, and in the top box under SP&S, by identifying the (£ and
%) movements in the main captions from the accounts, setting the business context and performing
calculations on revenue and the related captions. There are also good comparisons with the
admissions and box office revenue targets, and the commentary on results by cinema makes good
use of the work carried out at the appendix. There are also some other sensible bits of number-work,
such as the calculation of average ticket price and of operating profit adjusted for one-off items.

However, the rest of the analysis does not sufficiently tackle the key features. In particular, there is
too much emphasis on the revenue, admissions and occupancy and not enough on costs and profit.
(In addition, the calculation of the operating profit movement contains an error.) This is also reflected
in the grades for C&R. Specific shortcomings include the following:
 Absence of an explanation for the increase in food and drink revenue.

 Failure to realise that the festival revenue in 2018 was actually lower than that in 2017, together
with a well-intentioned but misguided calculation of the profit impact of this (the candidate has
used Sequin’s average box office gross margin, missing the point that the festival was of films
from the distributor with the highest fees).
 Misunderstanding of the (serious) impact of the rival cinema opening in Nottingham.
 Not commenting at all on the change in administrative expenses or on premises costs.
 Not realising the wider implications of the Hull results for the customer satisfaction ratio.
In addition, coverage of the catering issue at Grimsby is too brief and appears rushed, meaning that
the candidate has not obtained any passing grades for this part of the requirement.
Evaluation of Derby cinema proposal [Requirement 2]
This is the best of the three main requirements, gaining a majority of passing grades. These grades
have largely been achieved by means of a very good numerical section, in which the candidate has
followed the required format for the calculations to arrive at and articulate clearly his/her findings and
to evaluate the assumptions.
When considering the assumptions, the candidate has covered occupancy (making a sensible,
balanced comparison with both Hull and Grimsby, and with Sequin’s first-year experience) and the
split by ticket price (though the comment “there is no basis for this split” is inappropriate as he/she could
again have used the precedent of Hull, or Sequin’s 2018 results, as a benchmark). He/she makes the
relevant point that adding advertising revenue would improve the outcome, and that food and drink
revenue per admission is higher than Sequin norms, but is too vague in relation to other components,
with further incorrect “there is no basis” remarks. There is no mention of the free student tickets at the
local multiplex, no assessment of the impact of the new décor and no comparison of operating profit
margins with Sequin’s reported 2018 figures.
The section headed ‘benefits and risks’, though not specifically requested, enables the candidate to
receive credit (mainly under A&UI) for other issues, such as the distance / transport criteria and
Sequin’s strategic objectives. There is a good link with its only previous “unsuitable” site (Mansfield).
In the appendix, the candidate has done a simple flexing calculation to increase pre-opening costs.
However, this is based on the false understanding that the £96,000 costs incurred in 2016 were for
only one cinema (a thorough reading of the AI would have shown that this figure covered both
Grimsby and Hull). There is also an attempt to add back fit-out costs, the logic of which is again
flawed.
It is also in this ‘benefits and risks’ section that the candidate has chosen to address the student
membership scheme. However, as with the Grimsby issue at Requirement 1, this is too short and
unfocused. Candidates should realise that tasks of this nature are usually the subject of an analysis
exercise (SP&S box on the marking key) and an evaluation of that analysis (AJ box) and must
therefore be given a proper amount of attention.
The conclusions are reasonable but could have been enhanced by a more precise comment on
the adequacy of the assumptions, rather than just a passing reference to the 30% occupancy.
The recommendations are in general too vague to earn a passing grade.

Evaluation of conference/events plan [Requirement 3]
This section is poorly structured. In including only three subheadings – ‘benefits and risks’ (to cover
the main part of the requirement although not what was actually asked for), ‘licences’ (one of the
specific ethical and business trust issues to be identified) and ‘conclusions and recommendations’ –
the candidate has made it difficult to ensure that all elements are properly covered.
Such an unstructured approach is always a high-risk strategy. In this case, it has meant that although
the candidate has touched on a number of relevant areas, and has made some sensible points (eg,
the need for extra staff, the likelihood of additional costs and the impact on management time), he/she
has not done so in enough depth. This has resulted in no CC grades at all for this requirement.
There are a number of particular reasons for the weak grades profile, namely the failure to:
 develop the initial calculations into a comparison with Sequin’s existing results and/or those of its
rival Fulword;
 recognise that the venue for this trial, Nottingham, is the cinema that is currently in trouble;
 calculate and discuss opportunity costs;
 cover all aspects of the catering arrangements (specifically asked for in the requirement); and
 address the Helen Young issue – the main ethics and business trust issue to consider.
The articles about Fulword in both the AI and EP, and the section on conference catering in the AI,
should have given the candidate scope to explore some of these central points in more detail.
In the conclusions, the candidate correctly restates the overall revenue and profit impact and gives
Sequin the unequivocal advice to proceed. Ironically – given the poor quality of the section overall –
the recommendations here are the best of the three requirements, revealing an understanding of the
scenario that is not apparent in the rest of the discussion.
The candidate has included three appendices, one for each requirement.
Appendix 1 is detailed but not all of the information has been carried forward into the report itself.
With better planning, the candidate could have made better use of the content in the main report.
Conversely, there is some information missing – namely, analysis of costs – which is partly the
reason for low marks on costs in the main report.
This is followed by Appendix 2, in which the breakeven calculation is clearly set out. At the end of
the calculation, the candidate adds back fit-out costs. This (together with the associated comment in
the body of the report) is misguided as the fit-out costs have already been adjusted as necessary
(via depreciation). The one-line flexing for pre-opening costs is also based on a false premise.
For Appendix 3, the candidate has provided only a very brief table of the revenue and profit from the
conferences plan, and none of the other figures required – opportunity costs, Helen Young tickets.
(Note that this appendix is not marked separately but relevant credit is awarded under Requirement
3 – see above.)
The report is well structured, with appropriate use of sentences, paragraphs and headings. The
misspelling “loose” for “lose” (surprisingly common among Case Study candidates) is prevalent –
seemingly an aberration as there are no other mistakes of this type.

This report has been prepared by Kendall & Vincent for the sole use of Sequin Cinemas board.
No liability is accepted in the event of unauthorised disclosure to any other party without our express
permission.
Executive Summary
1. Total revenue increased by £561k from £6,577k to £7,138k (8.5%).
This is due to an increase in overall admissions of 47k from 606 to 653 (7.8%).
Gross profit increased by £272k (6.3%) from £4,333k to £4,605k due to increased revenue &
distributor fees paid.
More films were shown causing increased fees for distribution. This caused overall Box Office
GPM to fall from 58.8% to 57%.
Operating profit fell by £183k from £783k to £596k. OPM fell from 11.9% to 8.3% due to
increased staff & marketing costs.
Advertising revenue increased by £71k (15.6%) due to increased advertising time. This was
the strongest growth in all revenue streams.
Food & drink had the slowest growth. This could be due to Grimsby’s distorted figures.
Nottingham box office revenue increased by 31k (2.8%) due to increased admissions of 3k
(2.4%). N had the slowest growth due to opening of competitor close by.
H box office revenue increased by £163k (20.5%) due to increased admissions of 19k
(20.9%). Hull has been successful with targeting students.
SC could lose vital food & drink revenue due to Jewel’s distorted figures.
Overall SC shows good growth.
1) Review ticket prices and consider increases in fees.
2) Discuss food & drink fees with Jewel Grimsby & consider bringing in independent
verification for figures.
2. SC should proceed with the opportunity of opening a new cinema in Derby as it will enable SC
to grow and reach their target audience of students.
Derby is expected to break even in its first year and generate profit of £92,668.
This is based on assumptions of 30% occupancy. This could be fairly high for the first year.
This is also based on food & drink revenue of £150k, which may also be high as students tend
to spend less in restaurants.
A key benefit is that it will enable SC to grow and reach its target of 8 cinemas (20 screens) by
2020.
A key risk is reliance of Taylor Stone.

A key benefit of the membership scheme is that it will build customer loyalty, however it may
be priced too high and uncompetitive against rival cinema prices.
Recommendations
1) Research the demand and occupancy rates for the new cinema in Derby.
2) Ensure SC has compatible and appropriate IT systems in place for the membership scheme.
3) Research membership schemes in the local area to ensure it is priced competitively.
3. SC should proceed with the opportunity to hold conferences and events. It will help diversify
their revenue streams.
This opportunity could generate revenue of £130k (1.8% total revenue).
This could contribute £32,500 to operating profit (5.5% profit margin).
A key benefit of this opportunity is that it will enable SC to build corporate relationships and
potential sponsorship agreements.
It will also help increase occupancy and footfall during quiet periods.
A key risk is that these events take up management time and SC has no experience in running
these events.
It can also clash with cinema releases and drive away traditional, loyal cinema goers.
SC must ensure that it has the correct licence to run these events or it could risk losing its
licence and operating rights. This is high risk and can damage SC’s reputation.
1) Discuss this opportunity with Jewel.
2) Consider recruiting a specialist team to run the events.
3) Review current licences and ensure they are appropriate for the additional events.
1. Management Accounts 31 May 2018 (Appendix 1)
Total Revenue increased by £561k from £6,577k to £7,138k (8.5%). This is due to increase in
admissions of 7.8% (47k).
This is in line with industry growth of 8%, slightly better. However, revenue growth is slower than
prior years.
This is good performance for Sequin Cinema (SC) in a competitive industry.
The £6m box office revenue target was missed by £116k.
However SC managed to meet and exceed the 30% occupancy target by achieving 31.4% overall
occupancy.
Gross profit increased by £272k (6.3%) from £4,333k to £4,605k due to an increase in the number of
films shown (7).
Gross profit did not grow as much as revenue due to the distribution cost increases.

Operating profit fell by £183k from £783k to £596k (23.9%). This is due to costs increasing faster
than revenue.
SC has faced increasing costs due to increases in the minimum wage and higher costs of bonuses
for staff and marketing costs in Nottingham.
Without these costs, OP would be £786k, which is £3k higher than prior year.
Overall gross profit margin has fallen from 65.9% to 64.5% (1.4%), due to increased costs. Box
office GPM fell from 58.8% to 57%. Overall operating profit margin has fallen from 11.9% to 8.3%
(3.6%). This is due to increased costs.
Revenue streams
Box office revenue has increased by £437k from £5,447k to £5,884k (8%).
Food and drink revenue has increased by £53k (7.9%) from £675k to £728k.
Advertising has increased by £71k (15.6%) from £455k to £526k.
Advertising has seen the biggest increase and has exceeded the target of 8% box office revenue,
now 8.9%. This is due to increasing the amount of advertising before each screening. Advertising is
now 0.5% higher than prior year.
Box office revenue accounts for 82.4% of revenue mix, which is 0.4% lower than prior year (82.8%).
Advertising new accounts for 7.4% of revenue (2017: 6.9%).
The family festival generated £200,000 of extra box office revenue. This amounted to £114k of
profit. This festival contributed 19.1% to operating profit. This is a significant amount.
Ticket prices are unchanged, however the average ticket price increased from £8.99 to £9.01.
This indicates SC have sold a larger amount of £12 tickets.
Cinema Performance
L Box office revenue has increased by £53k (2.9%) due to the increase in admissions of 5k (2.5%).
The larger increase in revenue to admissions demonstrates higher proportion of £12 tickets sold.
L is no longer the strongest cinema in terms of occupancy and box office revenue.
Hull (H) is strongest in terms of occupancy.
Grimsby (G) is strongest in terms of box office revenue.
L may have reached market saturation.
Nottingham (N) Box office revenue increased by £31k (2.8%) due to increased admissions of £3k
(2.4%).
G box office revenue increased by £190k (11%) due to an increase in admissions of 20k (10.6%).
Occupancy is lowest in G.
H box office revenue increased by £163k (20.5%) due to increased admissions of 19k (20.9%).

The problems with Quantum opening close to Nottingham caused SC to increase marketing &
recruitment expenses. This has paid off, as there has been a slight increase in revenue &
admissions, however it has the slowest growth.
Hull grew the most due to SC targeting its 4th target group of students. The good customer
satisfaction rate has caused customer satisfaction to increase overall and SC is closer to its 95%
target, currently 93%.
Grimsby
There is a dispute between Grimsby Jewel & SC regarding fees from Jewel being lower than
expected.
SC could be losing vital food & drink revenue, which is required to improve margins.
The desire to hide information regarding “junk food” being sold to children is unprofessional and
unethical. SC reputation could be damaged through association with this.
Conclusion
Total revenue increased by £561k from £6,577k to £7,138k (8.5%).
This is due to an increase in admissions of 47k from 606 to 653 (7.8%).
Gross Profit increased by £272k (6.3%) from £4,333k to £4,605k due to increased revenue and films
shown. This is slower than revenue growth due to increased distributor fees. Box office GPM fell
from 58.8% to 57% due to increased distributor fees & more films shown in the year.
Operating costs feel by £183k from £783k to £596k (23.9%). This is due to increased staff and
marketing costs.
Advertising revenue increased by £71k (15.6%) from £455k to £526k. This is the fastest growing
revenue stream, as more time is allocated to advertising during screenings.
Nottingham box office revenue increased by £31k (2.8%) due to the increase in admissions of 3k
(2.4%). N had the slowest growth due to Quantum opening close by.
H box office revenue increased by £163k (20.5%) due to increased admissions of 19k (20.9%). Hull
saw the strongest growth and is now the best in terms of occupancy.
SC could loose vital food & drink revenue due to Jewel’s unprofessional behaviour of not disclosing
information.
Food & drink has the slowest growth & figures could be distorted due to Grimsby’s effort to hide or
adjust figures.
Recommendations
1) Review ticket prices and consider increases, as they have remained stagnant for some time.
2) Monitor costs, such as marketing and recruitment.
3) Assess the reasons behind strong growth in G and H and replicate across other cinemas.
4) Discuss catering fees with Jewel. Consider bringing in independent verification for figures.
5) Research more film festivals & implement across all cinemas.

2. Derby (Appendix 2)
SC is considering opening a new cinema in Derby.
This would cause SC to grow organically and move closer to its target of opening 8 cinemas (20
screens) by 2020. This is SC’s strategic target.
This will enable SC to increase its size and therefore bargaining power with distributors and reduce
fees to compete with multiplexes.
As growth is slowing, this would be a good decision. SC can also target its 4th target group of
students, another strategic objective. SC has sufficient cash £1,451k to invest in a new cinema.
This would result in profit in year one of £92,668 (8% of revenue).
Derby would exceed break even in year one.
If fit out costs are added back, profit would be £317,688 (around 31.6%). This is good profit for SC
and could increase falling gross profit and operating profit margins.
This however is based on a number of assumptions.
Assumptions
1. Occupancy
It is assumed occupancy is 30%. There is no explanation for this figure. This could be
achievable or slightly understated if Derby is similar to Hull.
However it could be overestimated if Derby is similar to Grimsby.
Furthermore occupancy is low in its first year of opening, therefore this should be looked at to
assess whether it is fair.
2. Ticket Prices
The 80% to 20% split on ticket prices may not be correct. There is no basis for this split.
Due to large student population, there is likely to be significant £8 tickets sold.
As the higher price is now £14, this could be seen as too expensive and therefore 20% could
be overestimated.
3. GPM 57.5%
The GPM margin is slightly higher than current GPM of 57%.
This could be lower if more mainstream films are shown to attract students. Mainstream films
are more expensive.
4. Pre Opening, Head Office costs & Advertising
There is no advertising revenue. This could significantly enhance the profit & results.
There is no basis for the Head Office costs, pre opening costs, admin and operating expenses.

5. Catering Revenue
Catering revenue seems high at £150k and amounts to 14.9% of box office revenue.
Food & drink is currently 12.4% of box office revenue.
There is no basis for this figure.
If Derby attracts more students, food and drink spend could be lower as they have less
disposable income.
Benefits and Risks
SC can diversify and spread risk through opening a new cinema.
It is within the 15km criteria and has good transport links and accessibility.
It will enable SC to target students, a strategic objective. There seems to be demand for a cinema in
the area.
It could enable SC to build relations with universities.
Membership schemes could provide SC with stable, guaranteed income and improve off peak
occupancy rates.
They also help build loyalty among customers.
On the other hand, this price (£100) may be too expensive and there could be a risk that uptake will
be low. This is especially a risk if multiplexes offer a similar scheme for unlimited films. The value at
competitors could be seen as better.
There is also increased reliance on Taylor Stone and SC is at risk of unfavourable rent increases.
There is a risk IT may not work effectively with the new membership scheme.
There is a risk that Derby may not be a suitable option and assumptions provided could be at risk of
bias to entice SC to invest money in Derby.
There have been unsuitable sites suggested in the past, such as Mansfield.
Profit for Derby could be lower if costs increase. For example if pre opening costs are £96k (2016),
profit will reduce to £56,668.
Conclusion
SC should proceed with this opportunity as it will enable SC to grow and reach their target audience
of students.
Derby is expected to break even in its first year and generate profit of £92,668.
This is based on a number of assumptions, such as 30% occupancy in year 1.
A key benefit is that it will enable SC to diversity and the membership scheme could help build
customer loyalty.
A key risk is that it increases reliance on Taylor Stone. The membership scheme may not be priced
appropriately and there is a risk of lower take up of the scheme.

Recommendations
1) Research the demand and occupancy rates for a new cinema in Derby.
2) Research prices in the area, as £14 may be too high.
3) Ensure SC has compatible and appropriate IT systems in place for the membership scheme.
4) Research membership schemes in the local area to ensure it is priced competitively.
5) Consider working with other developers or other sites/cities.
3. Conferences and Events Market (Appendix 3)
SC is considering a plan to enter the conferences and events market.
This will enable SC to diversify its operations and place less reliance on box office revenue, currently
(82.4%).
This is a strategic objective and can help counter the falling operating profit margin.
It will enable SC to utilise cinemas during quiet periods and generate additional cash to grow and
expand.
It can also help counter the slowing revenue growth.
This opportunity could generate £130k revenue for SC (1.8% of total revenue).
This could contribute £32,500 to operating profit with a margin of 5.5%.
This is based on the revenue and costs given. If costs, such as administrative and operating
expenses increase, this could provide a lower profit and return.
The operating profit margin is 25%. Higher costs could see losses.
Gross profit margin is 65%, better than box office gross profit margin.
Benefits and Risks
If managed correctly, this opportunity could improve SC profit margins and provide steady income
for SC, as 50% of fees are received upfront.
It is unclear over conditions if events are cancelled last minute.
The 50% split in receiving revenue would however increase receivable days and there are risks of
bad debts.
SC could loose out on costs incurred in the event of cancellations.
This opportunity would enable SC to diversify its revenue stream and provide more business for
Jewel, which could strengthen working relations.
However if Jewel appears to be inappropriate or enable to cope with increased demand and footfall
in restaurants during these events, alternative caterers would have to be considered.
This could damage relations with Jewel.

SC would be able to develop a larger corporate network of clients and make better use of facilities
during off peak times.
This event however is taking place during the Christmas and holiday period.
Clashes with big, blockbuster films could have a detrimental impact on box office revenue and
customers could go elsewhere.
SC could loose regular, loyal clients to rival cinemas.
SC could loose a large part of revenue generated during Christmas.
However this opportunity is a strategic objective and could see SC reach a wider customer base and
improve its brand image and reputation.
Those events could provide possible sponsorship for festivals. Those film festivals provide important
revenue and contribution to operating margin.
SC has no experience in this field, therefore this could take up a significant amount of management
time and detract from other important strategic objectives, such as opening new cinemas and
growth.
SC may have to recruit additional staff to organise these events. This will increase costs further and
repress profit margins.
The events could cause clashes with cinema box office timetables and the building will not be
available to the general public throughout the event. This could cause many customers to go
elsewhere.
It could impact customer satisfaction and SC may not be able to achieve the 95% target.
There could be a negative impact on advertising and food and drink revenue.
If few films are shown, there will be less advertising revenue.
Distribution fees can also increase, as SC could be showing fewer films. This will reduce their
bargaining power with distributors and this will have a negative impact on gross profit margins.
However, it could attract wider audiences to SC.
Licences
If a cinema decides to extend its activities to host events for local businesses, it may not be covered
by existing licences.
This could have a detrimental impact on revenue and reputation for cinemas.
SC must ensure they have correct licences to extend the activities to cover corporate events and
conferences.
If not, their reputation and brand could be damaged and they could loose revenue through lost
licences. This is high risk.

Conclusions and Recommendations
SC should proceed with this opportunity, as it will help diversify their revenue streams and meet a
strategic objective.
This opportunity could generate revenue of £130k (1.8% to total revenue).
This could contribute £32,500 to operating profit (5.5% profit margin).
A key benefit of this opportunity is that it will enable SC to diversify, build corporate relationships and
place less reliance on box office revenue.
A key risk includes these events taking up management time.
It can also clash with cinema screenings and drive away loyal customers.
SC should ensure it has correct licence for events.
1) Discuss this opportunity with Jewel
2) Research costs of these events
3) Consider how much management time will be required to run these events
4) Consider recruiting a specialist team to run these events
5) Consider hiring a company to run corporate events
6) Discuss this opportunity with distributors
7) Evaluate whether this trial can be postponed to after Christmas
8) Review current licence rules and ensure SC has the correct licence to run and hold these
events.

Appendix 1 (i)
£’000 £’000 £’000

2018 2017 Change % change
Revenue 7,138 6,577 ↑ 561 ↑ 8.5%
CoS (2,533) (2,244) ↑ 289 ↑ 12.9%
GP 4,605 4,333 ↑ 272 ↑ 6.3%
OP Exp (2,339) (2,108) ↑ 231 ↑ 11.0%
Admin – HO (1,670) (1,442) ↑ 228 ↑ 15.8%
OP 596 783 ↓ (187) ↓ 23.9%
Box Office
Revenue 5,884 5,447 ↑ 437 8%

Cost of Sales (2,533) (2,244) ↑ 289 12.9%
43%
3,351 3,203 ↑ 148 4.6%
GP & OP
Overall GPM 64.5% 65.9% (1.4%)
Box Office GPM 56.95 = 57% 58.8% (1.8%)
OPM 8.3% 11.9% (3.6%)
200,000
43% (86,000)
114,000 19.1% of OP significant
Appendix 1 (ii)
Revenue streams
£’000 £’000 £’000

Box Office 5,884 5,447 ↑ 437 8% ↑
Food & Drink 728 675 ↑ 53 7.9% ↑
Advertising 526 455 ↑ 71 15.6% ↑
Food & Drink

% of BO 12.4% 12.4%
Advertising
% of BO 8.9% 8.4% 0.5% ↑
Advertising hit target 8% - fastest growth.
OP £
596,000
60,000
76,000
55,000
786,000

Appendix 1 (iii)
000 £000
Occupancy change Admissions B. office
Leicester (L) ↑ 0.8% ↑ 5 ↑ 2.5% ↑ 53 ↑ 2.9%
Nottingham (N) ↑ 0.7% ↑ 3 ↑ 2.4% ↑ 31 ↑ 2.8%
Grimsby (G) ↑ 2.7% ↑ 20 ↑ 10.6% ↑ 190 10.9% = 11%
Hull (H) ↑ 6.1% ↑ 19 ↑ 20.9% ↑ 163 20.5%
31.4%
Hit target 30%
Ticket Price Food & Drink

Leicester (L) 9.04 1.19
Nottingham (N) 8.91 1.13
Grimsby (G) 9.18 1.08
Hull (H) 8.72 1.02
Average price £9.01 vs £8.99
Admissions 653 606 47 ↑ 7.8%
Films 114 107 7 ↑
Customer satisfaction 93% 91% 2% ↑

Appendix 2
350 x 20 screenings x 52 weeks = 364,000
364,000 x 30% = 109,200
£8 x [80% x (109,200)] = 698,880
£14 x [20% x (109,200)] = 305,760
Revenue 1,004,640
GPM 57.5% 577,668
Add: Catering 150,000
Less: Pre opening costs (60,000)
Less: Operating Expenses (435,000)
Less: Head Office (140,000)
Profit 92,668
92,668 / 1,154,640 = 8%
92,668
Add: fit out costs 225,000
317,688
Pre opening costs £96,000 Profit = £56,668

(2016)
Appendix 3
Revenue 10,000
Share of revenue – caterer – 25%
Gross profit 65%
Operating profit 25%
£130,000 Total 1.8% Total Revenue
£32,500 Total 5.5% OP

(4 HOURS)
CASE STUDY
CANDIDATE NUMBER
page;
examiners.
ICAEW USE ONLY
ICAEW/CS/N18 248141
BLANK PAGE
ICAEW/CS/N18 248141
November 2018 Case Study: Bespoke Monogramming Limited (BM)
List of exhibits
1 About you, Afon Crabbe; your employer, Borax Beadle ICAEW Chartered Accountants
(BB); and your client, Bespoke Monogramming Limited (BM)
2 The design and related production industry
3 BM: history and overview
4 Email from Ffion Deans to Penny Price: BM financial and operational history and review
of management accounts for the three years ended 30 September 2017
5 BM: management accounts for the three years ended 30 September 2017
6 Email from Ffion Deans to Penny Price: review of BM business operations for the year
7 BM: purchasing and inventory
8 BM: computer aided design and production (CADP)
9 BM: customer evaluation and making sales
10 BM: evaluating suppliers and contracting for supplies
11 Email from Gayle Harries to BM board cc Penny Price: review of management

accounts, corporate responsibility, commercial review
12 Email from Shelly Drapes to BM board cc Penny Price: customer review for the year
13 Email from Viv Baines to BM board cc Penny Price: supplier review for the year ended
30 September 2017
14 Media articles
15 Email from Penny Price to Afon Crabbe, 7 November 2018: BM
16 BM: draft management accounts for the year ended 30 September 2018
17 Email from Ffion Deans to Penny Price, 7 November 2018: BM operations and financial
performance for the year ended 30 September 2018
18a Email from Viv Baines to Penny Price, 5 November 2018: new supplier contract
19a Email from Shelly Drapes to Penny Price, 2 November 2018: new customer contract

BLANK PAGE
Bespoke Monogramming Limited (BM): Case Study requirement
You are Afon Crabbe, a final-year trainee ICAEW Chartered Accountant working in the
business advisory unit of Borax Beadle (BB), a firm of ICAEW Chartered Accountants. One
of your clients is Bespoke Monogramming Limited (BM), a company which designs and
produces bespoke monogrammed bathrobes and towels for supply to businesses in the
luxury hotel and related hospitality industry. You report to Penny Price, a partner in Borax
Beadle.
Requirement
You are required to prepare a draft report for the BM board, as set out in the email dated
7 November 2018 from Penny Price to you (Exhibit 15). Your report should comprise the

Marks allocation

90%
100%
BLANK PAGE
EXHIBIT 15
EMAIL
From: Penny Price
To: Afon Crabbe
Subject: BM
BM has produced its draft management accounts for the year ended 30 September 2018.
BM’s board has asked Borax Beadle to help with assessing BM’s financial performance for
the year ended 30 September 2018. The board has also asked for advice on some specific
financial matters and broader strategic and operational issues. I am attaching the following:
 BM’s draft management accounts for the year ended 30 September 2018 (Exhibit 16)
 An email from Ffion Deans providing additional information about the management
accounts and board discussion notes concerning trade receivables (Exhibit 17)
 An email from Viv Baines about a new supplier proposal (Exhibit 18a) and related
media articles (Exhibit 18b)
 An email from Shelly Drapes concerning a new customer (Exhibit 19a), together with
media articles (Exhibit 19b).
Please draft for my review a report addressed to the BM board. The report should comprise
the following.
1. A review of BM’s draft management accounts for the year ended 30 September 2018 in
Your review should be based on the draft management accounts as set out in Exhibit 16.
It should cover revenue; each element of cost of sales; gross profit; and operating profit.
In your review you should refer to the additional information provided in Exhibit 17
relating to the draft management accounts. You should also answer the questions raised
by the non-accounting members of the BM board in relation to trade receivables (Exhibit
17).
2. An evaluation of the proposal to use Wisher as a supplier of base products (as detailed in
Exhibit 18a).
Using the assumptions in Exhibit 18a, calculate BM’s cost of sales, gross profit and
operating profit, for each of the years to 30 September 2019 and 2020, if BM decides to
use Wisher base products. You should evaluate (a) the adequacy of the assumptions and
(b) the information about Wisher, referring where possible to BM’s supplier criteria
(Exhibit 10). You should include any business trust and ethical issues, taking account of
the media articles in Exhibit 18b. Provide a clearly justified recommendation as to
whether BM should use Wisher as a supplier for its base products.
3. An evaluation of the potential financial contribution and the issues surrounding the
request to supply a new customer, MEC, with BM monogrammed products (Exhibit 19a),
referring also to the matters identified in Exhibit 19b.
You should evaluate the financial, operational and strategic factors against BM’s
customer criteria (Exhibit 9). Include any business trust and ethical issues. You should
provide appropriate calculations and commentary to support your evaluation.
BLANK PAGE
EXHIBIT 16
Bespoke Monogramming Limited
Draft management accounts

£000s
Notes
Revenue 8,493
Gross profit 1,552
Other operating costs 2 (1,416)
Interest charges (13)
Taxation (25)

Notes £000s
Non-current assets
Property, plant and equipment 3 594
594
Current assets
Inventory 4 326
1,767
Total assets 2,361
Ordinary share capital 200
Retained earnings 556
Total shareholders' equity 756
Current liabilities
Bank overdraft 158
1,605
Statement of cash flows 2018
Year ended 30 September £000s

Adjustments for:
Depreciation & loss on disposals 159
Interest charges 13
295
Change in inventory (31)
Cash generated from operations 300
Taxation paid (29)
Interest charges (13)
Purchase of PPE (364)
Proceeds from disposal of PPE 12

Cash and cash equivalents at end of year (158)
Notes to draft management accounts
Note 1 Cost of sales

2018
£000s
Base products 3,982
Monogramming materials 1,925
Production labour 433
Production overheads 601
6,941
Note 2 Other operating costs

2018
£000s
Administrative staff and overheads 879
Marketing and distribution 373
Allowance for impairment of trade receivables 86
Trade receivables written off 78
1,416
Note 3 Property, plant and equipment (PPE)
Leasehold IT &
Cost £000s £000s £000s £000s
At 1 October 2017 114 706 290 1,110
Additions - 188 176 364
Disposals - - (52) (52)
At 30 September 2018 114 894 414 1,422
Depreciation
At 1 October 2017 86 461 162 709
On disposals - - (26) (26)
Charge for the year 11 82 52 145
At 30 September 2018 97 543 188 828
Carrying amount at 30 September 2018 17 351 226 594
Note 4 Inventory 2018

£000s
Base products 217
Monogramming materials 109
326
Note 5 Trade and other receivables 2018

£000s
Other receivables 113
1,441
Note 6 Trade and other payables 2018

£000s
Trade payables (see Note 6a below) 1,269
Other payables 178
1,447
Note 6a Purchases and suppliers Annual Year-end

Purchases Payable
£000s £000s
Cassio (monogramming materials) 958 143
Fomenta (base products) 1,765 342
Hardy (base products) 1,864 295
Prospectus (monogramming materials) 977 183
Tooley (base products) 374 72
Other suppliers (not products) - 234
5,938 1,269
BLANK PAGE
EXHIBIT 17
EMAIL
From: Ffion Deans
To: Penny Price
Subject: BM operations and financial performance for the year ended September 2018
Additional information relating to the draft management accounts
a BM benefited from the Royal Wedding in May 2018, which created £750k of additional
one-off revenue from established and new customers.
b Boreal Spas’ expansion enabled BM to increase its revenue from Boreal by 40% this
year.
c The predicted increase in BM revenue from Cosset Hotels also occurred.
d Deep Wave Cruises (DWC) stopped buying BM products temporarily in March 2018
because of difficulties in BM’s delivery of orders. The issue was resolved, and trading was
later restored. Revenue from DWC was up overall by just 1% in the year.
e Both Cassio’s and Fomenta’s prices increased by an average of 10% by comparison with
the previous year. Hardy, Prospectus and Tooley held their prices at the previous year’s
levels.
f BM recruited new employees whose training costs are being reimbursed under the UK
government apprenticeship scheme. This training subsidy, which amounted to £50k in the
year to 30 September 2018, is netted against production labour costs.
g The investment in new IT and monogramming machines for the CADP system has
enhanced the range and complexity of design possibilities and increased production
capacity and speed. This resulted in an increase in efficiency in the CADP system.
h The trade receivables write-off, which occurred in December 2017, relates to Titanic
Cruises. After an outbreak of serious illness amongst passengers on a cruise, there was
adverse publicity on social media and Titanic suffered mass cancellations. Subsequently,
it went into liquidation, owing BM its trade receivable balance as at 30 September 2017.
Trade receivables
In the context of the trade receivables write-off, the following questions were raised by the
non-accounting members of BM board:
 BM makes an allowance of 20% of its year-end trade receivables balance. Is this too
prudent given all our other controls?
 With the large allowance for impaired trade receivables, could we not use that instead of
writing off the actual trade receivable as a separate expense? It is all making our
operating profit look much worse.
 Because it is clearly impossible to anticipate which of our customers are going to fail
financially, should we not just deal with each problem as it happens, rather than create a
problem where none exists?
 It appears that the reason BM cannot get rid of its continuing overdraft is that we have set
aside a lot of our funds in the allowance for impaired trade receivables. Can we not just
transfer some of that back into the bank account and save the interest payments?
Please answer these questions raised by the non-accounting members of the board. (Do not
perform any additional financial statement analysis.)
EXHIBIT 18a
EMAIL
From: Viv Baines
To: Penny Price cc: BM board
Subject: New supplier contract
In September 2018, BM was approached by Wisher Limited, a UK company created in

January 2017, based near Cardiff. Wisher specialises in producing the items BM uses as its
base products, from re-shredded cotton. Wisher is seeking to become an established BM
supplier from 1 January 2019. If BM decides to go ahead with Wisher, it would replace some
existing base product supplies with those supplied by Wisher.
Assumptions and information
Assumptions
1. BM expects to maintain its annual revenue at the same level as for the year ended 30
September 2018, and that this will accrue evenly within each year.
2. To maximise commercial efficiency in its trade with BM, Wisher would want to be
supplying 50% of BM’s base products.
3. For the 3-month period to 31 December 2018 BM is continuing to purchase all of its base
products from its existing suppliers.
4. In the initial 9-month period to 30 September 2019, the average cost of the base products
that BM purchases from Wisher will be 20% more than the average cost of the equivalent
base products purchased by BM from other suppliers in the year ended 30 September
2018.
5. In the 12-month period to 30 September 2020, Wisher expects to achieve economies of
scale. As a result, it should be able to supply its higher volume of base products for this
12-month period for the same total cost to BM as the total for the initial 9-month period to
30 September 2019. (Therefore, BM would save the cost of purchasing alternative base
products for 3 months of this 12-month period.) Wisher’s base product costs would remain
at the same level after that.
6. Carl Morgan estimates that BM’s ongoing testing of Wisher’s re-shredded cotton
products, to ensure continuing high product quality, might add a further overall 10% to
total production overheads in the year ended 30 September 2019 (by comparison with the
total production overheads in the year to 30 September 2018). Production overheads
would then remain at that increased level after that.
Other information
 Wisher can supply a full range of BM base products (bathrobes and towels). Wisher’s
base products are all manufactured using re-shredded cotton from local UK sources.
 Given their sustainable source, these base products are created with a slightly off-white
colour. This would be acceptable to most of our current clients.
 In the year to 30 September 2019, BM purchases could be approximately 40% of
Wisher’s total annual sales.
 BM will be responsible for collecting Wisher products and transporting them to its site.
 As a relatively new business trying to manage its cash flow, Wisher gives credit terms of
30 days from invoice date.
 Wisher is supported by Cardiff Local Government in its sustainability and local
employment programme.
EXHIBIT 18b
International Trader September 2018
Expansion of cotton re-shredding gathers pace

In what is claimed to be the biggest investment in re-shredding processing plants in Europe,
the HT group has recently acquired and created two new processing operations. One is the
takeover of Grindle manufacturing business just outside London. The other is located close to
Berlin in Germany. Both locations give good access to enormous quantities of unwanted
cotton clothes and related products, generated by local retailers, which these re-shredding
processes require. HT, which has a major re-shredding site near Stockholm in Sweden, aims
to open ten more sites over the next two years, near other major European cities.
HT claims that this new process of re-shredding cotton will become the dominant force in the
manufacture of all cotton products within the next five years, and accordingly it is investing
heavily in this sector. The process benefits enormously from economies of scale with the cost
of re-shredded products predicted to fall sharply, as critical re-shredding levels are reached.
In a change of production process, Grindle’s future aim is to draw most of its raw materials
from London, which has a huge number of clothes retail outlets. It will also benefit from good
access to the local and export markets which it will be serving. Dan O’Hare, the managing
director of Cyril (a major clothes retailer in the centre of London), stated: “Having a re-
shredding facility nearby will be a huge benefit to London clothes retailers. Getting rid of
unfashionable and unwanted cotton clothes inventory is a major problem – in future, it will be
collected and dealt with efficiently whenever needed.”
Another recently established, independent, re-shredding operation is Wisher, located in the

city of Cardiff. It is following a similar path in terms of its location near a major city with
access to large quantities of raw materials and looking to achieve a similar pattern of growth.
Geographic Global October 2018
Shredded fabric responsible for fire risk during manufacture and use
In a little reported incident in its factory in India, Shredex (one of the new driving forces
behind the innovation of shredding and re-compiling different natural fabric) has denied that
the end-product of re-shredded cotton created a fire risk. In a statement issued to local press,
Shredex has reiterated that the reason for a recent fire, which damaged the building and
caused production to cease, was an electrical fault.
Although that may have been true, the relevant fact is that the fire spread rapidly, and it is
believed that the newly-manufactured materials which caught fire so easily may have been
responsible. As a result, the manufacturers of such products are going to have to provide
clear evidence of rigorous fire safety tests before these new cotton-shreds can be stored and
used in the manufacture of finished products.
The Shredex statement also states that its process is completely safe and that criticism of its
safety standards and employment practices has come from rivals who do not want the re-
shredding industry to succeed. What is not in dispute is the enormous political and historical
importance of cotton production in India on small hand looms, made famous by Mahatma
Gandhi, which helped India to gain its independence.
EXHIBIT 19a
EMAIL
From: Shelly Drapes

To: Penny Price cc: BM Board
Subject: New customer contract
BM has been approached by an intermediary on behalf of the owner of a private cruise ship.
The owner, Anton Lewis, a European citizen, is the managing director of the Mediterranean
Exploration Corporation (MEC), which is a recently-registered UK company.
This cruise ship, which includes 40 luxury suites on board as well as spa and pool facilities, is
used on occasions by the company as a floating marketing location to entertain its wealthy
business associates. It is mainly used as the personal asset of the managing director.
This ship is also hired out to other wealthy individuals who wish to charter it for special event
cruises to exclusive locations in and around the islands of the Mediterranean and Atlantic.
MEC would like to enter into a contract with BM to purchase bathrobes and towels which
incorporate its motif and the date and location for each cruise.
The company owns five other larger luxury cruise ships, all of which operate outside the UK.
Initial discussion details
 The first batch (1,200 items – the estimated minimum needed per cruise) must be ready
for final inspection by 15 December 2018. The cruise would start on 1 January 2019.
 Two motif monogramming alternatives are proposed by MEC:
o If BM uses its own base products (Option 1) in the monogramming process, a
mark-up of 30% on its production costs would apply.
o If MEC supplies base products from its own source (Option 2) for the BM
monogramming process, MEC would be open to negotiating a price representing a
mark-up of up to 50% on the total of other BM production costs.
 A different bespoke motif would be needed for different events and there could be up to
ten motif changes in the year.
 Cruise locations can only be notified a short period before departure.
 BM is concerned that because of the relatively complex and changing design work in
these motif changes, the design and production process could be longer than usual.
 BM would be responsible for the delivery of these orders to the specific cruise locations.
 If BM successfully delivers the contract according to the agreed terms, then it would have
an opportunity to win other MEC contracts.
 It is believed that MEC’s other luxury cruise ships can cater for more than 5,000 wealthy
guests and their partners each year by way of different luxury cruises.
 MEC claims to generate revenue of more than £300 million a year globally.
 MEC has also indicated that it would want to pay BM in pounds sterling (£) using MEC’s
normal credit terms of 90 days through its bank based in Switzerland.
EXHIBIT 19b
International Trader News October 2018
The need to manufacture, export and not report
Recently a noticeable new type of customer has been observed in the UK market for luxury goods –
the billionaire oligarch, complete with private cruise ships. These are not so much sailing vessels as
floating hotels. Equipped with everything including helicopter landing pads, they are display
platforms for their owners to flaunt their wealth for guests and others whom they wish, or need, to
impress. For those fortunate enough to satisfy these wealthy owners and make them their customers
it is a case of almost too good to be true – supplying a customer in a world where money is no object.
Although money is not a problem for such customers, quality of service and quality of products most
certainly are. These customers require everything from the menus served on board, to the pillows on
which an important guest’s head is to rest, to be very high class. From restaurants and bars serving
the widest variety of menus and fine wines through to cinema screens showing the latest Oscar-
nominated films – if money can buy it, then it will have been bought to impress others. Poolside
facilities are second to none and steam rooms, spas and jacuzzis are all available to allow discreet,
relaxed mingling for the rich and famous.
However, from the other side, discretion by suppliers is paramount – no trading organisation acting
as a seller to these customers can ever advertise or claim that role. Although their demands may
sometimes appear almost fanciful, in other ways these very wealthy customers tend to be extremely
loyal to those they trust.
Suppliers who can match the demanding requests of these wealthy customers can expect to be paid
appropriately for their service. More importantly, they will almost certainly be recommended to
other similar customers in this exclusive circle – but only discreet suppliers should apply.
International Financial Trader October 2018

Expansion of MEC fleet
Those who study the movements of the many ships owned by the rich and famous will have
seen that the cruise operator MEC appears to remain located for operational purposes
outside the UK – despite having recently registered as a UK company. Its latest acquisition,
the cruise liner Intrepid, was given its final interior fitting-out in a shipyard in the Bahamas.
Prior to that, two of its other prestigious cruise liners were being given their major service
overhaul in another Caribbean shipyard.
When asked why a UK operator such as MEC would choose to purchase these services
based in other countries, a spokesperson for MEC stated: “Like all commercial operations,
we are looking for the best value for money for any goods and services we purchase. We do
not feel that we must support any local service provider who does not provide those services
at what we consider to be the best possible price. If a better service provider can offer a
better service at a lower price, we will always look to change to that provider.”
For companies like MEC, which have an almost unlimited worldwide choice in selecting the
suppliers that serve them best, physical location is no barrier to pursuing such a goal. Some
would consider that these actions are demonstrating not only a position of strength but also
an element of commercial opportunism and a lack of loyalty to suppliers.
Contents
Page

Introduction 2
Information provided in the CS Exam 9
Analysis of CS Exam information in Exhibit 15 10
Analysis of CS Exam Information in other exhibits (Exhibits 16-19b) 10
Requirement 1: Review of BM’s financial performance 15
Requirement 2: Evaluation of Wisher new supply proposal 15
Requirement 3: Evaluation of proposal to supply MEC 16
Overall Assessment Criteria (OAC) 16
Part 4: Appendices
Appendix 1: Analysis of BM’s management accounts 17
Appendix 2: Analysis of Wisher proposal 18
Appendix 3: Analysis of MEC proposal 19
Part 5: Marking Key

Introduction
This report covers the November 2018 Case Study exam: Bespoke Monogramming Limited (BM). It is issued in
conjunction with two illustrative scripts and related examiners’ commentaries. The first script was in the first
quartile of all assessed scripts; the second failed the exam. In reviewing these scripts, it is important to be
aware that it is rare for a script to be uniformly ‘good’ or ‘bad’. A successful script will present appropriate
coverage of all requirements but may include errors of calculation or logic; an unsuccessful script may contain
one or two appropriate sections and/or some good points but be let down by poor or incomplete text elsewhere.
Attached to this report are three appendices with examples of the sort of work that candidates did, or might
have done, under ‘financial analysis’ in each requirement. The two illustrative scripts offer further insights in the
area of financial analysis.
75.7% of all candidates sitting the paper passed, compared with 76.0% in July 2018 and 75.2% in November
2016. The pass rate reflects the fact that this case was of a similar standard to all recent case studies.
candidates that the BM case concerns a company engaged in the design and production of monogrammed
products (such as bathrobes and towels) for the luxury hotel, spa and cruise ship market. It has one main
revenue stream. The candidate is in the role of Afon Crabbe, a final-year ICAEW trainee Chartered Accountant
working in the business advisory department of Borax Beadle ICAEW Chartered Accountants (BB), reporting to
the engagement partner Penny Price. BM is a recently-acquired client.
The AI identifies that in August 2015 BM suffered a major bad debt which had (and continues to have) a big
impact on the business. The year to 30 September 2016 was a year of recovery and revenue growth of 7.3%
(£349k, up from £4,795k to £5,144k). In 2017 revenue grew strongly: up by £1,517k to £6,661k (29.5%). BM
relies on an overdraft (agreed limit of £250k). Because of increases in cost of sales and reducing gross margins,
it has to work hard on its cash flow to stay within its limit. The management accounting information in the CS
Exam shows that BM increased its revenue but gross margins were reduced again in 2018.
Requirements in the CS Exam followed on from the information provided in the AI. In summary, they comprised:
(1) an analysis of the revenue, cost of sales, gross profit and operating profit for 2018, by comparison with 2017.
There was also a request to explain bad debts and the allowance for doubtful trade receivables.
(2) an evaluation of a new supplier proposal from Wisher for 2019 and 2020. It had to be evaluated against BM
supplier criteria, together with an assessment of all the assumptions and business trust and ethical issues.
(3) an evaluation of the contract with a new customer (MEC) to supply products to one of its cruise ship. The
contract had to be assessed using BM’s customer criteria and evaluated by considering commercial (financial,
operational and strategic), business trust and ethical factors.
Tutor firms in their reviews have commented that “[t]his exam paper is consistent with past case study exams” and
that “as long as [candidates] tailored their answers to what was in the Case, then this Case was no more problematic than
any other.”
Study from the candidates’ perspective and that this exam was of a comparable level with previous exams in
assessing candidates’ professional skills.
Successful candidates followed the instructions provided in the rubric, and the instructions in each of the three
requirements, producing full and balanced answers to those requirements, including appropriate clearly-labelled
appendices. Their reports were properly structured, covered all requested aspects and contained concise,
relevant executive summaries, highlighting the key factors. Successful scripts provided logical, clear answers to
each requirement and the top scripts were of an excellent quality.

Candidates who failed did so for a variety of reasons but, as always, a small number who failed appear to
have misallocated their time between the three requirements. Some candidates who failed did not provide either
appropriate analysis or adequate evaluation of assumptions. Others failed to apply adequate judgement in a
particular section of the report, together with only basic conclusions and poor or general recommendations such
as (in this case), the specifically useless such as: “BM should increase its prices”. (Would that giving clients
financial advice or commercial recommendations could be so simple!)
heading with good appendices in all sections and good integration of AI and EP information – particularly for the
financial analysis calculations – and a sufficient use of relevant facts provided throughout the case. However,
the business issues and wider context in all requirements posed problems for a number of candidates.
requirement or calculation (such as considering assumptions); and, because of the importance of good analysis
to any section of the report, it is difficult for a candidate to recover from inadequate analytical work.
their analysis – particularly in Requirements 1 and 2. Weak candidates failed to demonstrate their judgement by
not critically evaluating assumptions presented in the case or by not reflecting adequately on their own analysis.
The ability to provide evidence of applying good judgement is a major differentiator in scripts.
candidates often presented a smaller number of conclusions, and offered general or weak recommendations.
loss. It also required a consideration of the allowance for trade receivables. Most candidates demonstrated the
required level of competence in performing the financial analysis against prior year. As one tutor firm stated, “it
was a very fair test, and strong analysis of the Advance Information would have prepared most students for the skills
required to score well in this part of the exam”. Weaker candidates struggled to explain bad debts and doubtful
trade receivables, which affected their judgements and recommendations.
Requirement 2 was to evaluate the proposal for a new supplier proposal from Wisher by calculating the revenue
and cost of the proposal for two future periods. Candidates were also asked to assess the adequacy of the
assumptions made and to consider this proposal against BM supplier criteria (Exhibit 10). Strong candidates
provided the analysis and evaluation of all issues based on good preparatory work. Weaker students did the
calculations but did not question assumptions appropriately. Their conclusions and recommendations were
similarly weak.
Requirement 3 concerned the evaluation of a new customer proposal from MEC. Most candidates presented
clear financial calculations in an appendix but performed less well on the commercial (financial, operational and
strategic) analysis. Weaker candidates provided less convincing analysis of business trust and ethical issues
and were less competent on related judgement. They failed to provide an appropriately balanced consideration
of all the issues or to tie the information back to matters previously provided in Exhibit 9. Many had only weak
conclusions and poor uncommercial recommendations.
Executive Summary (ES) and Overall Assessment Criteria. Most reports contained an ES which dealt with the
different sections of the report, but many did not always focus on the key factors specific to each section. Good
candidates demonstrated the ability to assess the BM scenario and write an appropriate, structured, relevant
report. These reports used suitable tact, with reasonable spelling and grammar. Weak scripts were not well
written and showed less evidence of a well-structured report in sections – possibly the result of poor planning.
Conclusion
BM dealt with a current business issue – that of corporate collapse and bad debts – and the issue of reducing
gross margins. It was set at an equivalent level to previous cases. As one tutor firm stated, “This case will have
provided a fair test of candidates’ professional skills and knowledge”. The examiners agree that the BM case was a
fair assessment which rewarded thorough preparation and understanding of the AI, as well as good integration
with CS Exam information. This was evident in the scripts of strong candidates. Those candidates who were
poorly prepared, or could not adapt their analytical thinking, found this CS Exam testing.

The Case Study relates to Bespoke Monogramming Limited (BM), an owner-managed company based on the
outskirts of Cardiff (the capital city of Wales). BM is engaged in the design and production of monogrammed
products (bathrobes and towels) for the hotel and related hospitality industry. The candidate is in the role of
Afon Crabbe, a final-year trainee ICAEW Chartered Accountant working in the business advisory department of
Borax Beadle (BB) reporting to the engagement partner Penny Price. BM is a new client.
1 About you, Afon Crabbe; your employer, Borax Beadle ICAEW Chartered Accountants (BB); and your
client, Bespoke Monogramming Limited (BM)
2 The design and related production industry
3 BM: history and overview
4 Email from Ffion Deans to Penny Price: BM financial and operational history and review of management
accounts for the three years ended 30 September 2017
5 BM: management accounts for the three years ended 30 September 2017
6 Email from Ffion Deans to Penny Price: review of BM business operations for the year ended 30
September 2017
7 BM: purchasing and inventory
8 BM: computer aided design and production (CADP)
9 BM: customer evaluation and making sales
10 BM: supplier evaluation and contracting for supplies
11 Email from Gayle Harries to BM board cc Penny Price: review of management accounts, corporate
responsibility, commercial review
12 Email from Shelly Drapes to BM board cc Penny Price: customer review for the year ended 30
September 2017
13 Email from Viv Baines to BM board cc Penny Price: supplier review for the year ended 30 September
2017
14 Media articles

By studying and analysing this Advance Information, candidates could establish an overall picture of BM.
(Additional commentary by the examiners is provided in this font and in brackets.)
Exhibit 1 provides a brief background to the candidate Afon Crabbe, the firm Borax Beadle (BB) ICAEW
Chartered Accountants and BM. (This exhibit identifies the range of work covered and necessary skills expected
of the candidate. These include the skills of analysing and assessing clients’ financial statements to identify
issues and concerns relating to their financial activities; performing further calculations and financial analysis to
identify and evaluate financial strengths and weaknesses of clients, their customers and suppliers; and
analysing and evaluating commercial, business trust and ethical considerations on clients’ future decisions and
providing the necessary clear opinions and reasoned judgements on all issues.)
Exhibit 2 provides a summary of the design and related production industry and a brief summary of the
bespoke monogramming industry. (In particular, it identifies the fierce competition which exists between the
many small organisations (not identified) which operate in this industry and the need to supply high-quality
goods and consistently good customer service.)
Exhibit 3 gives a brief history of BM and its four key business operations:
 purchasing and inventory

 computer aided design and production (CADP)
 customer evaluation and making sales
 supplier evaluation and contracting for supplies.
BM operates from leased offices and production space on a site in a business park on the outskirts of Cardiff
which has good road, rail and air transport links. BM started conducting its monogramming operation on a series
of eight CADP monogramming machines (whose individual output is 100 items per day). Gayle Harries, the
founder and Managing Director of BM, identifies the strength and weakness of the company’s operation: “BM
sells a luxury product, which because of the bespoke monogramming process becomes totally customised.
Because of that process, there is then only one buyer for these finished goods. Customer satisfaction is
therefore paramount.”
Exhibit 4 is an e-mail from Ffion Deans (FD) to Penny Price (PP) accompanying the BM management accounts
for the three years ended 30 September 2017. It provides a general review of BM’s previous financial history
and of these management accounts, highlighting key points which cannot easily be discerned from them. The
general review includes details concerning customers (drawn from the luxury hospitality industry); inventory
(mainly base products and materials with little finished goods or WIP); and that all purchases are made in
pounds sterling. In August 2015 BM suffered an unexpected major bad debt of £222k (Majestic). This write-off
represented over 60% of BM’s trade receivables and almost 20% of BM’s operating costs. The impact on
recurring revenue (more than £600k) was also significant. As a result of this BM needed to negotiate increased
overdraft facilities (maximum £250k) and placed financial controls on all expenditure. It undertook a review of
customers’ creditworthiness and created a general 20% allowance for the impairment of year-end trade
receivables in its management accounts. BM also conducted a review of its suppliers to evaluate any risks to its
supply chain. (This summary financial story, provided by FD, explains the critical impact on operations and the financial
statements caused by the Majestic bad debt. The accounting treatment of the bad debts and the creation of the 20%
allowance for doubtful trade receivables must be fully understood by candidates together with other numerical information
provided in later exhibits to enable a comprehensive understanding of BM financial story and transactions.)
Exhibit 5 provides five pages of BM’s management accounts and notes for the three years to 30 September
 BM achieved a small growth in revenue of £349k (7.3%) from 2015 (£4,795k) to 2016 (£5,144k) as it
recovered from the impact of the Majestic bad debt; but there has been a very strong growth of £1,517k
(29.5%) from 2016 to 2017 (£6,661k) as a result of investment in production facilities and a marketing drive.
(Further analysis of revenue may be available through the notes below and subsequent exhibits.)
 Gross profit % has declined marginally over the three years from 25.0% (2015) through 23.1% (2016) to
20.5% (2017). (This decline indicates that BM experienced rising direct costs against the sales being made.)
 Absolute gross profit has improved in 2017 to £1,364k from being relatively static in the previous two years
– at around £1,190k. (Given the large increase in sales this low increase in GP is of concern for BM viability.)
 There are steady percentage changes in operating costs by comparison with revenue, down from 24.4%
(2015) to 17.9% (2017) – whilst the absolute figure for operating costs has remained relatively static at

under £1,200k (approximately) over the three years. (This steady percentage improvement has occurred
following the Majestic bad debt experience in 2015 and the subsequent creation of the allowance for doubtful accounts
receivable – indicating good control of other operating costs.)
 Operating profit has been improving significantly in absolute terms over the three years (from £29k in 2015 to
£169k in 2017). Operating profit in percentage terms (against revenue) has improved but remains very low at
only 0.6% in 2015; 1.2% in 2016; 2.5% in 2017. (Given the apparent firm control in operating costs, the main
impact on OP% is the noticeable decline in GP% over these three years.)
 The statement of financial position indicates that after two lean years in 2015 and 2016, BM’s investment of
£230k in non-current assets in 2017 is a sign of increased trading confidence. (An analysis of the relevant note
3 (below) reveals more).
 In 2015 year-end inventory was £532k (almost 15% of cost of sales). Since that time, following the major re-
appraisal of working capital control and operations, the level of inventory has dropped significantly to
approximately 5.6% of cost of sales. (This indicates that BM now has good control of purchasing, inventory levels
and cash flow.)
 There has been a major slackening of the accounts receivable against revenue over the three years. (This
reflects the artificially low starting-point of the 2015 year-end receivables caused by the deduction of the Majestic bad
debt balance of £222k. The year-end 2016 trade receivable (gross – before the 20% doubtful accounts receivable
allowance) against revenue is approximately 49 days – above the 45 days suggested in Exhibit 9. The year-end 2017
trade receivable of £1,231k (gross) represents approximately 67 days. BM suggests there has been a surge in sales
activity close to the 2017 year-end which may account for some of this increase but it may also indicate weaker
controls by BM which, given its customer evaluation criteria and the need to control its overdraft, is a concern.)
 The level of trade and other payables is increasing steadily in absolute terms (from £744k in 2015 to
£1,061k in 2017) – this has not changed significantly in percentage terms against relevant costs in the
statement of profit or loss. (This increase in trade and other payables indicates that BM is paying its creditors
reasonably promptly. This is important from a corporate credibility position – see further analysis below.)
 The statement of cash flows (SCF) – reconciling to the bank overdraft – indicates that the levels of cash
being generated from operations are not that significant when compared with the impact of changes in the
components of working capital. This means that control of each element of working capital (particularly trade
receivables) is crucial (see comment above). Otherwise the investment in non-current assets in 2017 of
£230k is the only significant item. It is worth noting that BM has not taken out any long-term loan to match
its non-current investment. The bank overdraft remains at a similar level in 2016 (£1,386k). (The SCF tells an
important story and requires detailed reading and understanding. It is worth noting that BM has not taken out any long-
term loan to match its investment in non-current assets – as a result, that investment has drained working capital and is
causing BM to continue in overdraft. The SCF should be reviewed again after the information on the notes to the
accounts has been assimilated, together with other exhibits later in the case, to ensure full comprehension.)
o Cost of sales: overall these costs are increasing against revenue each year, from 75.0% (2015) to
79.5% (2017), which is a worrying development. (Further detailed numerical analysis is possible but the
main detail is that it is the cost of base products and monogramming materials that is increasing ahead of
increases in revenue. For BM the issue is whether these costs can be controlled – or passed on.)
o Other operating costs: overall the operating costs are decreasing as a percentage of revenue –
down from 24.4% in 2015 to 22.0% in 2016 and 17.9% in 2017. (The analysis of operating costs rather
than operating profit provides a more meaningful assessment of BM’s ability to control its costs. It is also
worth noting that the allowance for impairment of trade receivables (approximately 10% of operating costs)
continues to be significant whilst the year-end trade receivables balance continues to increase.)
o Non-current assets: information is provided for all of the three years since the beginning of October
2014, broken down into the major categories and showing the related depreciation. (This is an
important note but its significance lies more in what is not happening rather than what is happening. There
have been no substantial transactions (acquisitions or disposals) from October 2014 until the year ended 30
September 2017 – and the impact of that investment on cashflow is discussed above. The funding of non-
current asset investment may need to be reviewed.)
o Inventory: this has reduced from £532k in 2015 to £223k in 2016 and £295k in 2017. (This indicates
that where BM can control its operations and costs internally it is effective and successful.)
o Trade and other receivables: given the low and consistent level of other receivables, the major
changes in this figure are in (net) trade receivables. (See further detailed analysis (above) concerning
changes in gross trade receivables. Enforcement of BM’s trading policy needs to be kept under close review.)
o Trade and other payables: given the steady level of other payables, all changes in this category, in
absolute terms, and against relevant purchases, relate to trade payables. (These changes appear to
indicate that BM pays its trade suppliers slightly less promptly – but this could be due to timings of purchases.
Given its overdraft, BM may be trying to manage its position by using extra trade credit. This can be risky.)

Exhibit 6 is an e-mail from Ffion Deans to Penny Price, comprising an overview of BM’s 2017 business
operations. Because there is just one revenue stream, with a fixed price product, any further analysis of revenue
mainly concerns volume of items produced and sold. As seen in the management accounts, the increase in
revenue in 2017 of £1,517k (29.5%) over 2016 is a significant achievement – caused by BM’s focused
marketing and sales drive. However, the fact that cost of sales is increasing more rapidly means that GP margin
continues to reduce – a matter of growing concern. (The exhibit also explains that some customers placed sales orders
close to the year end which had an effect on year-end trade receivable balances – and there was a linked increase in activity
with purchases and trade payables BM stayed below its agreed overdraft limit of £250k at all times.)
Exhibit 7 describes BM’s purchasing and inventory – prepared by Carl Morgan (head of production, warehouse
and transport). The main facts are that BM purchases only best-quality base products (with a gsm of 600 or
above) which enables monogramming to occur without distortion. BM’s inventory comprises only the purchased
base products and cotton and silk thread monogramming materials. Finished goods – monogrammed products
– are not held in inventory and are not valued in BM’s accounts. (This short exhibit provides clear information about
BM’s attention to quality in its purchasing to avoid production problems. It also emphasises the problem of making
bespoke products in the event of any failure to pay by customers – these products have no value to other buyers.)
Exhibit 8 describes BM’s computer aided design and production (CADP) operation, highlighting BM’s strength
in providing customers with unique and highly-valued designs which are thoroughly tested and agreed by
customers before production. It also provides an average production cost breakdown for an average BM product
(This Exhibit provides information on current production capacity (1,200 items per day) and output. It also provides
information showing how costs have increased over the past three years whilst the product selling price has remained at
£50, thereby reducing contribution per product.)
Exhibit 9 describes BM’s customer evaluation and sales process. It reviews the collapse of prestigious
customer Majestic and presents a schedule of annual revenue and year-end receivables for 2016 and 2017.
The detailed customer appraisal criteria are also presented together with two customer case studies and
evaluations. (Candidates should have ensured that they understood the financial detail concerning revenue and accounts
receivable and reconciled the total of the year-end receivables in this schedule with the figure for trade receivables in Note
5 of the accounts [the figure in Note 5 is net of the 20% allowance in the accounts]. Candidates must also have made sure
that they understood the customer evaluation criteria, and in particular how the criteria are applied. The evaluation is
summarised and justified in the two customer case studies depicted.)
Exhibit 10 provides information on BM’s supplier evaluation and contracting for supplies. There is a schedule of
annual purchases and year-end payables for 2016 and 2017, broken down by the major components of cost of
sales (base products and materials) for UK and overseas suppliers. There is also a list of supplier evaluation
criteria together with two case studies of suppliers and their evaluations. (Candidates should have ensured that they
could reconcile the schedule of purchases in this exhibit with each component of the cost of sales in Note 1 of the
management accounts [this would also require taking account of opening and closing inventory identified in Note 4]. They
should also have made certain that they were fully familiar with the supplier evaluation criteria, how they are applied, and
how the evaluations are derived and justified in the two supplier case studies presented.)
Exhibit 11 is an email from Gayle Harries to the BM Board summarising: the review on the 2017 management
accounts; BM’s corporate responsibility; and a commercial review considering financial, operational and
strategic risks. (This exhibit identifies that the company has performed well in 2017 in terms of revenue and identifies the
target for 2018 as £8 million. It also identifies its production level for 2018 as being 160,000 items. Despite relentless
pressure on costs, BM is unable to raise prices, but is aiming to keep its overdraft down to £150,000 in the year to 30
September 2018. BM is involved in projects to create a sustainability chain and to increase the use of re-shredded cotton
provided that it meets BM’s quality standards. The financial, operational and strategic risk review covers the full spectrum
of possibilities for this business.)
Exhibit 12 comprises an email from Shelley Drapes to the BM board and Penny Price providing a customer
review for the year ended 30 September 2017. This review is a brief summary of the recent activity of each
customer together with some predictions concerning future possible trade (in terms of growth or opportunities) in
the year ahead, with that customer and any related businesses. (The information provided in this exhibit is
important. It provides an indication of where BM believes that growth in revenue terms will occur for its business. It is a
broadly positive review indicating that BM’s business is expected to grow. It should be read in conjunction with Exhibit 11
to obtain a more complete picture of BM’s future.)

Exhibit 13 comprises an email from Viv Baines to the BM board and Penny Price with details of a supplier
review for the year ended 30 September 2017. The review presents and comments on the five major suppliers
of base products and monogramming materials. (This exhibit provides details of these suppliers which indicate the
strengths and weaknesses of the supply chain. Some of the problems that have occurred in the past year, such as the steady
increase in prices from an overseas supplier, could also be seen as long-term threats. Some of the product and operational
successes (such as the quality of the linen-cotton products supplied by Tooley) might also represent avenues for future
opportunities. This information in this exhibit should be read in conjunction with Exhibit 11 to obtain a more complete
picture of BM’s future.)
 Exhibit 14a is an item from International Travel News concerning the “disappearance” of monogrammed
products from luxury hotels, and similar establishments, throughout the world. (This article indicates the prize
of possession of the type of products supplied by BM to luxury hotels – as well as the dubious ethics of some hotel and
spa guests.)
 Exhibit 14b is from UK Trade News. It covers the cachet of unique souvenirs surrounding a specific high-
profile event in the UK – that of the Royal Wedding in Windsor – and the prices that monogrammed items
relating to such an event can command. (This is further evidence that high-quality monogrammed items are in
demand for a wider audience. It also might have indicated the commercial importance of this particular event to BM as
a supplier of monogrammed products to exclusive local hotels.)
 Exhibit 14c UK Financial Trader reports on the serious issue of the need for all UK organisations to identify
that the source of receipts or transfers of funds through their organisations is legitimate. (This article
highlights the issue of money laundering particularly in the luxury product market where some customers may be
trying make legitimate their proceeds of “somewhat shady deals from somewhat sunny places”. Candidates may need
to be aware of this issue.)
 Exhibit 14d is a report in the Trader International describing how recycled cotton (previously known as
“shoddy”) was becoming an increasingly important product and how the cotton recycling process was likely
to become as important as paper recycling in the near future. (This article identifies the major issue of
sustainability in any production process – in this case that of cotton – and how its acceptability (cotton “chic”) can
change a marginal activity, such as re-shredding, into a mainstream, increasingly important activity.)
 Exhibit 14e is an International Monthly article describing the “price of working to unreasonable deadlines”. It
concerns the detrimental effect of stress in the workplace and the need for companies to be fully aware of
the negative impact this can have on employees (initially) and ultimately on the products or services
delivered to customers. (The article suggests that there is an enormous hidden cost to companies which is not taken
into account or given sufficient publicity.)
 Exhibit 14f is a report in UK Financial Journal concerning the surge of corporate collapse of many large
companies in the UK in 2018 and the devastating effect that such collapses can have on suppliers –
particularly smaller businesses. (The article reminds candidates of the important impact of corporate collapse on
weak or unprepared companies. The solution suggested – insurance – is neither commonplace nor cheap.)

Information provided in the CS Exam
The CS Exam information contained nine pages of additional information by way of seven exhibits. The new
 Exhibit 15 – Email from Penny Price to Afon Crabbe, 7 November 2018: BM Limited
 Exhibit 16 – BM: draft management accounts for the year ended 30 September 2018
 Exhibit 17 – Email from Ffion Deans to Penny Price, 7 November 2018: BM operations and financial
performance for the year ended 30 September 2018
 Exhibit 18a – Email from Viv Baines to Penny Price, 5 November 2018: new supplier contract
 Exhibit 19a – Email from Shelly Drapes to Penny Price, 2 November 2018: new customer contract
Please draft for my review a report addressed to the BM board. The report should comprise the following.
1. A review of BM’s draft management accounts for the year ended 30 September 2018 in comparison with the
year ended 30 September 2017.
Your review should be based on the draft management accounts as set out in Exhibit 16. It should cover
revenue; each element of cost of sales; gross profit; and operating profit. In your review you should refer to
the additional information provided in Exhibit 17 relating to the draft management accounts. You should
also answer the questions raised by the non-accounting members of the BM board in relation to trade
receivables (Exhibit 17).
2. An evaluation of the proposal to use Wisher as a supplier of base products (as detailed in Exhibit 18a).
Using the assumptions in Exhibit 18a, calculate BM’s cost of sales, gross profit and operating profit, for
each of the years to 30 September 2019 and 2020, if BM decides to use Wisher base products. You should
evaluate (a) the adequacy of the assumptions and (b) the information about Wisher, referring where
possible to BM’s supplier criteria (Exhibit 10). You should include any business trust and ethical issues,
taking account of the media articles in Exhibit 18b. Provide a clearly justified recommendation as to
whether BM should use Wisher as a supplier for its base products.
3. An evaluation of the potential financial contribution and the issues surrounding the request to supply a new
customer, MEC, with BM monogrammed products (Exhibit 19a), referring also to the matters identified in
Exhibit 19b.
You should evaluate the financial, operational and strategic factors against BM’s customer criteria (Exhibit
9). Include any business trust and ethical issues. You should provide appropriate calculations and
commentary to support your evaluation.


Analysis of CS Exam information in Exhibit 15
 Using the new financial information, candidates should assess the draft management accounts for the year
ended 30 September 2018 (2018) in comparison with the year ended 30 September 2017. The exact
financial analysis comprises an analysis of “revenue; each element of cost of sales; gross profit; and operating
profit” in comparison with the equivalent 2017 results. The review should also refer to the additional
information provided in Exhibit 17. Candidates should also answer “the questions raised by the non-accounting
members of the BM board relating to trade receivables” (Exhibit 17)
 Evaluating the new Wisher proposal to supply base products meant considering the information as provided
in Exhibit 18a (by both parties), concerning the financial expectations relating to this proposal as well as
other Wisher factors. Specifically, candidates had to “calculate BM’s cost of sales, gross profit and operating
profit, for each of the years to 30 September 2019 and 2020, if BM decides to use Wisher base products”. This meant
constructing a projected statement of profit or loss (as per the BM draft management accounts) for this
Wisher proposal using the information provided. Candidates had to “evaluate (a) the adequacy of the
assumptions and (b) the information about Wisher, referring where possible to BM’s supplier criteria (Exhibit 10).”
They were also instructed to “include any business trust and ethical issues, taking account of the media articles in
Exhibit 18b and they had to “provide a clearly justified recommendation as to whether BM should use Wisher as a
supplier for its base products.” This meant referring to BM’s current financial results and weaknesses together
with BM’s existing corporate ethos and its supplier evaluation criteria – as presented in the AI.
 The third requirement entailed “the evaluation of the potential financial contribution and the issues surrounding the
request to supply a new customer, MEC, with BM monogrammed products” (including any ethical or business trust
issues)” as indicated in Exhibit 19a and b. Candidates were specifically requested to “provide appropriate
calculations and commentary to support [their] evaluation.” (The appropriate template for the calculation had been
provided in the AI Exhibit 8.)
executive summary, within the time available in order to produce a well-balanced report.
Analysis of CS Exam information in other exhibits (Exhibits 16-19b)
From reading the other new exhibits, candidates should have established the following.
together with accompanying notes. This information show details of: revenue, cost of sales and gross profit for
BM; non-current assets; trade and other receivables; bank loans and trade and other payables – including
analysis by supplier. The 2018 accounts are in a similar format to the 2017 information presented in the AI and
should not have posed any problem for candidates to assimilate. (This should have been a highly predictable exhibit
– although the actual figures would not have been known in advance. Analysis of the actual results to 30 September 2018
would have been anticipated and would have been normal and essential preparatory work. Detailed analysis of the AI
figures, given that there is effectively only one revenue stream, would have focused on the cost of sales, gross profit and
operating profit and it is this analysis of the financial statements which is requested in the CS Exam.)
Exhibit 17 is an email from Ffion Deans (FD) to Penny Price (PP) providing additional detailed information
concerning BM’s operations and financial performance for the year ended 30 September 2018. This is to be
used in the financial statement analysis performed by the candidates in Requirement 1 and as contextual
information for Requirement 2 and 3. This exhibit also contains details of questions raised by the non-
accounting members of BM board relating to the “trade receivables write-off”. These questions include whether
“the allowance of 20% on year-end trade receivables … is too prudent” and a query “concerning the impact of writing off
the actual trade receivable as a separate expense [from the allowance] … making [BM’s] operating profit look much
worse”. (The numerical performance analysis should have concentrated on the significant increase in BM’s revenue offset
by the higher changes in cost of sales and therefore the decline in GP% in 2018 by comparison with 2017. As well as
explaining the impact of the 20% allowance for doubtful trade receivables, candidates had to put these operating costs in
the context of the actual financial performance of BM. They also needed to be diplomatic in the recommendations made –
as well as trying to avoid exposing their own lack of understanding concerning this issue.)
Exhibit 18a comprises one page of information on the new supplier proposal concerning Wisher. There is a
mixture of assumptions and information provided by both BM and Wisher: maintaining annual revenue at current

level (a simplifying assumption for any subsequent calculations); the supply of base products by Wisher to be 50% of
BM base products (this seems a very high percentage); increased costs (by 20%) in the 9-month period to 30
September 2019 (any cost increases are problematic for BM); significant reduction in costs in the subsequent year
(depends on future economies of scale); Wisher base products derived from re-shredded cotton (this sustainable
source suits BM’s ethos but causes quality control and production cost increases). Information concerning relative sizes
of both businesses (allows evaluation under BM supplier criteria), transportation responsibilities (all additional but
unspecified BM costs), terms of trade (tighter than other BM suppliers) and further similarities in corporate ethos are
also provided. Other information relating to this proposal is included in Exhibit 18b. (Candidates had to calculate
BM’s cost of sales, gross profit and operating profit for each of the years to 30 September 2019 and 2020. This total
calculation should follow the format of BM’s statement of profit or loss in either the AI or CS Exam. Candidates were
expected to be able to identify this format and insert the appropriate newly-calculated figures easily. The financial and
operational assumptions given had to be assessed, as well as any that were missing. Candidates also had to “include any
business trust and ethical issues taking account of the media articles in Exhibit 18b”.)
Exhibit 18b comprises two short media articles. One relates to the expansion of cotton re-shredding operations
throughout Europe in the future manufacture of cotton products. The second raises the question of the safety of
re-shredded products. (From the AI, candidates would have been aware of BM’s active interest in this sustainable
method of manufacturing base products. These articles confirm the positive and negative aspects of this change towards a
new manufacturing process. Both articles are easy to assimilate and to incorporate into the discussion concerning Wisher’s
manufacturing process and products.)
Exhibit 19a is an email from Shelly Drapes to Penny Price providing details concerning a new customer MEC,
and its proposal for BM to supply it with products under two possible alternative arrangements. There is both
numerical and descriptive information concerning this proposal which has to be analysed and appraised in the
context of BM’s production costs – as provided in the AI – and its customer evaluation criteria. (Candidates have
to assess this proposal using different criteria: primarily a numerical and financial calculation of the impact of accepting
this proposal under both alternatives. Candidates must also consider all the operational factors: base product quality and
production impact; design creation and agreement; delivery locations and deadlines – all from both a standard commercial
perspective and in the light of BM’s experience with similar customers. Candidates must also assess MEC, as far as
possible, against the BM customer evaluation criteria and assess the additional risks highlighted by the articles in Exhibit
19b. The proposal needs to be assessed and a recommendation made.)
Exhibit 19b comprises two media articles. The first concerns the increase in a new type of customer in the UK
market for luxury goods – the billionaire oligarch – and those who are the discreet suppliers to these customers.
The second article focuses on the international business location and choice of supplier made by the MEC
cruise operator. Both articles raise concerns over the activities of organisations which involve significant
international operations that are difficult to monitor. (These articles develop issues introduced previously in the AI and
should have served to raise awareness (or remind candidates) of the matters involved in these instances. Candidates need to
be aware of what those interacting with such businesses need to consider in their commercial dealings: the loyalty to
suppliers of such customers, the sources of their wealth, the need for supplier discretion, all set against the need to act
transparently and to consider their own position and reputation in those interactions. These all impact BM in assessing this
new customer.)
All the information provided in the CS Exam follows on from the financial and commercial story told in the AI.
The main facts are that the growth in BM revenue by £1,832k from £6,661k to £8,493k is a growth of 27.5% –
above the target growth of £8 million (20%). With BM’s product prices assumed to have been held during the
year, the revenue increases are due to increases in volumes. BM margins have declined from 20.5% to 18.3%
because of the comparative increase in cost of sales and the impact of this is reflected in operating profit
margins – down from 2.5% to 1.6%. Operating profit has also been affected by the Titanic bad debt write-off and
the increase in the allowance for doubtful trade receivables. (There is a need for careful, integrated financial analysis
of the BM results to analyse all changes and the application of logical judgement to that analysis. There is also the need for
a clear explanation of bad debts and the allowance for doubtful trade receivables to the non-accounting members of the BM
board.)
The story, which is established in the financial statements, is further developed in the scenarios for
Requirements 2 and 3. In Requirement 2, candidates have to assess, using structured financial data analysis, a
new supplier proposal which affects the major issue facing BM – that of increasing cost of sales whilst sales
prices remain static. There is a need to apply good judgement in assessing the assumptions concerning the
Wisher proposal and to make a clear recommendation. Requirement 3 needs a structured financial, operational
and strategic review of the new customer proposal from MEC, an organisation with specific requirements and
factors which need to be addressed and evaluated. Information provided in the CS Exam and some information

already supplied in the AI concerning all these issues must be used. Both Requirement 2 and Requirement 3
included the consideration of business trust and ethics.
For Requirement 1 the financial statement analysis of the management accounts for BM for the year to 30
been a straightforward exercise numerically given that revenue analysis related to only one type of product and
thus was not complicated. Candidates should have looked for the key changes in cost of sales and gross profit
– based largely on assessing Note 1 of the 2018 management accounts by comparison with the equivalent
information in Exhibit 5 from the AI. The accompanying explanatory notes in Exhibit 17 to the management
accounts had to be considered against information from Exhibits 12 & 13 and should have been a
straightforward exercise to review, assess and integrate into a report. (The specific issue that some non-accounting
members of the board may not understand the issue of bad debts and the allowance for doubtful trade receivables and their
impact on operating profit and the BM overdraft requires understanding followed by clear explanations. For a badly-
prepared candidate who does not understand, or cannot explain the issue succinctly, this section may not have been as easy
as it should have been.)
Requirement 2 required some very basic financial data analysis to calculate a projected BM statement of profit
or loss for the new Wisher supplier proposal for the years 2019 and 2020. The calculations are based on the
assumptions provided by Wisher and developed by BM. Candidates should have evaluated each assumption.
The most important factors were the percentage (50%) of BM supplies that Wisher wanted to make together
with the 20% increase in base product costs that a switch to Wisher’s re-shredded product would cause – which
would make the supplies in the initial period very questionable financially. The massive reduction in Wisher
product costs in the subsequent period – leading to a very positive result for BM – is also highly questionable.
Most of the other commercial factors provided as information in the CS Exam are positive and in accordance
with BM’s supplier criteria and corporate ethos. (The calculations, based on BM’s statement of profit or loss, are
straightforward but provide mixed information. There are also other factors to be considered and evaluated. Professional
judgement – particularly on the immediate financial impact versus the longer-term gain – is essential. In assessing the
commercial situation, would BM want to reduce by 50% base product supplies from its established suppliers, for base
products from one single unproven supplier? The risk would be huge. For Wisher to supply a smaller percentage would
make much more sense financially and operationally. A sensible evaluation of financial, operational and commercial
criteria, including any business trust factors, with a clear conclusion and recommendations, is needed.)
Requirement 3 required the evaluation of the new MEC customer proposal with its specific criteria. Candidates
should have used the numerical information provided for the two options proposed to assess the new contract,
its profitability and its materiality using a structured template provided in the AI. It is essential to BM to ensure
that all operational issues, and the possible problems, are considered in context against the value of this initial
contract in terms of the contribution from each option. (Candidates should have calculated the contribution for both
options, decided which of the two might be the best and then critiqued the other MEC criteria (or assumptions) before
arriving at a final conclusion and offering recommendations. It meant identifying and evaluating the commercial, business
trust and ethical issues, which required a logical and integrated review of AI customer criteria and CS Exam information.)
Grades were awarded under four main topics: Review of BM’s financial performance; Evaluation of Wisher proposal;
Evaluation of MEC proposal; Executive summary and Overall Assessment Criteria. For each topic, under each of the
Competent); IC (Insufficiently Competent); ID (Insufficiently Demonstrated); NA (Not Attempted). The number of
boxes per topic and skill (below) reflects an even balance between the three main requirements, as indicated in the
CS Exam rubric.

Review of BM’s financial performance and appendix 3 3 3 2 11
Evaluation of Wisher proposal and appendix 3 3 3 2 11
Evaluation of MEC proposal and appendix 3 3 3 2 11
9 9 9 6 33
Executive summary 6
Overall Assessment Criteria 1
40

Professional skills
Assimilating and using information (AU&I)
All requirements needed numerical analysis or calculations to be presented. As a result, it was essential that
candidates prepared a structured financial appendix, or separate calculation to present that information in a
concise appropriate format. In order to assess all appendices / calculations in an equivalent way the
assessment of each appendix / calculation is presented as the first box in each requirement, under AU&I, on the
marking grid. This means that there are three boxes under A&UI for each requirement. As always in each of the
three requirements, candidates had to make extensive use of financial and non-financial information from both
the AI and EP in order to build their answers.
Requirement 1 needed candidates to demonstrate A&UI skills by way of (1) an appendix, (2) the initial financial
statement analysis work in the report and (3) the identification of appropriate relevant wider context issues for
BM. Candidates were universally very strong on the first two boxes but frequently lacked the necessary focus to
identify the relevant business issues and wider context for the third box. (These included BM’s customer resistance
to price rises and the profile of BM’s suppliers – UK and overseas.)
Similarly, for Requirement 2, candidates needed to demonstrate A&UI skills with (1) an appropriate numerical
appendix using the BM statement of profit or loss as the structure for the calculations, (2) the initial key criteria
numerical analysis of that financial data in the report, and (3) the identification of relevant business and wider
context issues in relation to this matter. Almost all candidates demonstrated good numerical A&UI skills for the
first two boxes, with an appropriate appendix and initial analysis. Candidates were marginally less strong on
business and wider context issues. (Examples could have included commentary on costs of overseas supplies and the
BM overdraft.)
In Requirement 3 box (1) the appendix – using the structure from Exhibit 8 – was appropriately presented by
the vast majority of candidates who achieved full credit for this aspect of their report. Similarly, for box (2) the
initial numerical analysis in the report, most candidates achieved very high competency grades. However, box
(3), the presentation of relevant business issues and wider context, was frequently very poorly focused with only
a handful of candidates identifying the relevant issues. (These include: BM’s experience with cruise customers; the
problem of delivery of orders to customers (DWC); BM’s rigorous testing of base products for quality assurance.)
The key messages for candidates concerning A&UI are:
 presenting a clearly derived summary of the financial or numerical context for a scenario by way of a well presented,
structured appendix is a skill which all candidates should possess – for each requirement
 including the relevant business issues and wider context for each section of the report is essential to identify the
relevant scenario and circumstances for the matters under review in that section
 using information from both AI and the CS Exam in compiling each section of the report is an essential aspect of each
section, regardless of whether or not there has been a specific reference made to an exhibit in the CS Exam.
Structuring problems and solutions (SP&S)
Most candidates demonstrated good skills in structuring problems and solutions. This is because they followed
the structure and steps indicated in each requirement and performed the analysis which they had to do. SP&S is
the core component in each section of the report and the assessment criteria follow the requirement instructions
in each section. In Requirement 1 it is financial analysis of the statement of profit and loss and the explanation
of bad debts and allowances for doubtful debts. In Requirement 2, it is the analysis of the new supplier Wisher‘s
proposal, including a review of assumptions and an evaluation using supplier criteria and analysis of business
trust and ethical issues. For Requirement 3, it is an analysis of the MEC new customer proposal: calculating two
options and considering the new customer contract in commercial terms (financial, operational and strategic)
and against established customer evaluation criteria (including any business trust and ethical issues).
Stronger candidates worked through the steps of each requirement logically dealing with the points requested in
appropriate detail. Weaker candidates were less precise and often included excessive or irrelevant detail or
omitted some aspects of the analysis. This could be seen to apply in all sections but as always in the financial
analysis section, weak candidates appeared too absorbed in unnecessary pre-prepared analysis (such as over-
analysing trade receivables) – despite the restricted information and a clearly detailed requirement. In addition,
explaining the bad debts and allowance for doubtful trade receivables issue in Requirement 1 caused some

difficulty in SP&S despite it being a basic topic. Requirement 2 was the most consistently well-answered SP&S
section with large numbers of candidates securing clear passing grades across the three boxes. However, the
scripts of weaker candidates continue to display an inability to identify and critique the assumptions – although
these would have to have been used in their initial calculations. It is hard to understand such weaknesses. In
Requirement 3, a very large number of the candidates started by using appropriate numerical analysis but then
failed to identify, question or analyse in sufficient detail the commercial, business trust and ethical concerns.
The key messages for SP&S are:
 candidates must ensure that they work through each step requested in the requirement when analysing any financial or
numerical information (or their own calculations) for each section of the report
 candidates must identify and critically analyse any assumptions relating to the matters under review in that section
 candidates must identify and address all commercial issues and any business trust and ethical concerns in each section
of the report
 a candidate’s weaknesses in SP&S will affect the subsequent sections of AJ and C&R – although a strength in SP&S
does not always carry into AJ and C&R.
Applying judgement (AJ)
Strong candidates applied good judgement built on the analysis which they had conducted. Weaker candidates
failed to demonstrate good skills in AJ. Mostly they failed to develop their analysis by not evaluating the
information or assumptions given or failed to question the critical factors from their own analysis in the
appropriate depth. For AJ in Requirement 1 this included an appropriate evaluation of the analysis of revenue
with a range of points from strong growth in a competitive market to a failure to increase prices being
unsustainable (a key point). There was also the evaluation of the importance of each component of cost of sales
and operating costs and the control over each element, which stronger candidates achieved. However, the
judgement relating to the evaluation of bad debts and the allowance for trade receivables was often feeble (and
in weak candidates usually totally wrong). In Requirement 2, there was some good evaluation of the numerical
and financial analysis and other commercial considerations but the evaluation of the assumptions was
frequently very poor and badly developed. It was a more welcome fact that the evaluation of the business trust
issues was adequate. In Requirement 3, the evaluation and judgement relating to the MEC contract should have
followed a logical commercial evaluation pathway: evaluation of the financial criteria and impact; evaluation of
operational and strategic issues; evaluation of ethical and business trust issues. Strong candidates performed
well on each of these boxes. Weaker candidates did sufficiently well on financial evaluation but they struggled
with other aspects of the commercial evaluation and were poor on the ethical and business trust points.
The key messages for AJ are:
 candidates must ensure that they evaluate each step of the analysis requested in the requirement, both financial and
non-financial, for each section of their report in a critical, logical process
 candidates are expected to critically evaluate any assumptions relating to the matters under review in that section
 candidates are expected to evaluate the specific commercial issues and any business trust and ethical concerns in each
section of the report
 an ability in AJ is fundamentally important in determining overall success in the CS Exam. A failure to formulate and
communicate good judgement in the report usually correlates with a failure overall.
Conclusions and recommendations (C&R)
Good candidates provided logical, clear conclusions – under a heading – which extended the previous analysis
and judgement in that section. Good candidates also provided clear commercial recommendations which were
appropriate to the business circumstances in the section being written.
Weaker candidates did not usually provide enough clear conclusions and those that were provided were not
fully developed or presented under a heading. Similarly, weaker candidates made poor, frequently generalised
recommendations, with no development, depth or justification from the analytical work, such as “BM should
increase its selling price ” – as if the BM board would never have thought of that, and which flew in the face of all
case scenario information. (The fact is that the current situation is unsustainable and that must be spelt out).
The key messages for C&R are:
 conclusions must be clearly drawn, under a heading, from the SP&S and AJ, for each section of the report
 recommendations must be specific and logical relating to the context of each section of the report.

Requirement 1: BM financial analysis
The main financial statement analysis requirement was well answered by the vast majority of candidates, with
appropriate use of a well-structured appendix. The opening paragraph of this requirement provided a clear
pathway for structuring the financial statement analysis comprising “revenue; each element of cost of sales (COS);
gross profit (GP) and operating profit (OP)” (abbreviations added). The company only has one revenue stream and
its sales price appears not to change so the analysis is largely focused on costs and those details are in Note 1
and 2 to Exhibit 16. All candidates should have been able to assimilate and assess this information and
respond rapidly to this requirement. In addition, Exhibit 17 presented further key facts relating to the required
analysis.
Most candidates were well prepared for this type of analysis. In the overwhelming majority of scripts clear
analytical appendices were prepared and the question was appropriately answered. Nevertheless, candidates
attempt short cuts (by omitting key information) in the appendix and some over-analyse the information (by
preparing additional irrelevant schedules). In the critical case of omission – in some foolhardy attempt to save
time (but losing points for the appendix) – some candidates prepared columnar appendices without showing the
base figures for the two years and only presented the absolute change and percentage changes relating to each
heading. This is a meaningless piece of information which a reader would have to recalculate to understand. It is a false
economy of time to omit this basic information and candidates lost marks accordingly. At the other end of the spectrum,
some candidates were determined to analyse not only what they were not asked to analyse but for which there
was no information in the CS Exam. A prime example of this was a schedule showing all of BM’s individual
trade receivables for 2017 with the days outstanding calculated. Sadly, the examiners did not present any equivalent
information for 2018 which these candidates could use, nor ask for this analysis – it was thus a futile time-wasting exercise.
Using Notes 1 and 2 of Exhibit 16 and the explanations in Exhibit 17 should have meant that candidates could
easily analyse and evaluate events for the year to 30 September 2018 and identify that the main BM problem (of
static prices and increasing cost of sales) has continued. As one candidate explained, “BM has had an impressive
increase in revenue of 27.5%, through increased sales volume up from 133,000 to almost 170,000 items. However, BM’s
static price may be driving its increasing sales and that must be assessed and addressed because margins are falling”.
Weaker candidates lacked this clarity of analysis and evaluation. Very few candidates achieved passing grades
in AJ because they lacked consistent clear evaluation of BM’s revenue and cost information.
The specific request to answer a series of questions concerning bad debts and the allowance for doubtful trade
receivables proved to be an awkwardly revealing task for a significant proportion of candidates. A multitude of
errors of understanding were revealed – particularly in the evaluation of this issue. “The allowance for doubtful
trade receivables has no impact on profit or cash” with the recommendation that “all BM board members must attend a
course on understanding financial accounts” The expression “physician heal thyself” comes to mind, especially in
terms of tact. This section of this requirement proved to be a good differentiator between candidates.
Requirement 2: Evaluation of new supplier proposal (Wisher)
This requirement assessed candidates’ ability to calculate, analyse and evaluate the proposal for Wisher to
supply BM with 50% of its base products going forward. Both Wisher and BM had provided information based
on that proposal and there were numerous financial and non-financial factors to consider. The template for the
calculation was BM’s statement of profit or loss which had to be adjusted for these future changes. This should
have meant that the calculations were straightforward for a sensible candidate. This proved to be the case as
most appendices prepared were universally clear and correct.
Candidates also had to “assess the adequacy of the assumptions and the information about Wisher… and provide a
clearly justified recommendation”. Using both the normal questioning of all assumptions in these requirements and
the supplier evaluation template from the AI (and with all the details in Exhibit 18a and 18b), there was no
shortage of assumptions and issues to consider. Good candidates, having performed correct calculations, then
evaluated all assumptions, and considered those aspects of the proposal which were clearly risks for BM. Weak
candidates did not provide adequate critical analysis of the assumptions, which meant that they failed to apply
appropriate judgement in this part of requirement. However, both the analysis and evaluation of the business
trust and ethical issues were performed well by the majority of candidates. As one tutor firm stated, “Given that
the Advance Information illustrated BM’s 7 point criteria for evaluating suppliers and that there were two newspaper
articles supplied in the exam paper on the supplier and its supply chain (with associated ethical issues), this part of the
requirement should have been straightforward for most students.”
Good candidates demonstrated their skills throughout this section of their report, and scored good marks.
Weaker candidates struggled with context, judgement and recommendations and performed less well.

Requirement 3: Evaluation of new customer (MEC) proposal
Requirement 3 was an evaluation and assessment of the new customer proposal from MEC. Two options were
presented: Option 1 continues with the normal BM product costs but with a 30% mark-up proposed by MEC to
arrive at the sales price per product. Under Option 2, MEC would supply the base product and BM could mark-
up on all other costs by 50%. Candidates could have used the structure of an example from Exhibit 8 in the AI
as the template for any product cost calculation. The vast majority of candidates did so using that template as
the basis for creating their appendix and either used the 2017 figures (as per Exhibit 8 – adjusted for the MEC
criteria) as the basis for the calculation or updated those figures for the 2018 cost changes. Amongst those that
did not follow the template a good number produced more idiosyncratic appendices – which did not gain as
many points. Bafflingly, a very small number produced no figures at all in this part of the report. A great number
of candidates presented no wider context information at all.
With most candidates having created a good appendix it should have been a reasonable process for them to
proceed through the commercial (financial, operational and strategic) and BM customer analysis and evaluation
of the MEC proposal. Unfortunately this route was not followed universally and there was a clear divergence in
the quality and focus of answers between those who followed that process and those who did not. The weakest
element of the report was the analysis of the financial elements, but the operational and strategic review and the
ethical and business trust elements were of better quality. Good students also demonstrated sufficient
judgement over the facts supplied by correctly identifying that although BM had the capacity, the complexity of
the other operational issues should cause BM to exercise caution.
Most candidates concluded appropriately but good recommendations were relatively rare throughout.
All candidates wrote some form of an executive summary. Unfortunately not all executive summaries were of a
sufficient standard. Good executive summaries were aimed at the BM board – and covered the three aspects of
the report concisely and identified the most important factors in each section. In the review of BM’s financial
performance, this included identifying the point that BM’s downward trend on margins was not sustainable. The
next section included the fact that the second period of the Wisher proposal is critical in any decision but it
depends on unpredictable economies of scale in the re-shredding process. The final section needed to contain
numerical information on both options to support the analysis of the MEC proposal. Good scripts presented
each section of the ES as a précis of the whole context of the relevant scenario: the original analysis in the
report, the judgements made, and a summary of the conclusions and recommendations from each section.
Good summaries contained the essential numerical information in the ES extracted from the body of the report.
Weak candidates had an ES that was poor in terms of focus on the key issues or factors for each section.
These candidates failed to present the relevant facts – and especially the key facts or figures – concerning the
items considered to be important from the report. These are indicated in the previous paragraph. There is also
the problem that summarising a weak section of the main report leads to a weak part of the ES. There was also
evidence of poor planning and time management by a minority of candidates.
Overall Assessment Criteria (OAC)
Most candidates produced a properly drafted document with the appropriate headings, paragraphs and
sentences. The majority of scripts had an appropriate disclaimer of liability from Borax Beadle. Most scripts
were appropriate for BM board use and were formal, tactful and ethical. Most candidates had reasonable
spelling and grammar (markers always stretch this point). As always, a minority made inappropriate statements,
particularly concerning the understanding of bad debts and the allowance for doubtful trade receivables (which
none of the BM board would have considered acceptable). Fortunately, reading the scripts of strong candidates
provides reassuring evidence of the high quality of those candidates. They demonstrate the necessary
professional skills, across their reports, needed to be a successful ICAEW member and these scripts were a
great pleasure to read.

R1: Analysis of BM’s management

accounts
Year ended 30 September 2018 2017 Change Change
£000s £000s £000s %
Revenue 8,493 6,661 1,832 27.5

Cost of sales (6,941) (5,297) (1,644) 31.0
Gross profit 1,552 1,364 188 13.8
Operating costs (1,416) (1,195) (221) 18.5
Operating profit 136 169 (33) (20)
Analysis of Cost of sales 2018 2017 Change Change

£000s £000s £000s %
Base products 3,982 2,895 1,087 37.6
Monogramming materials 1,925 1,450 475 32.7
Total materials 5,907 4,345 1,562 35.9
Production labour 433 370 63 17.0
Production overheads 601 582 19 3.3
6,941 5,297 1,644 31.0
Analysis of Operating costs 2018 2017 Change Change

£000s £000s £000s %
Administrative staff & overheads 879 785 94 12.0
Marketing and distribution 373 303 70 23.1
Provision for doubtful debts 86 107 (21) -
Bad debts 78 - 78 -
1,416 1,195 221 18.5

Appendix R2: Analysis of Wisher proposal
Using Notes
Profit or loss Actual Projected
Year ended 30 September 2018 2019 2020
£000s £000s £000s
Revenue 8,493 1 8,493 8,493
Cost of sales
Base products 3,982 2 4,281 3,783
Monogramming materials 1,925 3 1,925 1,925
Production labour 433 4 433 433
Production overheads 601 5 661 661
Cost of sales (6,941) 6 (7,300) (6,802)
Gross profit 1,552 7 1,193 1,691
2018 Operating costs (OC) (1,416) 8 (1,416) (1,416)
Operating (loss)/profit 136 9 (223) 275
or
Adjusted operating costs
No change in revenue = no to change in TR allowance 86 86
No specific bad debts 78 78
Reduction from 2018 OC 164 164
Adjusted operating costs (1,252) (1,252)

Operating (loss)/profit (59) 439
Workings for base product

Base product 2018 = £3,982k
Inc/(Dec) Total Wisher
20% increase for 50% for 9 m increase = 20% of £1,991k x 9/12 299 4,281 1,792
Save 50% of 3/12 purchases decrease = 30% of £1,991k x 3/12 (498) 3,783
Notes
1) Sales are kept the same but that assumption is OK because most expenses would change in proportion
2) Base product increases for Period 1 are probably prudent (9 months)
Base product reductions for Period 2 (12 months) may be optimistic
3) Monogramming material costs move in line with revenue
4) Production labour remains static in the calculation but that may be an understatement (transport / quality control)
5) Production overheads increase of 10% is probably just a guess
6) CoS increase in Period 1 by £299k + £60k = £359k in total
CoS reduction in Period 2 = -(£498k) + £60k = net (£438k) leading to much higher GP
7) Gross profit is very low in 2019 (Period 1) at £1,193k and significantly better in 2020 (Period 2) at £1,691k
8) Operating costs are assumed to remain constant – per 2018 (but see above: bad debt /TR allowance)
9) Operating loss occurs in 2019 and large operating profit in 2020

R3: Analysis of MEC proposal

Using
Costs and sales price 2017 Notes Option 1 Option 2
£ £ £
Base products 22.0 1 22.0 -
Monogramming materials 11.0 2 11.0 11.0
Production labour 3.0 3 3.0 3.0
Production overheads 4.0 4 4.0 4.0
Total monogramming cost 40.0 5 40.0 18.0
Mark-up (contribution) 10.0 6 12.0 9.0
Sales price 50.0 7 52.0 27.0
£8,493k
Assuming £50
per item
Costs and sales price =169,860 2018 Notes Option 1 Option 2
Or approx.
170k £ £ £
Base products 3,982 23.4 1 23.4 -
Monogramming materials 1,925 11.3 2 11.3 11.3
Production labour 433 2.6 3 2.6 2.6
Production overheads 601 3.5 4 3.5 3.5
Total monogramming cost 6,941 40.8 5 40.8 17.4
Mark-up (contribution) 6 12.2 8.7
Sales price 7 53.0 26.1
Notes: Option 1
1. The information concerning all costs is taken either from AI Exhibit 8 (average production costs per item), or
by using 2018 total revenue and dividing by £50 per item, to find the number of items produced and sold
2. Monogramming material costs are expected to remain the same in this ongoing process
3. Production labour is shown as being the same
4. Production overheads remain the same as all other similar monogramming
5. Total monogramming costs are the base for the mark-up / contribution calculation
6. Mark-up per item is 30% (£12 or £12.2) on cost (margin 23%) – a higher contribution per item than Option 2
7. The total figure gives a much higher sales price per item than Option 2.
Notes: Option 2
1. Base product costs do not apply to Option 2

2. Monogramming material costs are expected to remain the same in the new process – but with untried base
products these could be higher
3. Although production labour is shown as being the same it could be higher with any re-runs
4. Production overheads could increase (testing may fail) and production may be disrupted
5. Total monogramming costs are the base for the mark-up / contribution calculation – these could be low
6. Mark-up per item is 50% (£9) on cost – (margin 33.3%) but a lower contribution per item than Option 1
7. Sales price appears lower and beneficial to MEC

November 2018 - Bespoke Monogramming Ltd
First Marking
DATE CANDIDATE NO.
TIME MARKER NUMBER
ES Req 1 Req 2 Req 3 TOTAL
CC
SC
IC
ID
NA
Total 7 11 11 11 40
BM Bespoke Monogramming BP Base Products

W Wisher MM Monogramming Materials
MEC Mediterranean Exploration Corp PL Production Labour
DWC Deep Wave Cruises PO Production Overheads
BD/DD Bad Debt / Doubtful Debts AS&O Admin Staff & Overheads
TR Trade Receivables M&D Marketing & Distribution
OC Operating Costs
TEAM CHECKER
LEADER SIGNATURE
Changes made? c
OVERALL ASSESSMENT CRITERIA EXECUTIVE SUMMARY
R1 - Review of BM's financial performance
ES.OAC.1 ES.R1.1
w Appropriate layout eg headings, paragraphs, sentences w Revenue: qualitative comment on change with fig
w Appropriate disclaimer of liability from BB w COS/GP/GP%: qualitative comment on change with fig
w Suitable language eg formal, tactful, ethical w OC/OP/OP%: qualitative comment on change with fig
w Reasonable spelling and grammar w GP% concerning downward trend / OP% near to breakeven
ES.R1.2
w Static prices with increasing costs is unsustainable
w Comments on targets (revenue / volume / bank overdraft)
w Concludes/recommends on impact of bad debt/prov DD
NA ID IC SC CC
R2 - Evaluation of Wisher proposal R3 - Evaluation of proposal to supply MEC
ES.R2.1 ES.R3.1
w Concludes on 2019 operating loss with fig w Concludes on Option 1/Option 2 with figs
w Concludes on 2020 operating profit with fig w Concludes on relative size / cashflow impact / GP%
w Significant contract / BM reliant on W / impact on BM suppliers w Concludes on timescale / delivery costs
w Concludes on evaluation of assumptions w Concludes on BP quality / capacity
ES.R2.2 ES.R3.2
w Economies of scale from 2020 crucial to make deal attractive w Concludes that MEC/Option 2 is too risky for Dec start
w Concludes on way forward w Perform Due Diligence on MEC
w Concludes on Wisher business trust/ethics w Concludes on MEC business trust/ethics
w Commercial/business trust/ethics recommendations w Other commercial recommendations
CC
SC
IC
ID
NA
Total 7
REQUIREMENT 1 - Review of BM's financial performance
R1.AUI.1 R1.SPS.1
Appendix 1 Financial analysis: revenue (report)
w Well presented table eg £, % w Target: £8m/20% exceeded
w Analysis of revenue / volume / customer w Royal Wedding: significant impact / £750k / one-off
w Analysis of COS elements w Boreal/Cosset: inc predicted / up 40%/£266k / up 15%/£130k
w Analysis of GP / OP w DWC: up 1% / below predicted inc (30%) / delivery problem
R1.AUI.2 R1.SPS.2
AI/CS Exam info (report/appendix) Financial analysis: COS/OC (report)
w Overall revenue: up £1,832k / up 27.5% w BP: up £1,087k/37.5% / 10% inc o/seas supplier (Fomenta)
w Overall COS: up £,1,644k / up 31.0% w MM: up £475k/32.8% / 10% inc o/seas supplier (Cassio)
w Overall GP: up £188k / up 13.8% w PL: up £63k/17.0% / net of £50k apprenticeship subsidy
OR
Overall GP%: down 18.3% v 20.5%
w PO: up £19k/3.3% / inc efficiency
w Overall OP: down £33k / down 19.5%

OR w AS&O: up £94k/12.0% / reason unknown / example
Overall OP%: down 1.6% v 2.5%
w M&D: up £70k/23.1% / increased marketing effort
R1.AUI.3 R1.SPS.3
Business issues / wider context Identification of bad/doubtful debt issues
w History of growth / good quality products w TR: 2015 significant BD / £222k (out of £351k) / Majestic w/o
w Customers: prices static / competitive market w Bad debts £78k / allowance for TR £86k
w Suppliers: UK and overseas / supplier power w 20% is a significant percentage / appears prudent
w Bank overdraft (£158k) exceeds target (£150k) w Prov DD: allowance which attempts to mitigate future risk
w Uncertainty in movement of sterling w Allowance impacts OP but not cash
w 7 point customer evaluation / expected TR days 45 days
R1.AJ.1 R1.CR.1
w Rev growth: 27.5% v 29.5% / good in competitive market w Revenue: qualitative comment on change with fig
w Excl Wedding: rev up £1,082k/16% / not met (£8m) target w COS/GP/GP%: qualitative comment on change with fig
w Like-for-like comparisons difficult due to one-off events w OC/OP/OP%: qualitative comment on change with fig
w Growth: driven by volume / (170k) > production target (160k) w Concludes on impact of BD/prov DD
w Comment on customer mix / new customers / mktg success
w Static prices with increasing costs is unsustainable
R1.AJ.2 R1.CR.2
Evaluation of COS/OC analysis Makes recommendations
w BP/MM: significant proportion of total costs w Further revenue analysis by customer
w BP/MM: UK purchases becoming better value for money w Investigate DWC delivery problems
w BP/MM: comment on change in supplier mix w Critical to address static prices / find cheaper/UK suppliers
w PL/PO: actual inc £113k / extra CADP depn w Consider BD insurance / improve credit control
w GP%: costs not being passed on / worrying downward trend w Review 20% DD allowance
w OP%: comment on operating cost control w Other commercial recommendations
NA ID IC SC CC
R1.AJ.3
Evaluation of bad/doubtful debt issues NA ID IC SC CC
w TR more diverse (eg Henry Six £177k out of £1,231k)
w BD/Prov DD together impact OP significantly (£164k)
CC
w BM need to balance prudence v reality of BD experience
SC
w BD unpredictable / risk of trading / insurance expensive IC
ID
w Bad debt impacts cash received going forward
NA
w Inc in TR days / > expected / credit control weakening Total 11
NA ID IC SC CC
REQUIREMENT 2 - Evaluation of Wisher proposal
R2.AUI.1 R2.SPS.1
Appendix 2 Identification of GP/OP (report)
w Well presented and clearly derived w GP for 2019 with fig
w Calculates COS for both 2019/2020 w GP for 2020 with fig
w Calculates GP for both 2019/2020 w Operating loss for 2019 with fig
w Calculates OP for both 2019/2020 w Operating profit for 2020 with fig
w Identifies GP%/OP%/mark-up
R2.AUI.2 R2.SPS.2
AI/CS Exam info (report/appendix) Assumptions
w Revenue: £8,493k same for both years w Revenue: eg prudent given growth / optimistic no Royal Wedding
w BP: £3,982k / £23.42 per unit w BP 20% inc: comment with reason eg figures from Wisher
w BP: uses 3m/9m split w 2020 economies: comment with reason eg may not materialise
w BP: 20% inc in 2019 / 9m=12m cost in 2020 w PL static: comment with reason eg pay rises/subsidy
w MM/PL: £1,925k + £433k / £11.32 + £2.55 per unit w PO 10% inc: comment with reason eg additional quality checks
w PO: 10% inc / £661k / £3.89 per unit w OC static: discussion of figure identified
R2.AUI.3 R2.SPS.3
Business issues / wider context Wisher comments incl business trust/ethics
w Wisher wants to supply 50% of BM base product w BM has responsible attitude to environment / corporate ethos
w Wisher has limited financial history / new company w Product not yet tested for quality / flammability not tested
w Currently only three BP suppliers w Wisher ability to supply quantities of BP not known
w Increasing BP costs from o/seas supplier (Fomenta) w Wisher is in Cardiff / BM responsible for collection
w Strategy to use more reshredded cotton / actively testing w BM would be significant customer / 40% of Wisher sales
w Reshredded cotton may be a fire risk w Wisher strict trading terms (30 days)
R2.AJ.1 R2.CR.1
Evaluation of Wisher proposal Draws conclusions (under a heading)
w Significant contract / calc of relative size / overreliant on W w Concludes on 2019 operating loss with fig
w Operating loss would be unsustainable / impact solvency w Concludes on 2020 operating profit with fig
w Inc OP from 2020 addresses low margins / OP% > 1.6% w Concludes on assumptions
w Adverse impact on existing supplier relationships w Concludes on evaluation of Wisher incl business trust/ethics
w Unknown acceptability of off-white/reshredded material w Concludes on way forward
w Changes in assumptions will impact GP/OP/decision
R2.AJ.2 R2.CR.2
w Revenue: not critical as COS linked to volume w Market research on new product / back-up for costs
w BP: 20% extra cost drives the operating loss in 2019 w Perform Due Diligence on Wisher
w Economies of scale: crucial to make deal attractive w Negotiate T&C (eg payment terms / price (<20%))
w PL/PO: extra staff/costs needed for collection process w Negotiate starting with less than 50% of supply
w PO: BM little experience using reshredded cotton w Perform quality tests on reshredded cotton BP
w OC: BD may not recur / DD prov may change w Other commercial recommendations
NA ID IC SC CC
R2.AJ.3
Evaluation incl business trust/ethics NA ID IC SC CC
w In line with ethos / sustainability of materials
w Short timescale to do testing (Jan 2019 start)

CC
w Switching to Wisher for 50% of base product is very high risk SC
IC
w Low carbon footprint / quick delivery / easy to resolve issues
ID
w Wisher overreliant on BM / diversifies current suppliers NA
Total 11
w T&C may indicate W financial strain / impact on BM cashflow
NA ID IC SC CC
REQUIREMENT 3 - Evaluation of proposal to supply MEC
R3.AUI.1 R3.SPS.1
Workings / report Analyses financial calculations (report)
w Well presented and clearly derived w Option 1: costs based on existing process / more certain
w Calculation for BM (Option 1) supplying BP w Option 1: higher £ contribution / selling price > £50
w Calculation for MEC (Option 2) providing BP w Option 2: reduces cash outflow as no BP to buy
w Calculates GP% w Option 2: higher % contribution
w Initial contribution from 1,200 order:

Option 1 £14.4k-£14.7k Option 2 £10.4k-£10.8k
R3.AUI.2 R3.SPS.2
AI/CS Exam info (report / workings) Operational and strategic issues
w BP: £22/£23.4 for Option 1 £0 for Option 2 w Quality of MEC BP unknown
w MM/PL/PO: £11/£11.3 + £3/£2.6 + £4/£3.5 w Timing/quantity of MEC BP unknown
(OR Option 1 - 2017 £40 / 2018 £40.8) w No cost of delivery included with either option
(OR Option 2 - 2017 £18 / 2018 £17.4)
w Product required by 15 Dec / locations notified at short notice

w Mark-up: Option 1 correctly uses 30% (£12/£12.2)
w Rapid/repeated changes in monogram designs expected

w Mark-up: Option 2 correctly uses 50% (£9/£8.7)
w 1,200 is approx 1 day production

R3.AUI.3 R3.SPS.3
Business issues / wider context Comment on ethical/bus trust issues
w Margins being squeezed / difficult to raise prices w Approached by intermediary
w BM has experience with cruise customers w Recently registered UK company / no references provided
w Previous problem with delivery to DWC w Cruise ship mainly used as personal asset of MEC MD
w BM supply quality product / do rigorous testing w MEC claims >£300m revenue / MEC much larger than BM
w MEC has reputation for lack of loyalty to suppliers
w MEC bank is based abroad (Switzerland) rather than UK
R3.AJ.1 R3.CR.1
Evaluates financial impact Draws conclusions (under a heading)
w Calculation of relative size of initial order / small order w Concludes on Option 1/Option 2 with figs
w Considers/uses up-to-date (2018) figures for calculation w Concludes on operational/strategic issues
w Considers future revenue from additional work w Concludes MEC/Option 2 is too risky for Dec start
w Payment terms worse than normal / impact on cashflow w Concludes on ethical/business trust issues re MEC
w Mark-ups not yet agreed / compares GP% to other work
w Negotiating T&C may be difficult / MEC are demanding

R3.AJ.2 R3.CR.2
Evaluation: operational/strategic issues Makes recommendations
w Poor quality will mean production problems/extra costs w Negotiate T&C (eg mark-up, payment terms)
w Delays receiving BP could create difficulties/costs w Confirm quality/quantity of BP from MEC
w Delivery to specific locations could be significant cost w Consider logistics/cost of delivery to ship location
w May be insufficient time for testing/production/delivery w Assess possibility of future/ongoing contracts
w Short deadlines could be stressful for BM staff w Consider order book/pipeline for capacity
w Production capacity appears sufficient for additional work w Other commercial recommendations
NA ID IC SC CC
R3.AJ.3
Eval/recs: ethical/business trust issues NA ID IC SC CC
w Establish working relationship/contract with MEC
w Consider money laundering risk / reputational risk

CC
w Establish business arrangement between MD & MEC SC
IC
w MEC: Due Diligence / doesn't meet customer criteria
ID
w MEC may not provide repeat business NA
Total 11
w BM would prefer UK bank
NA ID IC SC CC
spelling, grammar, sentence construction and punctuation from the original script have been retained.
The commentary follows the order and numbering of the script with references to the topics in the
marking key. It should be read in conjunction with the review of the Second Illustrative Script and also
the full Examiners’ Report for this session.
This script passed the exam. It is of average length – but as always this depends on the actual
handwriting – and was fully readable with very few crossings-out. This candidate achieved 29
competent grades (Clearly Competent (CC) and Sufficiently Competent (SC)) balanced across the
whole report. Good passing grades were obtained in all three requirements. The professional skills
grades (maximum 33) were: in 7 out of 9 grade boxes for Assimilating and Using Information (A&UI);
in 6 out of 9 for Structuring Problems and Solutions (SP&S); in 5 out of 9 for Applying Judgement
(AJ); and in 5 out of 6 for Conclusions and Recommendations (C&R). This candidate also achieved 5
out of 6 passing grades for the Executive Summary and 1 passing grade for the Overall Assessment
Criteria. The candidate achieved sufficient competent grades in the three requirements: Requirement
1 (review of BM’s financial performance); Requirement 2 (evaluation of new supplier proposal
Wisher); and Requirement 3 (evaluation of new customer MEC proposal). The main body of the report
is split more or less equally between the three requirements. There were appropriate appendices for
all three requirements.
Terms of reference (TOR) and executive summary (ES)
This report starts with an appropriate front page title and TOR section – the report is from Borax
Beadle (BB). The ES, which follows, has a clear structure and is split evenly between the three topics.
The summary of the financial analysis of the BM management accounts contains some appropriate
numerical analysis covering revenue, cost of sales, GP and OP but does not emphasise sufficiently
the concern over the downward trend in GP%. There are some inaccurate statements concerning the
bad debts and doubtful trade receivables but the conclusions and recommendations are appropriate.
The section dealing with the new supplier proposal contains the appropriate numerical information for
the proposal and concludes on the key assumptions. It fails to comment on the significant size of this
contract or the critical factor of economies of scale cost savings in 2020. Other C&R are sufficient.
In the evaluation of the new customer proposal, the candidate provides numerical information on both
Options andthe relative financial importance of the contract evaluating timescale and capacity. Ethical
and customer criteria are stated but there is no mention of Option 2 risks or other C&R.
The ES covered all three areas appropriately and used numbers in all sections. Despite that in order
to score better grades on this section, the candidate could have:
 presented the explanations of bad debts and doubtful trade receivables more appropriately;
 identified the critical factor of the possible future cost savings in evaluating the Wisher project;
 commented on the risks attached to using MEC base products for production and timescale.
Overall Assessment Criteria
The script was easy to read and well-structured. There was an appropriate disclaimer (see above)
and formal tactful language was used throughout. There were a few lapses in grammatical style –
almost certainly a result of exam pressure and not ability – but overall the language was such that it
meant that a point was dropped.

Review of BM’s financial performance [Requirement 1]
The candidate presents an appendix with a clear, columnar, financial statement analytical schedule
relating to the key figures from BM’s statement of profit or loss for 2018 compared with 2017. The
analysis of movements between the years for revenue, cost of sales (COS), GP and OP is made in
both absolute and percentage terms and it is a model of clarity and brevity. The only slight flaw is that
the candidate has presented some additional analysis relating to the suppliers which is not directly
relevant – and must have wasted some time. Nevertheless, this is an excellent appendix.
The appendix provides the comparative analysis of the items requested in sufficient detail to allow
further reward in A&UI and SP&S. This script also integrates business and wider context information
brought forward from the AI with the new CS Exam information to provide excellent relevant context in
this section – also rewarded under A&UI. There was some relevant analysis of the bad debts and
doubtful trade receivables but it was not sufficient to be rewarded further under AJ in this section.
Overall AJ was the weakest skill in this section. C&R were sufficiently competent.
This section of the report starts by providing a succinct analysis of overall revenue: “BM met their target
to reach £8m turnover in 2018, and shows that a strategy of high customer service and good quality products
continues to be popular with clients.” The revenue analysis continues by bringing in the main items
presented in the CS Exam and there was enough development to gain sufficient AJ points. It is a
thorough section with clear references to the operational factors which occurred in the year.
The analysis of GP is properly focused at the right level but it is not developed sufficiently in
judgement. In the analysis of operating costs (OC)the candidate rightly selects bad debts as one
change to consider. However, both here and in answering the BM board queries there are aspects of
this answer which indicate poor understanding of the issue of bad debts write-off and the allowance
for doubtful trade receivables. “A 100% write off was made against Titanic’s debts, as no funds are likely to
be received as they were liquidated. This was a prudent decision … Additionally, the allowance of 20% means
that the effect of the Titanic bad debt would be spread over 2017 (20%) and 2018 (80%).” (This example is being
shown because this type of error (the write-off of a bad debt is not merely “prudent”; it is a necessary accounting treatment)
and the failure to explain properly what the allowance is intended to do, typified many candidates. It should provide readers
with food for thought.)
This section has adequate judgement on the revenue analysis but is less strong on other
components. Sufficiently competent conclusions follow the analysis with appropriate numbers.
Recommendations were sufficiently competent. Overall this was a strong section of the report.
 evaluated the revenue in more detail using the facts supplied in the CS Exam
 evaluated the COS and OC in more detail to identify the component strengths and weaknesses
 evaluated the issue of bad debts and the allowance for trade receivables more adequately.
Evaluation of new supplier Wisher proposal [Requirement 2]
The candidate presents an appendix which shows clear financial data calculations concerning the
cost of sales for the two periods requested which are then included as elements in the calculation of
GP and OP. The candidate correctly calculates the Period 1 operating loss followed by a Period 2
operating profit. This correct calculation and effective labelling of work throughout the appendix meant
that a reader could easily follow what the candidate had done. This appendix was clearly competent.
The financial data in this section, derived from the appendix, provides a solid basis for further reward
under A&UI. However, the A&UI relating to the wider context was not strong because it did not
provide the BM business background to this issue. The analysis of the GP and OP in the report are
not sufficiently strong (no numbers are referred to or used). The evaluation all the commercial
considerations is adequate. Similarly, the analysis of the assumptions is sufficient “BM has assumed
overheads will only rise by 10% for quality testing, but this increase could be far greater if the products are
found to be lower quality” but the evaluation of the assumptions is patchy and inadequate.

The analysis and evaluation of the ethical and business trust considerations are comprehensive and
clearly competent in both SP&S and AJ, and are put in the relevant context of BM’s corporate ethos.
“The use of recycled cotton is in line with BM’s aim to be more environmentally friendly. As a local supplier,
Wisher may also help reduce BM’s carbon footprint.” This is a strong section.
The conclusions in this section are very good and the recommendations are sufficient.
 incorporated more of BM’s relevant business background into this section

 made better use of the numbers from the appendix in the body of this section
 evaluated the assumptions which are identified more fully.
Evaluation of the new customer MEC proposal [Requirement 3]
The candidate presents a clearly competent appendix which comprises a clear set of relevant
financial workings which have made use of the calculation from Exhibit 8 and information from Exhibit
19a. This appendix gave this candidate top grades in A&UI in this section of the report. It also
provided a clear base for subsequent analysis and evaluation in the report. However, as throughout
this report, the candidate presented insufficient wider or business background context in A&UI.
The candidate has provided less effective analysis (SP&S) of the financial calculations in the body of
the report although the evaluation (AJ) is clearly competent. Both the analysis (SP&S) and the
evaluation (AJ) of the operational/strategic issues in the report are clearly competent. “At 1,200 items,
the run is small compared to BMs capacity of 1,200 items per day. This could make it easier to schedule the
production run, even though it is short notice” and “If option 2 is chosen, production time will be longer, as the
CADP team is likely to see glitches that need to be fixed on an unusual fabric. Quality also could not be
guaranteed …” As a result of this and other commentary, this candidate scores very well in these
operational boxes.
However, this candidate does not provide an adequate analysis (SP&S) or evaluation (AJ) in the
coverage of the ethical and business trust issues.
The conclusions are just sufficient but the recommendations insufficient.
 analysed and incorporated more of the financial calculations in the body of the report
 presented more BM business background relating to the context of this section
 identified, commented on, and evaluated the ethical and business trust factors relating to MEC.

Illustrative Script 1
To: The Board of BM
From: Borax Beadle
Subject: Review of financial performance and recent developments
This report has been prepared for the Board and should not be distributed to any other parties without written
consent.
No liability can be accepted without such consent.

1.1 Analysis of Financial Statements
Revenue increased significantly by £1,872K (27.5%), achieving the company’s targets for revenue and items
sold. A key success was the sales of £750k associated with the Royal Wedding, which prompted additional
orders from existing and new clients.
Gross profit showed a disappointing growth of only £188k (13.8%) against revenue, with BM missing the target
average mark up of 25%. This was due to increased cost of sales of £1,644K (31.0%) as Formenta and Cassio
implemented 10% price rises and sterling continued to weaken.
Operating profit therefore dropped by £33k (19.5%), largely due to an enforced write off of £78k Titanic bad
debt.
The liquidation of Titanic has reduced profitability, and was not considered despite customer evaluation controls.
An allowance of 20% helped spread the impact of the expense over two years.
Recommendations
- Try to negotiate price rises with customers
- Investigate cost of insurance against bad debt
1.2 EVALUATION OF WISHER PROPOSAL
Switching to Wisher as a supplier for 50% base products would increase cost of sales to £7,280k in 2019,
leading to an operating loss of £203k. In 2020, small savings on costs of sales would be made (£6802k), leading
to an operating profit of £275k.
BM would purchase 40% of Wisher’s goods, which puts them in a powerful negotiating position. It would also
reduce BM’s reliance on other suppliers.
It is not clear if BM’s customers would accept Wisher’s goods, which as recycled cotton, are likely to be slightly
lower quality.
Any cost savings made in 2020 could be wiped out by the likelihood of other suppliers raising their prices, or by
production labour costs being higher if the material is hard to work with.
A full supplier evaluation has not been conducted, and no references are available for Wisher.
Wisher’s supply chain is not transparent, and there are concerns that they may use Indian suppliers with unsafe
working practices.
Due to the scale of goods Wisher is proposing, the proposal should not be accepted in its current form.
Recommendations
- Reduce the number of goods Wisher is intending to supply

- Investigate Wisher’s supply chain and seek assurance of ethical working practices at the suppliers.
1.3 Proposal from MEC
The MEC proposal could generate a contribution of £14,400 - £10,800. Although this is currently a small
proportion of the firm’s business, there may be scope to expand this amount in future.
The deadline for the project is tight, but as the run is small, it should be deliverable, as BM has daily capacity of
1200 items.
There are some concerns over MEC’s corporate ethos, which should be evaluated further by conducting a full
customer check.
There is also concern that the tight deadline will demoralise BM staff by increasing stress.
BM should accept the contract, to obtain a new client and reduce their reliance on current customers.

Recommendations
- Discuss overtime requirements with staff

- Update 2017 cost card and
- Verify source of Anton’s wealth to satisfy money laundering requirements
2. ANALYSIS OF FINANCIAL PERFORMANCE
2.1 REVENUE
Revenue increased by £1,872k (27.5%), which shows continued impressive growth compared to last years rise
of £1,517k (29.5%). Pleasingly, this means BM met their target to reach £8m turnover in 2018, and shows that a
strategy of high customer service and good quality products continues to be popular with clients.
Revenue growth was driven by volume rises to 169,860 as prices remained static, meeting BM’s target to
produce 160k items.
The Royal Wedding boosted revenues as expected, providing 8.8% of revenue this year, as hotels
commissioned special items for the event. Good work on this event likely improved BM’s reputation further,
particularly with Alphonse Hotels who were planning commissions for the Royal Wedding, and who remain BM’s
largest client. The effect of the wedding was significant, as most of BM’s clients are UK based.
A 40% increase in revenue from Boreal Spas was seen as the company expanded to European Spas. This
growth shows the importance of BM’s relationship with Joe Styles, and additionally has allowed BM to diversify
into a new market.
Revenue from DWC did not increase by the expected 30% due to difficulties with delivery. Fortunately, the issue
has been resolved and they have been retained as a client.
At 1.2% of sales last year, Titanic cruises were not a major customer, and therefore the loss of their business
has not affected revenue to the extent of Majestic’s liquidation in the past.
Please note that some of the figures produced in 2017 will be distorted, given the number of new clients
obtained.
2.2 GROSS PROFIT
Gross profit increased by £188k (13.8%), at a slower rate than revenue, due to continued pressure on margins.
Suppliers have driven cost increases that BM have been unable to pass to customers, as both have high power.
Unfortunately, BM did not achieve their target mark up of 25% this year, as it dropped to 22.4%.
Further pressure on prices comes as sterling continues to weaken due to poor Brexit negotiations, further
increasing cost of sales.
2.3 COST OF SALES
Cost of sales increased by £1,644k (31.0%), as BM has been unable to negotiate discounts with suppliers whilst
still obtaining the good quality it needs to satisfy customers.
Base product costs have increased by £1087k (37.5%), as Formenta – BM’s largest supplier – have increased
prices by 10%. The cost rise has also been driven by greater use of Tooley – who charge a 10% premium on
other suppliers – by £191k (104%). Use of Tooley’s products will help differentiate BM in the Spa & cruise
markets, as their products strengthen when wet.
Monogramming material costs have increased by £475k (32.8%) due to a greater spend on Cassio products
(£262k or 37.6%). This is due to a 10% increase in Cassio’s prices, as well as the continued popularity of their
innovative gold thread amongst customers.
Production labour costs have increased at a slower rate of £63k (17.0%), due to a £50k training subsidy for new
apprentices employed. It is unclear if BM met their target of 10% apprentices in the workforce, but this strategy
is helping to reduce costs.

Production overheads increased slightly by £19k (3.3%). These costs should be largely fixed, and have also
been kept low by increased efficiencies from the new CADP machines.
2.4 OPERATING PROFIT
Operating profit disappointingly decreased by £33k or 19.5%, largely due to the forced write off of £78k Titanic
rec’s. This was a prudent accounting decision, even if it had a poor impact on profits.
Other operating costs should largely be fixed in nature, but marketing and distribution costs have increased by
£70k (23.1%) as BM continues to seek new customers.
2.5 TRADE RECEIVABLES ISSUE
A 100% write off was made against Titanic’s debts, as no funds are likely to be received as they were liquidated.
This was a prudent decision.
The allowance of 20% for receivables seems to be a reasonable amount, as other controls – such as the client
check – have not been effective in predicting which clients will fail.
The allowance is a general allowance for trade receivables, and arguably should remain in the accounts as
Titanic failing does not make other clients more likely to settle invoices.
However, the allowance is a management estimate, so could be reduced to offset the Titanic write off. This
would not be ethical practice, and such creative accounting is frowned upon.
The Titanic issue of illness was a difficult issue to predict, but other bad debts may have been avoided by BM
controls. Additionally, the allowance of 20% means that the effect of the Titanic bad debt would be spread over
2017 (20%) and 2018 (80%).
Unfortunately, the allowance for bad debt is an accounting adjustment, not a cash flow, and does not reflect
funds being ‘held back’. Therefore, it cannot be transferred back to the overdraft.
2.6 CONCLUSION
Revenue increased significantly by £1,872k (27.5%), as the Royal Wedding provided significant work as new
and existing clients commissioned special items.
Gross profit increased at a lower rate of £188k (13.8%), as high customer and supplier power have continued to
squeeze margins.
Cost of sales has risen by £1,644k (31.0%), as Formenta and Cassio have enforced a 10% price rise.
Operating profit has fallen by £33k (19.5%), due to a forced write-off of a £78k bad debt and other rises in other
operating costs.
The allowance for trade receivables should be maintained in the accounts, even though an additional
adjustment has been made.
Recommendations
- Investigate potential for raising prices given good reputation

- Attempt to pass cost of special Cassio thread to clients
- Seek alternate suppliers and try to negotiate discounts
- Discuss potential need for greater overdraft use with bank after Titanic default
- Investigate cost of insurance against bad debt
- Consider raising criteria in customer evaluations and review the level of the bad debt allowance.

3.1 EVALUATION OF WISHER LIMITED
3.2 FINANCIAL IMPLICATIONS
In 2019, the use of Wisher as a supplier would increase cost of sales to £7299.75k – an increase of £358.75k –
a significant 5.2%.
Importantly, this would turn an expected operating profit in 2019 to a loss, assuming all other costs are equal.
This would damage BM’s reputation with the bank, who may withdraw the overdraft if they felt interest payments
could not be made.
In 2020, cost of sales are projected to drop slightly to £6802k, giving a gross profit of £1,691k. This almost
achieves BM’s target mark up of 25% on average – at 24.9%.
Wisher would require payment within 30 days of invoicing, which is longer than average trade payable days of
21.4 days in 2018. This may reduce overdraft use by reducing the working capital cycle.
The calculations were based on assumptions and may be subject to change should these prove inaccurate.
3.3 ASSUMPTIONS
BM is assuming that revenues will be stable in 2019 and 2020, but this is unlikely as revenues have increased
each year for the past 4 years. An increased volume sold would increase gross profit and operating profit.
BM is assuming that there would be demand for 84,930 items of recycled cotton goods, but this is unlikely as
quality is likely to be less good. This would mean greater reliance would be placed on existing suppliers, and the
cost savings in 2020 may not be achieved.
BM is assuming that the prices of other suppliers will be stable, but this is unlikely given weakening sterling.
This would further increase cost of sales and decrease profits.
BM has assumed overheads will only rise by 10% for quality testing, but this increase could be far greater if the
products are found to be lower quality.
Production labour costs are likely to rise, as re-shredded cotton will be difficult to work with, meaning more
experienced, expensive staff will be required, rather than apprentices.
BM has not included costs of collection of the items, but this will be their responsibility and will increase cost of
sales.
BM have assumed customers will be willing to pay £50 per item, but customers are likely to request discounts
when Wisher products are used, as recycled cotton is perceived to be cheaper.
3.4 EVALUATION AGAINST SUPPLIER CRITERIA
It is unclear whether Wisher could meet supply requirements in very busy periods, such as Royal Weddings, as
being a new company, they are unlikely to hold significant inventory.
The quality of re-shredded cotton is unlikely to be as high as other suppliers, which could damage BM’s
reputation and reduce sales.
The business is newly established, and seems to find cash flow management challenging, which could indicate
that Wisher does not offer a secure supply.
BM would purchase 40% of Wisher’s annual sales, putting it in an excellent negotiating position. This may mean
BM can negotiate significantly lower prices in future years when Wisher begins to achieve economies of scale.
Wisher appears to have a similar corporate ethos to BM, having a local employment programme.
Wisher has a good reputation so far, and has been mentioned favourably in the local press.

There are unfortunately no references for Wisher, but BM could request these before committing to orders.
Wisher is a UK-based business, which could reduce BM’s current FOREX exposure.
3.5 ETHICAL AND BUSINESS TRUST ISSUES
Wisher appears to have a strong training program supported by local government, which is in line with BM’s
own employment practices.
Wisher has not described their supplier chain, which would be problematic if they use a supplier in India with
poor safety practices.
The use of recycled cotton is in line with BM’s aim to be more environmentally friendly. As a local supplier,
Wisher may also help reduce BM’s carbon footprint.
If Wisher sources shredded cotton from the UK, the carbon footprint of the supply chain would be reduced
substantially.
Any association with employee harm in Indian factories would be very damaging for BM’s reputation, and could
lose many clients.
3.6 CONCLUSION
The use of Wisher as a supplier would mean BM made an operating loss of £203k in 2019 and a profit of £275k
in 2020.
The small cost savings generated in 2020 could be wiped out by potentially increased labour costs required to
work with a lower quality more difficult fabric.
Wisher seems to satisfy BM’s supplier criteria, and has a similar corporate ethos.
However, due to the scale of supply that Wisher wishes to provide, BM should not accept the proposal.
3.6 CONCLUSION
The use of Wisher as a supplier would mean BM made an operating loss of £203k in 2019 and a profit of £275k
in 2020.
The small cost savings generated in 2020 could be wiped out by potentially increased labour costs required to
work with a lower quality more difficult fabric.
Wisher seems to satisfy BM’s supplier criteria, and has a similar corporate ethos.
However, due to the scale of supply that Wisher wishes to provide, BM should not accept the proposal.
3.7 RECOMMENDATIONS
- Conduct market research on the perceived benefits of sustainable cotton

- Negotiate scale of supply with Wisher, and see if smaller quantities could be provided
- Seek further back-up for cost estimates
- Request Wishers supplier details, and conduct ethical due diligence on them
- Seek references for Wisher from the bank and other customers
4.1 EVALUATION OF MEC
4.2 FINANCIAL IMPLICATIONS
In option 1, revenue of £62,400 would be generated. At 0.7% of 2018 revenues, this represents a very small
project. Option 2 would be even smaller. The contribution would also be small at £14,400 or £10,800.
The mark up achieved on both options is significantly above BMs target of 25%, which would improve (slightly)
BMs current gross profit margin, and give a small positive contribution.

MEC is demanding a 90 day credit period, which is much longer than BM’s usual terms, and will make the cash
flow effects of a one off product worse than usual. BM may not be able to afford this given the Titanic liquidation.
As a cruise ship with spa, MEC are likely to favour Tooley products, which are more expensive than average
and would reduce the contribution of option 1.
If MEC grows substantially, BM is likely to attract further business in the future, increasing revenues.
The calculations are based on the 2017 cost card, which has changed in the light of increased supplier cost.
4.3 OPERATIONAL ISSUES
BM would need to supply the first batch by 15 December, which is an ambitious target as the production
process often takes weeks to months. This may prove impossible.
If BM missed the deadline, they would be left with a batch of unsaleable items, which would damage cash flows.
At 1,200 items, the run is small compared to BMs capacity of 1,200 items per day. This could make it easier to
schedule the production run, even though it is short notice.
BM would need to arrange delivery to the cruise ship at short deadlines, which it may find challenging given
previous difficulties making DWC deliveries.
By requiring 10 motif changes a year, MEC would take a disproportionate amount of design team time. This
could damage BMs relationship with other customers if they feel they are being neglected.
If option 2 is chosen, production time will be longer, as the CADP team is likely to see glitches that need to be
fixed on an unusual fabric. Quality also could not be guaranteed, which may damage BMs reputation.
4.4 STRATEGIC ISSUES
The MEC contract would allow BM to diversify into chartered ships, which would be positive move as they are
currently restricted to 3 markets.
Anton Lewis may be willing to recommend BM to friends, which would boost BMs revenue.
There is a potential for repeat work, which would reduce BMs reliance on their current customers.
MEC are likely to demand very high quality products, which BM has significant experience in providing, so they
are in a good position to successfully deliver the project.
MEC have stated they will seek the best price from suppliers worldwide, which means BM will face fierce
competition to win the proposal.
MEC has not been recommended to BM, which may make completing the 7 point customer evaluation checks
difficult.
MEC is likely to demand discretion, so BM could not use this client as an advertisement.
4.5 BUSINESS TRUST & ETHICAL ISSUES.
MEC are not supportive of local suppliers, and it is unclear how they treat their employees, so they do not seem
to share BMs goal of high ethical standards.
The deadline for the first batch of goods is very tight, which would increase employee stress. This could reduce
the quality of work on all jobs if they become demotivated.
MEC has a Swiss bank, which may increase suspicion of money laundering. Directors are now held personally
liable for her money laundering checks as the public demands they take more responsibility for prevention, so
checks should be thorough. Luxury goods are a high risk area for money laundering.
It is unclear why Shelly recommended this client, and she may have been biased if corporate hospitality was
given.

BM would need to deliver these products abroad at short notice, so air freight would be required, increasing
BMs carbon footprint.
4.6 CONCULUSION
The MEC project would deliver a small increase in revenue of £62,400 (option A) or £32,400 (option B). This
translation to a contribution of £14,400 (option A) or £10,800 (option B).
The costs used were based on 2017 figures, which are now out of date.
The project would be deliverable based on BMs high capacity, but the tight deadline is likely to place significant
stress on staff.
BM should accept the contract, as it delivers a positive contribution and offers diversification to a new market.
Recommendations
- Conduct full 7 point customer evaluation

- Verify source of Anton’s wealth for ML regs
- Update 2017 cost cards and recalculate price
- Confirm deadline with MEC and discuss contract terms
- Obtain quotes for freight costs
- Discuss potential overtime requirements with staff

APPENDIX 1 (5.1)
£’000
2018 2017 Δ %
Revenue 8,493 6,661 1,832 27.51%

Cost of Sales (6,941) (5,297) 1,644 31.01%
Gross profit 1,552 1,364 188 13.81%
Other operating costs (1,416) (1,195) 221 18.5%
Operating profit 136 169 (33) -19.5%
Mark up 22.35% 25.75%

GP Margin 18.27% 20.48%
OP Margin 1.60% 2.54%
COST OF SALES
Base products 3,982 2,895 1,087 37.5%
Mono Mat 1,925 1,450 475 32.8%
Prod Labour 433 370 63 17.0%
Prod Overheads 601 582 19 3.3%
O.O.C
Admin staff & o/h 879 785 94 12.0%
Marketing & distribution 373 303 70 23.1%
Allowance for trade rec 86 107 (21) -19.6%
Trade rec w/o 78 0 78 NA
REVENUE
Volume 169,860 133,220 36,640 27.5%
PURCHASE & SUPPLIERS £’000

2018 2017 Δ %
Cassio 958 696 262 37.6%
Formenta 1765 1479 286 19.3%
Hardy 1864 1284 580 45.2%
Prospectus 977 775 202 26.1%
Tooley 374 183 191 104.4%
APPENDIX 2 (5.2)
Volume good sold in 2018 = 169,860
Wisher to supply 50% = 84,930
Base product cost per item 2018 = 3982k / 169,860 = £23.44
2019 2020
Cost of sales (BP)
3m to 31/12/18 = 3982k 3/12 995.5
9m to 30/09/19 = 3982k x 9/12 x 1.2 x 50% 1791.9

3982k x 9/12 x 50% 1493.25
4280.65
12m to 30/09/20 = 3982k x 50% 1991

Wisher = 2019 costs 1791.9
3782.9
Increased prod o/h 60.1 60.1

601 x 10%
Labour 433 433
Mono Mat 1925 1925

Prod o/h 601 601
Cost of sales 7299.75 6802.00
2019 2020
Revenue 8493 8493

Cost of sales (7280) (6802)
Gross profit 1,213 1,691
OOC (1,416) (1,416)
Operating profit (203) 275
Mark up 16.7% 24.9%

GPM 14.3% 19.9%
OPM -2.4% 3.2%
5.3 APPENDIX 3
Items required: 1,200
Option 1:
Production costs £40.00

(per cost card)
Mark up (30%) £12.00
Sales price £52.00
Revenue: 1,200 x 52 = £62,400
Contribution: 1,200 x £12 = £14,400
Option 2:
Production costs £18.00

(40 – 22)
Mark up (50%) £9.00
Sales price £27.00
Revenue: 1,200 x £27.00 = £32,400
Contribution: 1,200 x £9 = £10,800

spelling, grammar, sentence construction and punctuation from the original script have been
retained. The commentary follows the order and numbering of the script with references to the topics
in the marking key. It should be read in conjunction with the review of the First Illustrative Script and
also the full Examiners’ Report for this session.
This script failed the exam. It is of average length – but as always this depends on the actual
handwriting, which was difficult to read. This candidate achieved 19 competent grades (Clearly
Competent (CC) and Sufficiently Competent (SC)), balanced across the whole report. Some but not
enough competent grades were obtained in all requirements. The professional skills grades
(maximum 33) were: in 5 out of 9 grade boxes for Assimilating and Using Information (A&UI) – with
1 NA box; in 5 out of 9 for Structuring Problems and Solutions (SP&S); in 2 out of 9 for Applying
Judgement (AJ) – with 2 NA boxes; and in 3 out of 6 for Conclusions and Recommendations (C&R).
This candidate also achieved 4 out of 6 passing grades for the Executive Summary. The candidate
achieved sufficient competent grades in Requirement 1 (review of BM’s financial performance), but
failed to achieve sufficient passing grades in Requirement 2 (evaluation of new supplier proposal
Wisher) and Requirement 3 (evaluation of new customer MEC proposal). The main body of the
report is split more or less equally between the three requirements. There are appropriate
appendices for all three requirements.
Terms of reference (TOR) and executive summary (ES)
This report starts with a separate front page, title and TOR section – the report is from Borax Beadle
(BB). The ES, which follows, is structured and is split evenly between the three topics.
The summary of the financial analysis of the BM management accounts contains some appropriate
numerical analysis covering revenue, cost of sales, GP and OP but does not emphasise sufficiently
the concern over the downward trend in GP%. C&R points in the ES are appropriate.
The section dealing with the new supplier proposal only contains some of the appropriate numerical
information (not 2020) for the proposal although the conclusion is reasonable. It fails to comment on
the critical factor of economies of scale cost savings in 2020. This section was insufficient.
In the evaluation of the new customer MEC proposal, the candidate provides numerical information
on both Options, the relative financial importance of the contract and evaluates timescale and
capacity. In the final section there is no mention of Option 2 risks and insufficient ethical and
customer criteria are provided.
The ES covered the three areas and used numbers in all sections. To score better grades on this
section, the candidate could have:
 Commented on the unsustainable fact of BM’s reduction in GP margins;

 identified the critical factor of the possible future cost savings in evaluating the Wisher project;
 commented on the business trust and ethical issues surrounding MEC.
The script was not easy to read and the layout was variable – which it is not possible to discern from
a printed copy of the script. There was an appropriate disclaimer. However, lapses in layout,
language, spelling and grammar throughout meant that points were dropped.

Review of BM’s financial performance [Requirement 1]
The candidate presents a clear appendix with a columnar, analytical schedule relating to the key
figures from BM’s statement of profit or loss for 2018 compared with 2017. The analysis of
movements between the years for revenue, cost of sales (COS), GP and OP is made in both
absolute and percentage terms. The candidate has presented some additional analysis relating to
the suppliers / purchases mix which is not directly relevant, or carried into the report – and must
have wasted some time. Nevertheless, this is a good appendix.
The appendix provides the basis for the comparative analysis of the items requested in sufficient
detail to allow further reward in A&UI and SP&S. However, this script does not provide sufficient
business background information to provide appropriate relevant context in this section. There was
some relevant analysis of the bad debts and doubtful trade receivables but there was little by way of
judgement concerning that topic in this section. Overall AJ was the weakest skill in this section with
no passing grades. Although conclusions were sufficiently competent, recommendations were not.
This section of the report provides an analysis of overall revenue: “Overall revenue (R) has grown
significantly by £1832k / 27.5% because of the continued growth in leisure industry and the good reputation of
BM as high quality producer. This growth allows BM to achieve its target sales of £8m and assuming price at a
constant of £50, volume target of 160 000 items.” But this revenue analysis does not continue into AJ.
Similarly the analysis of GP and OP is at the right level but it is not developed sufficiently in
judgement. In the component of this section dealing with bad debts and the allowance for doubtful
trade receivables the analysis is adequate: “The bad debt allowance is different from allowance for
impairment of trade receivables as the former is adjusted when it is certain that bad debt has occurred. The
latter is an estimate of how much in a particular year will there be a bad debt, and takes into account the
amount of TR at year end after bad debt allowance” but unfortunately there is very little in AJ and there is
some evidence of some unclear comprehension of this issue.
This whole of this section has inadequate judgement – a major flaw in such a report. Sufficiently
competent conclusions follow the analysis with some appropriate numbers. Recommendations were
insufficiently competent. Overall this was a variable section of the report.
 evaluated the revenue using the facts supplied in the CS Exam

 evaluated the COS and OC in more detail
 evaluated all aspects of the issue of bad debts and the allowance for trade receivables.
Evaluation of new supplier Wisher proposal [Requirement 2]
The candidate presents an appendix which shows some detailed financial data calculations, but not
the COS totals, for the two periods requested. This information is then included as elements in the
calculation of GP and OP. The candidate calculates a Period 1 operating loss followed by a Period 2
operating profit. This calculation although incorrect had effective labelling in the appendix and it
meant that a reader could easily follow what the candidate had done. The appendix was sufficiently
competent and financial data derived from the appendix was clearly competent (A&UI). However,
the A&UI relating to the wider context was not strong because it did not provide the full BM business
background to this issue.
The analysis (SP&S) of the GP and OP in the report is clearly competent and the evaluation (AJ) of
that information was also sufficiently competent. “The overall impact from changing supplier to Wisher is
the decrease in operating profit for the first year, followed by improved GPM & operating margin for the
subsequent years …the [2019] loss is significant, causing negative cash flow impact during the first year of
implementation. The increase in loss will impact the overdraft (OD) limit of £250k as loss will cause OD target
to be exceeded.” However, the analysis of the assumptions is not sufficient and the subsequent
evaluation is incomplete and inadequate.

The analysis and evaluation of the ethical and business trust considerations are not sufficient or fully
demonstrated in SP&S and AJ, and are not put in the relevant context of BM’s corporate ethos. This
is not a strong section.
The conclusions in this section are very good but the recommendations are insufficient.
 incorporated more of BM’s relevant business background into this section

 analysed and commented on the assumptions used in this section
 identified, analysed and evaluated the business trust and ethical issues more fully.
Evaluation of the new customer MEC proposal [Requirement 3]
The candidate presents an insufficiently competent appendix which comprises a set of financial
workings which are not easy to follow and are incomplete. However, the candidate extracted
sufficient numerical information to demonstrate good use of the calculations done. In this section the
wider or business background context was not attempted.
The candidate has provided insufficient analysis (SP&S) of the financial calculations in the body of
the report and the evaluation (AJ) is also weak. The analysis (SP&S) and the evaluation (AJ) of the
operational/strategic issues in the report are sufficiently / clearly competent. “The deadline for finalised
products is expected to be less than a month away which may impact the existing capacity. Given it can be
produced with 1 day capacity, this may be mitigated and It is also understood that the final products are to be
sent to the cruise location which will not only increase carbon footprint but will also increase the distribution
cost”. As a result of these and other comments, this candidate scores very well in these operational
boxes.
However, this candidate does not provide an adequate analysis (SP&S) or evaluation (AJ) in the
coverage of the ethical and business trust issues.
The conclusions are sufficient but the recommendations insufficiently competent.
 presented clearer and more complete financial calculations in the appendix;

 presented more BM business background relating to the context of this section
 identified, and evaluated the ethical and business trust factors relating to MEC;

To: The Board of Bespoke Monogramming Ltd (BM)

From: Borax Beadle
Date: 07/11/2018
Subject: Financial Performance and Strategic Review
Disclaimer
This report is for the Board of BM Ltd only and no liabilities can be accepted if distributed to third
parties.

1.0 EXECUTIVE SUMMARY
1.1 FINANCIAL PERFORMANCE
Overall, Revenue (R) has grown significantly by £1832k / 27.5% because of the continued growth in leisure
industry allowing BM to achieve its target sales of £8m and 160,000 items sold.
The main contributing factor is the increase in sales from Boreal Spas of 40% as a result of the latter’s
expansion in spa markets.
Gross Profit Margin (GPM) has decreased slightly to 18.3% vs 20.5% last year as predicted as a result of £
weakening and increase material cost (MM) and by base product (BP). MM and BP has increased significantly
by £475k / 32.8% and £1087k / 37.5% both as a result of 10% price increases charged by supplier.
Production overhead increases slightly by £19k / 3.3% reflecting fixed nature of the cost.
Production labour has increased quite significantly by £63k / 17% despite financial incentives.
Operating margin has decreased from 2.5% to 1.6% reflecting poor cost control.
It is prudent to provide for allowance of repayment of trade receivables separately from bad debt.
Conclusion & Recommendation
Overall, bad performance for the year
 Discuss potential overdraft limit increase

 Enhance customer evaluation process and debt control
1.2 WISHER – EVALUATION OF SUPPLIER
For 2019, COS is £83k, GP is £162k, GPM is 1.9% and operating loss is £1236k.
For 2020, COS is £6596k, GP is £1897k, GPM is 22.3
Although in the first year it will generate loss, in 2020, it is expected to generate significant profit which will
allow BM to achieve its target mark up of 25%.
The cash flow impact is negative in the first year causing OD target to be likely to be exceeded.
The main assumption is that cost for materials and production labour are assumed to be the same as 2018
which is not the case in light of inflation.
Wisher also face tough competition from HT group which means it is likely to go out of business which will
cause production disruption.
However there is some scope for negotiation given the lower power Wisher has.
The main ethical consideration is working condition of the supply chain and the fire risk associated with
Shoddy.
Conclusion & Recommendation
Accept
 Discussion OD limit increase

 Produce evaluation report prior to engagement
 Clarify with Wisher on risk associated with Shoddy and discuss with WL

1.3 EVALUATION - MEC
Financial contribution to be made for Op1 and Op2 is £183k and £130.5k respectively. Both allow BM to
achieve its target mark up of 25%.
The project will be quite significant at 9% and 4.6% for respective options but will allow BM to have new
revenue stream and thus reduce overreliance on other customer.
The operational concern is the tight deadline for the first order which means it will take management time to re-
plan staff and capacity.
Location The price to be charged for option 2 is significantly lower than average price of £50 which will reflect
badly on BM.
The ethical considerations include the increased stress on staff which impact their morale and quality.
Conclusion
Accept Option 1
Negotiate faster payments term.

Compensate staff with higher wages.
Establish source of funds.
2.0 FINANCIAL PERFORMANCE
2.1 REVENUE
Overall revenue (R) has grown significantly by £1832k / 27.5% because of the continued growth in leisure
industry and the good reputation of BM as high quality producer. This growth allows BM to achieve its target
sales of £8m and assuming price at a constant of £50, volume target of 160 000 items.
The growth is much better than the target, albeit of a slightly lower rate vs last year of 29.5%.
The contributing factor is the increase in sales from Boreal Spas (BS) as a result of its expansion of 40% of
spas which BM is able to benefit. This continues to be stupendous client as Joe Styles, the key staff of BS is
main contact, who has been recommending business.
Cosset growth as predicted of 15% has also helped BM to generate the higher R.
Deep Wave Cruises (DWC) has also contributed to the growth by 1% despite the delivery issue. The fact that
if operates all year around helps BM to achieve constant orders and potentially improves cash flow.
The royal wedding which occurred in May 2018 has also contributed towards R growth and this is partly
achieved through Alphonse Hotels and subsequent orders from positive impact following BM publicity
following the event.
2.2 COST OF SALES (COS), GROSS PROFIT (GP) AND OPERATING PROFIT (OP)
Overall, GP increases steadily by £188k / 13.8% which is lower than R growth giving declining GP of 18.3% vs
20.5% last year. The decline in GPM is mainly due to £(pound) weakening following Brexit uncertainty which
has led to higher cost of the mainly imported material.
Base Product (BP) has increased significantly by £1087k / 37.5%. The main reason is the 10% P increment of
BM’s main supplier, Fomenta which supplies BP. The P of Fomenta’s product has always been higher and
further differentiates this year.
Monogramming material (MM) has also increased significantly by £475k / 32.8% as a result of the 10% price
increase of Cassio. The purchase mix of Cassio product has increased slightly 16.1% vs 15.8% last year as a
result of increased customer demand which led to overall increase of MMcost.

Production overhead has increased slightly by £19k / 3.3% as most costs are fixed and it also reflect
increased efficiency of CADP.
Production labour has increased quite significantly £63k / 17% despite receiving the financial incentive from
government. This higher cost may reflect BM’s continued commitment towards providing good working
experience with reasonably high wage.
Operating profit has decreased significantly by £33k / (19.5%) as a result of weak cost control giving OPM of
1.6% vs 2.5% last year.
The major contribution of this decrease is the significant increase of marketing cost by £270k / 23.1% due to
the continued marketing and sales drive targeting at SME.
2.3 TRADE RECEIVABLES
In light of disastrous Titanic and Majestic bad debt issue, it is prudent for management estimate of Trade
Receivable (TR) allowance of 20% to continue to be provided in the management accounts.
The amount written off this year of £78k, represents 73% of the allowance, which is a significant, so the 20% is
not too prudent but reasonable.
The bad debt allowance is different from allowance for impairment of trade receivables as the former is
adjusted when it is certain that bad debt has occurred. The latter is an estimate of how much in a particular
year will there be a bad debt, and takes into account the amount of TR at year end after bad debt allowance.
If management deal with it only as it happens, this is against prudence concept and may have larger impact on
profit when bad debt occurs.
The bad debt & allowance adjustment does not affect cash flow for the year but it will impact future cash flow.
It is the customer evaluation that needs improvement.
2.4 CONCLUSION
Overall, the performance has not been bad.
Overall Revenue has increased by £1832k / 27.5% allowing it to achieve its target of £8m sales and 160k
items.
The main contributing factor is increase in R from Boreal Spas of 40% from similar spa growth rate of Boreal.
GPM has decreased slightly: 18.3% vs 20.5% as a result of BP increases of £1087k / 37.5% and MM
increases of £475k / 32.0% due to 10% P increase GPM charged by supplier.
OPM has decreased significantly by £33k / (19.5)% reflecting poor cost control.
2.5 RECOMMENDATIONS
Investigate the reason for substantial increase in Base Products cost. Negotiate discount with supplier.
Enhance customer evaluation process & debt control.
Monitor cash to ensure overdraft (OD) stay within target.
Discuss with bank potential increase of OD limit.
Apply for insurance of bad debt.

3.0 EVAULATION OF SUPPLIER – WISHER
3.1 FINANCIAL
For 2019, cost of sales (COS) is £8333k giving gross profit (GP) of £162k, GPM of 1.9% and operating loss of
£1234k.
For 2020, COS is £6596k, GP is £1897k, GPM of 22.3% and operating profit (OP) of £481k at OP Margin
(OPM) of 5.7%.
The overall impact from changing supplier to Wisher is the decrease in operating profit for the first year,
followed by improved GPM & operating margin for the subsequent years. This allow the BM to achieve its
target mark up of 25% in 2020 as the mark up achieved is 28.8%
The loss is significant, causing negative cash flow impact during the first year of implementation. The increase
in loss will impact the overdraft (OD) limit of £250k as loss will cause OD target to be exceeded.
These calculations are based on uncertain estimates of price and cost and should there be any change to
these, so will the above calculation. It has also been calculated ignoring 50% proportion of the proposed
purchases.
3.2 ASSUMPTIONS
It is assumed that prices and volume are kept constant at 2010’s level - £50 and 169,860 items. Given
competition, P and Volume may decrease.
The BP cost of 20% higher is an estimate but it could be higher if BM eventually become reliant on Wisher as
currently only there is limited number of Shoddy suppliers in the market, hence high supplier power.
The MM & PL cost are based on 2018 which may be irrelevant in 2019 & 2020 as cost will normally increase in
light of inflation.
Past increases of 10% may be too optimistic given the use of new material will result in more testing required.
3.3 OTHER CONSIDERATIONS
Wisher (WL) will face competition from larger well established HT group which means it is likely that (WL) will
lose and go out of business which will disrupt production & increase production cost.
However, with competition BM starts to benefit as it has some power to negotiate the price.
It is also assumed that quality will be of the acceptable quality for BM customers but this is unknown at this
stage and following which will impact BM’s reputation as high quality producer using 600 gram or above
material.
It is also assumed that the products will have to be collected by BM, therefore admin costs may be higher than
anticipated.
The payment term is 30 days from date of invoice which negatively impact cash flow position of BM which
currently running on overdraft.
3.4 ETHICS AND BUSINESS TRUST
It appears that WL is also receiving government support for its local employee training programme which is
then in line with BM ethos. It appears that the company is investing in good fair employment practice for its
staff through the programme.
However, it is the working condition at WL including its supply chain is unknown. The safety standards is also
uncertain.
There is also fire risk hazard associated with parties which WL has not informed. This will have impact on
business trust between WL & BM and further discussion is required to establish the fact and the risk
associated. The impact of this is financial loss from fire.

BM’s directors should visit WL prior to engaging it to check for working condition and the production process.
3.5 CONCLUSIONS & RECOMMENDATIONS
For 2019, COS is £8,333k, GP is £162k, GPM is 1.9% and operating loss is £1,234k.
For 2020, COS is £6,596k, GP is £1,897k, GPM is 22.3% and OP is £401k and OPM is 5.7%.
This allows BM to achieve its target mark up of 25% although it will have negative cash flow impact of in the
first year causing it to breach its on target.
The main assumption is P & V to remain constant which may not be the case given competition.
The acceptability of quality is also unknown with client so will potentially impact BM’s reputation.
The main ethical issues is the working practice at WL and its supply chain which is unknown, albeit WL
offering same training program as BM.
Conclusion & Recommendations
Accept
 Produce full evaluation report prior to marketing engagement

 Clarify facts and visit WL to establish working conditions
 Clarify with WL on risk associated with production
3.6 RECOMMENDATIONS
Perform financial due diligence on Wisher

Produce full supplier evaluation report prior to making engagement
Negotiate discount with (WL)
Find alternative supplier
Perform market research on quality standard and acceptability of new BP to customer
Perform check on working conditions
4.0 CUSTOMER EVALUATION – MEC
4.1 FINANCIAL
Under option 1 (O1) this project will deliver an expected annual contribution of £183k whilst option 2 (O2) will
deliver £130,500. On this basis O1 is more favourable.
The above calculation is based on the estimated annual guests of 2500 individuals and their respective
partners using normal standard set of 6 for each couple (2,500 couples).
Option 1 and 2 allow a mark up of 30% and 50% respectively which is well above the target mark up of BM of
25%.
In terms of significance, O1 & O2 represent 9% and 4.6% of Revenue respectively. Risk of future overreliance
is greater with option 1 than option 2, albeit it will both generate new revenue stream to BM with lower
dependence expected of other clients.
The price charged for O1 & O2 is £52.9 and £26 per unit against the average selling price of £50 currently
achieved. With option 1 the higher price than average will reflect quality premium of which luxury cruises
operator is willing to pay so long as the quality of products are outstanding. With lower price of £26/unit of O2,
it reflects badly on BM quality and may lead to other customers demanding for discount.
Credit terms are 90 days to be paid from the business Bank which is well above the average credit terms
provided to average clients of 45 days.

4.2 STRATEGIC AND OPERATIONAL
The deadline for finalised products is expected to be less than a month away which may impact the existing
capacity. Given it can be produced with 1 day capacity, this may be mitigated.
The requirement of 10 times changes of design means that BM will have to have substantial production
overheads and it is unknown at this stage whether the new design is of significant amendments or otherwise.
It will also mean that more management time is being taken up as a result of coordinating the design through
the year.
It is also understood that the final products are to be sent to the cruise location which will not only increase
carbon footprint but will also increase the distribution cost. Competitive courier market will be able to mitigate
this concern.
With location being unknown until the very last minute, it poses difficulty in terms of staff & production planning
the tight deadline may impact the quality of goods produced. The most important aspect when dealing with
luxury cruises.
4.3 BUSINESS TRUST & ETHICS
BM currently has not made contact directly with MEC so the corporate ethical standard of MEC is unknown.
MEC also appears to be operating with secrecy indicating potential transparency issue that BM has to deal
with.
MEC also operated mostly outside UK although being incorporated in the UK. This may pose money
laundering threat if it is seen to be avoiding tax and eventually will impact BM’s directors personally if sources
of funds are not checked – establish source of funds. With changing deadlines, the staff will be working under
pressure and might impact its morale which could lead to low quality production. Compensate staff with higher
wages.
4.4 CONCLUSION
Accept the first option 1 as it gives higher contribution.
The financial contribution of Op1 & Op2 is £183k & 130.5k respectively.
The operational strategic issue is the tight deadline threat this order poses.
The strategic issue is the price charged may lead to BM product being negatively viewed under option 2.
The ethical issue is the sources of funds are unknown and could lead to ANC regulator.
4.5 RECOMMENDATIONS
Negotiate faster payment terms

Negotiate price with client
Perform financial & commercial due diligence on WL
Discuss to expect deadline of production of products
Establish the capacity for the next 1 month & ensure there is enough staff.

APPENDIX 1
2018 2017 Δ Δ
£000 £000 £000 %
Revenue 8493 6661 1832 27.5
Volume 169.86k 133.2
Target volume (items) 160k 125k
Cost of Sales
Base Products (BP) 3982 2895 1087 37.5
Monogramming Materials (MM) 1925 1450 475 32.8
Production Labour (PL) 433 370 63 17.0
Production Overheads (POH) 601 582 19 3.3
Total 6941 5297 1644 31.0
Gross Profit (GP) 1552 1364 188 13.8

GP Margin (GPM) 18.3% 20.5%
GP Mark-Up 22.4% 25.8%
2018 2017 Δ £00 Δ%

Operating Expenses £000 £000
Admin Staff & Overheads (O/H) 879 785 94 12.0
Marketing & Distribution 378 303 70 23.1
Allowance for impairment of 86 107 (21) (19.6)
trade receivables
Trade receivables written off 78 - 78 N/A
Total 1416 1195 221 18.5
Operating Profit (OP) 136 169 (33) (19.5)

OP Margin 1.60% 2.5%
Purchases Mix 2018 (%) 2017%

Cassio – MM 16.1 15.8
Fomenta – BP 29.7 33.5
Hardy – BP 31.4 29.1
Prospectus – MM 16.5 17.5
Tooley – BP 6.3 4.1
Other
APPENDIX 1
TR – 2017 > £ £78,000
Percentage of 2017 = 78/1416 = 5.5%
Percentage of 2017 write off = 70k / 107k = 73%

APPENDIX 2
YE 30 Sept
2019 2020
£000 £000
Revenue 8493 8493
Cost of Sales
BP (1735k & 3577) (5312) (3577)
MM (1925) (1925)
PL (433) (433)
POH (601 x 1.1) (661) (661)
GP 162 1897
GPM 1.9% 22.3
GP Mark-Up 1.94% 28.8%
Operating Costs (1416) (1416)
Operating (Loss)/Profit (1254) 481
OP Margin (14.8)% 5.7%
This calculation does not take into account 50% risk of the BP used.
Average cost per unit – Volume of 169,860 items
£
BP 23.4
MM 11.3
PL 2.5
POH 3.3
40.7
BP
3/12 x 6941k = £1735k

9/12 x 169,860 x 23.4 x 1.2 = 3577k
APPENDIX 3
Option 1
Average cost per unit from Appendix 2

→ £46.7
6 items
Per unit £ % Total £ £ £
R 52.9 130 X 5000 R 63480 64500 ½x6 793500
COS (40.7) (100) X 5000 COS (48840) (203500) ½x6 610500
GP 12.2 30 GP 14640 61000 183000
Option 2
Average cost (minus BP)

→ £17.3
6 items
Per unit £ % Total £ £ £
R 26.0 150 X 5000 31200 130000 ½x6 390000
COS (17.3) (100) X 5000 (20700) (86500) ½x6 (259500)
GP 8.7 50 GP 10440 43500 130,500

ADVANCED LEVEL EXAMINATION
(4 HOURS)
CASE STUDY
1. Please read the instructions on this page carefully before you begin your exam. If you
have any questions, raise your hand and speak with the invigilator before you begin.
2. Please alert the invigilator immediately if you encounter any issues during the delivery
of the exam. The invigilator cannot advise you on how to use the software. If you
believe that your performance has been affected by any issues which occurred, you
must request and complete a candidate incident report form at the end of the exam; this
form must be submitted as part of any subsequent special consideration application.
3. Click on the Start Exam button to begin the exam. The exam timer will begin to count
down. A warning is given five minutes before the exam ends. When the exam timer
reaches zero, the exam will end. To end the exam early, press the Finish button.
4. You may use a pen and paper for draft workings. Any information you write on paper
will not be read or marked.
5. The examiner will take account of the way in which answers are structured. Respond
directly to the exam question requirements. Do not include any content or opinion of a
personal nature. A student survey is provided post-exam for feedback purposes.
6. Ensure that all of your responses are visible on screen and are not hidden within cells.
Your answers will be presented to the examiner exactly as they appear on screen.
@ ICAEW 2019
BLANK PAGE
ICAEW/CS/J19
@ ICAEW 2019.
July 2019 Case Study: Playfree Limited
List of exhibits
1 About you (Daryl Ross), your employer (Kemp Crossley) and your client (Playfree
Limited)
2 The playground equipment industry
3 Playfree: History and development
4 Playfree: Review of the management accounts for the three years ended 30 June
2018
5 Playfree: Management accounts for the three years ended 30 June 2018
6 Playfree: Design and installation (D&I)
7 Playfree: Inspection and maintenance (I&M)
8 Playfree: Case studies
9 Playfree: Supply chain
10 Playfree: Strategic plan
11 Playfree: Warranties
12 Playfree: Example inspection report – executive summary
13 Recent media coverage
14 Email dated 24 July 2019 from Rosemary Connor to you: Playfree: Draft
management accounts and business developments
15 Playfree: Draft management accounts for the year ended 30 June 2019
16 Note dated 23 July 2019 from Tina Cleves: Additional information relating to the
management accounts; and new zipwires
17a Email dated 24 July 2019 from Francis Toynbee to Rosemary Connor:
Tyron – new playgrounds
17b Recent media coverage
18a Email dated 23 July 2019 from Oliver Johnstone to Rosemary Connor: Playground
equipment management
BLANK PAGE
Playfree Limited: Case Study requirement
You are Daryl Ross, a final-year trainee ICAEW Chartered Accountant working in the business
advisory unit of Kemp Crossley, a firm of ICAEW Chartered Accountants with offices
across the south of England. One of your clients is Playfree Limited. Playfree designs
playgrounds and installs playground equipment for a variety of venues across the south of
England, as well as providing inspection and maintenance services to playground operators. You
report to a partner, Rosemary Connor.
Requirement
You are required to prepare a draft report for the Playfree board, as set out in the email dated
24 July 2019 from Rosemary Connor to you (Exhibit 14). Your report should comprise the

Marks allocation
 Assimilating and using information 22.5%

 Structuring problems and solutions 22.5%
 Applying judgement 22.5%
 Drawing conclusions and making recommendations 15.0%
 Demonstrating integrative and multidisciplinary skills 17.5%
In planning your report, you should be aware that not attempting

one of the requirements will have a significantly detrimental effect on your chances of success,
as will not submitting an executive summary. In addition, as indicated above, all four skills
areas will be assessed under each of the four elements of your report. Accordingly, not
demonstrating your judgement or failing to include appropriate conclusions and/or
recommendations in each element of your report will affect your chances of success.
BLANK PAGE
EXHIBIT 14
EMAIL
From: Rosemary Connor

To: Daryl Ross
Subject: Playfree: Draft management accounts and business developments
Date: 24 July 2019
We have just received the latest draft management accounts from Playfree. We need to review
these and respond to a request for advice. We also need to evaluate two new opportunities for
Playfree. I am attaching the following:
 Playfree’s draft management accounts for the year ended

30 June 2019 (Exhibit 15)
 A note from Tina Cleves: Additional information relating to the management accounts;
and new zipwires (Exhibit 16)
 An email from Francis Toynbee to me about an invitation to tender from Playfree’s

existing client, Tyron (Exhibit 17a), together with related media coverage (Exhibit 17b)
 An email from Oliver Johnstone to me about an approach from Kent County Council
(Exhibit 18a), together with related media coverage (Exhibit 18b).
Please draft for my review a report addressed to the Playfree board. The report should
1. A review of Playfree’s management accounts for the year ended 30 June 2019 in
comparison with the year ended 30 June 2018. Your review should be based on the
management accounts as set out in Exhibit 15. It should cover, both overall and
separately for each of the two divisions: revenue, cost of sales and gross profit. You
should refer to the additional information in Exhibit 16. You should also respond to the
request for advice on the new zipwires (Exhibit 16).
2. An evaluation of the invitation to tender for the installation of five new playgrounds for
Playfree’s existing customer Tyron, as set out in Exhibit 17a.
Using the information in Exhibit 17a and Exhibit 17b, you should calculate the cost of
this work, assess the adequacy of the assumptions and recommend and justify a price at
which Playfree should bid for the work. You should also evaluate Tyron’s specifications
and discuss the ethical and business trust issues that Playfree should consider when
bidding.
3. An evaluation of the approach from Kent County Council for Playfree to assist it with
managing and monitoring its playground equipment and to provide ongoing advice
(Exhibit 18a).
You should evaluate, with relevant calculations, the financial, operational and strategic
issues, including IT issues. You should incorporate any ethical and business trust issues
for Playfree, including those arising from Exhibit 18b.
BLANK PAGE
EXHIBIT 15
Playfree: Draft management accounts for the year ended 30 June 2019
Statement of profit or loss for the year ended 30 June 2019
£000
Revenue (Note 1) 7,590
Cost of sales (Note 2) (6,009)
Gross profit (Note 3) 1,581
Administrative expenses (Note 4) (1,202)
Income tax (79)
Profit for the year 317
Statement of financial position at 30 June 2019
£000
Non-current assets
Property, plant and equipment (Note 5) 546
546
Current assets
Inventories 184
Trade and other receivables (Note 6) 930
Cash and cash equivalents 989
2,103
TOTAL ASSETS 2,649
Equity
Ordinary shares 75
1,759
Current liabilities
Trade and other payables (Note 7) 811
Taxation 79
890
TOTAL EQUITY AND LIABILITIES 2,649
Statement of cash flows for year ended 30 June 2019
£000
Cash flows from operating activities
Profit before tax for the period 396
Adjustments for:
Depreciation 189
Loss on disposal of PPE 6
Finance income (17)
574
525
Income tax paid (111)
Net cash generated from operating activities 414

Acquisition of PPE (322)
Proceeds from disposal of PPE -
Interest received 17
Net cash generated from investing activities (305)
Net cash generated from financing activities -

Cash and cash equivalents at start of period 880
Cash and cash equivalents at end of period 989
Notes to the draft management accounts
Note 1: Revenue
£000
Design and installation 6,310
Inspection and maintenance 1,280
7,590
Note 2: Cost of sales
£000
Design and installation
Design costs 361
Equipment and site-work components 3,468
Installation 697
Surfacing 527
Subtotal – design and installation 5,053
Inspection and maintenance 956
6,009
Note 3: Gross profit
£000
Design and installation 1,257
Inspection and maintenance 324
1,581
Note 4: Administrative expenses
£000
Personnel 701
Premises and IT 364
Other costs 137
1,202
Cost £000
At 1 July 2018 1,027
Additions 322
Disposals (81)
At 30 June 2019 1,268
Depreciation
At 1 July 2018 608
Charge for the year 189
Disposals (75)
At 30 June 2019 722
Carrying amount
At 30 June 2019 546
£000
Trade receivables 664
930
£000
Trade payables 533
Other payables and accruals 278
811
BLANK PAGE
EXHIBIT 16
Note from Tina Cleves, 23 July 2019
Additional information relating to the management accounts
In relation to the year-end review, please note the following issues, all reflected in the
management accounts.
 Activity for the year may be summarised as follows:
Sites Revenue
No. £000
D&I – total 93 6,310

Inspection 1,148 523
Maintenance 623 757
I&M – total 1,771 1,280
7,590
D&I tenders 200 14,800
 On 1 July 2018, new regulations were announced requiring higher fences around all new
nursery playgrounds installed after that date. In the year to 30 June 2019, the extra costs
to Playfree were £40,000 (£800 per playground). We agreed to invoice these to
customers at cost.
 On 1 October 2018, we bought a new set of surfacing machinery for £180,000 and
disposed of the existing set. Playfree’s installers had difficulties in operating the new
machinery while they became used to it. As a result, in order to meet tight customer
deadlines, we had to subcontract some of the surfacing work, at an additional cost of
£32,000.
 On 1 January 2019, we increased our annual maintenance fee by £300 on 25 large and
25 small playgrounds that we had installed around five years earlier and for which the
warranty had recently expired. Including the extensive rectification work needed in some
cases, our total fees for these 50 playgrounds were £110,000 and the total cost of our
work on them was £100,000.
 In an attempt to combat intense competition from Rox, we gave a first-year fee discount
of 50% on all new inspection engagements started in the year. We did not lose any
existing inspection customers or sites in the year.
New zipwires
Up to and including March 2019, we had continued to receive very few warranty claims.
However, in the final quarter of the year, we began to receive claims relating to Auchen’s new
range of zipwires, which cost us £5,000 each to buy. We need to decide how to deal with
these claims.
Customers say that the zipwires seem to be running much more slowly than the speed we
specified in our warranty to them – the same speed that Auchen included in its warranty to us.
When we tested them at installation, we were satisfied that they met the stated speed
requirement and our normal safety standards.
By 30 June 2019, there had been claims against 10 zipwires, with another 10 since then. It
seems likely that there will be more in the coming weeks and months. The customers affected
are asking for the zipwires to be checked and, if appropriate, replaced and re-installed free of
charge. By 30 June 2019, we had installed 30 of these zipwires. No adjustments for the claims
have been made in the draft June 2019 management accounts.
Request for advice
Please advise the Playfree board on (a) the action it should take to deal with this situation and
(b) what adjustments, if any, it should make to the draft June 2019 management accounts.
EXHIBIT 17a
EMAIL
From: Francis Toynbee

To: Rosemary Connor
Subject: Tyron – new playgrounds
Date: 24 July 2019
We have been invited by our customer Tyron to tender for the installation of the playgrounds
at five ‘new-style’ holiday parks. These are due to be opened on 31 March 2020, ready for
the busy spring holiday season (1 April to 31 May).
Tyron has asked one other company to tender – Eversley, which has not previously done any
work for Tyron. We have heard that Eversley might be quoting £420,000.
We have carried out our site surveys and prepared our design pack. From our surveys, we did
not identify any issues that could cause problems or delays with the installations. The total
cost incurred on the initial survey and design work was £8,000.
Assumptions
The following assumptions are based on details given by Tyron.
1. The playgrounds at the new parks will be larger than those at Tyron’s existing holiday
parks. Given the higher quality and extra items required, equipment cost per playground
will be 50% more than the equivalent budgeted amount for the five sites we installed for
Tyron in Kent and Hampshire in 2016.
2. Site-work components will also cost 50% more than the budgeted amount for the
previous five sites.
3. The costs of surfacing (if we use our regular materials) and the costs of installation will
both be 25% higher than the budgeted amounts for the previous five sites.
4. All equipment, site-work components and materials will be sourced from our usual
suppliers. However:
 If Playfree uses the material LTT, which is being used by Eversley, total surfacing
costs will be half of the surfacing costs of using its regular material.
 The swings being requested by Tyron for the new sites are not in our current OPE
range. YoYo and Swingz have both told us that they can supply them, at the same
price. However, YoYo is currently out of stock as the new swings have been
proving very popular with other visitor attraction operators.
Specifications
1. The equipment should be suitable for a range of ages, from 3 to 16, and fully accessible
to children with limited mobility.
2. Bidders must give a five-year warranty on all items.

3. All installation work must be completed by 31 January 2020 to enable proper testing in a
range of conditions and by a range of users. Bidders must be able to demonstrate that
they can meet this timetable. They will be required to bear any costs over budget and to
pay a penalty to Tyron if the project overruns beyond the scheduled completion date.
4. We are not required at this stage to include maintenance services in our bid. Tyron will
consider these separately after awarding the installation contract.
EXHIBIT 17b
RECENT MEDIA COVERAGE
UK holiday destinations booming as staycations remain popular (Leisure News, July

2019)
The continued popularity of ‘staycations’ – holidays in which people stay in their own country
rather than travel abroad – is good news for operators of holiday venues in the UK.
One of the beneficiaries is Tyron. The operator of six ‘budget’ holiday parks in the south of
England, Tyron has just announced a move into higher-specification parks as part of its
expansion strategy. It plans to open five ‘Tyron Plus’ venues, also in the south of England, in
April 2020, having acquired the sites in 2016 and held them since then pending approval for
development.
Tyron has not said precisely how these new parks will differ from its existing locations, except
that they will be “more upmarket”. Tyron needs to be clear, when inviting bids from suppliers
for all aspects of the operation (including accommodation, restaurants, swimming pools and
play areas), exactly what it requires from them in terms of design standards and branding.
EXHIBIT 18a
EMAIL
From: Oliver Johnstone

To: Rosemary Connor
Subject: Playground equipment management
Date: 23 July 2019
Kent County Council (KCC) has approached Playfree to assist and advise it on managing and
monitoring its playground equipment.
KCC has 150 children’s playgrounds under its control. It contacted us because, unlike all
the other main playground companies, we have not previously carried out any work for KCC
(or any other public authorities), so we do not have a conflict of interest. Of more than 300
public authorities in the UK, KCC is the first to undertake such a project, and others are
expected to follow.
Our vast knowledge of, and expertise in, the sector and region should position us well to
undertake this work. However, we need to consider all the issues before we are able to
accept.
The tasks for Playfree
Teresa March, KCC’s newly-appointed CEO, has identified that KCC currently does not have
an organised record of the equipment held at its 150 playgrounds. She therefore requires the
following from Playfree:
 Compilation of a database that holds, for each item of equipment: photo, description,
location, names of supplier and installer, date installed, with a flag when 12 months from
the end of its expected useful life
 Cyclical visits to each site (every six months) to confirm that the assets shown on the
database are all still held at the stated location, to confirm any additions and to count the
number of users on the day of our visit
 Ongoing liaison with the companies with which KCC holds maintenance and inspection
agreements.
Half of the 150 playgrounds also have gym equipment for adults. The other half are scheduled
to have it installed by 31 July 2020. In all cases, the cost of this equipment to KCC is fully
covered by sponsorship from a local sportswear company and is being installed under contract
by two specialist manufacturers.
Fees and costs
The fees proposed by KCC (per playground) are as follows:

 Upfront fee for creation of database: £600
 Annual fee for ongoing monitoring and review: £200
Teresa wants the database to be ready by 31 October 2019. In order to meet this deadline, I
estimate that we will need to employ a team of eight temporary staff members (temps) for
three months to 31 October, and to hire cars for each of them. Based on our normal figures,
the average payroll cost for each temp for the three-month period will be £6,000 and motor
expenses per car will be £1,500.
The total monthly ongoing cost after that will be £2,500 (payroll cost of one permanent
employee plus general running costs).
Other advice
The initial agreement with KCC will be for two years starting on 1 November 2019, to be
reviewed at the end of that period. Although there will be a cost to KCC in setting up the
system and then maintaining it, Teresa estimates that, once fully operational, it will save KCC
a significant amount of money, as part of an initiative to cut costs across a range of public
services. KCC aims to achieve this by:
 replacing obsolete equipment as efficiently as possible with the latest safe equipment;
 identifying playgrounds that are little used (or which would be too costly to repair or
replace) and closing them;
 rationalising its portfolio of suppliers to obtain discounts and economies of scale, both for
playground refurbishments and for maintenance and inspection agreements.
KCC is also seeking Playfree’s specialist advice on these matters, for which it would pay a
monthly retainer of £1,000 for two years from 1 November 2019 plus 10% of any cost savings
achieved by KCC as a result of the advice. KCC has set itself a target of achieving £100,000
of savings in playground operating costs for each of these two years. By accepting the
advisory work, Playfree would be specifically excluded from doing D&I or I&M work itself on
any KCC playgrounds.
EXHIBIT 18b
RECENT MEDIA COVERAGE
The new mobile app for playground operators (Advert by IT company in Public
Authority News, July 2019)
Designed for public authorities and their contractors, this reliable piece of software will ensure
complete and accurate records of your playground equipment. Available on all platforms, it
offers:
 Detailed, paperless audit trails
 Secure storage of all data, in one place and in one format
 £10,000 annual licence fee in first year, £5,000 thereafter
 No need for internet access, allowing use in remote places
 Full compliance with the latest data protection regulations
Painted into a corner (Toys Monthly, July 2019)
Dangerous levels of toxic chemicals have been found in the paint used on playground
equipment installed at 25 municipal parks in Kent. This confirms the findings of a study
reported in May, which revealed toxic chemicals in paint at 50 playgrounds in the north of
England and which suggested that the problem was likely to be more widespread. The 25
playgrounds in question are among the oldest in Kent, having been installed in the 1990s and
never refurbished. All the equipment affected was manufactured overseas, by a company in
Sweden that no longer exists.
The 50 playgrounds identified in the initial survey were closed for one month so that the
equipment could be stripped and safely repainted. They have only recently been reopened.
The total cost of the repainting was £250,000.
Contents
Page
Introduction 2
Information provided in the Case Study Exam (CSE) 10
Exam requirements 10
Analysis of Case Study Exam information 10
Requirement 1: Review of Playfree’s financial performance 15
Requirement 2: Evaluation of request from Tyron 16
Requirement 3: Evaluation of proposal from KCC 16
Part 4: Appendices
Appendix 1: Financial statement analysis: Playfree’s financial performance 18
Appendix 2: Financial data analysis: Calculation of Tyron tender costs and price 20
Appendix 3: Commercial data analysis: Calculation of revenue and profit from KCC proposal 21
Part 5: Marking key

Introduction
Attached to this report are three appendices giving examples of the sort of financial analysis that candidates
did or might have done. The two illustrative scripts offer further insights into this area.
The pass rate was 76.5%, compared with 75.7% in November 2018 and 76.0% in July 2018. Successful
candidates showcased their higher skills and used the four hours effectively. They produced methodical, well-
balanced, relevant scripts that answered each element of each requirement and contained high-quality
financial analysis; sound judgement; commercial recommendations; and succinct, focused executive
summaries. They were able to assimilate the case material into a report, demonstrating business awareness
and appropriate professional scepticism. They had clearly prepared well, making the necessary effort to
master the Advance Information for themselves and to hone their exam technique so as to maximise the use
of CBE.
The subject of the case is Playfree Limited, a company formed in 2012 and based in the south of England. It
designs playgrounds and installs playground equipment for a variety of venues across the region, as well as
providing inspection and maintenance services to playground operators. The candidate is in the role of Daryl
Ross, a final-year trainee ICAEW Chartered Accountant working in the business advisory unit of Kemp Crossley
(KC), a firm with offices across the south of England, and reporting to the partner, Rosemary Connor.
1. An analysis of Playfree’s revenue, cost of sales and gross profit for the year ended 30 June 2019 by
comparison with 2018, together with financial and operational advice on some faulty new zipwires.
2. An evaluation of the request from Playfree’s existing customer Tyron to tender for the D&I work on five
new playgrounds. Candidates had to undertake calculations, assess the adequacy of assumptions and
Playfree’s ability to meet certain Tyron specifications and discuss any ethical and business trust issues.
3. An evaluation of the approach from Kent County Council – not an existing customer – to assist it with
managing and monitoring its playground equipment and to provide ongoing advice. This covered
financial, operational, strategic, ethical and business trust issues, including IT.
Reasons for failure were largely familiar. Among weaker candidates, the quality of answers, especially with
respect to the skill of Applying Judgement, was similar to the examiners’ previous experience. This was particularly
apparent in relation to ethical and business trust issues.
Once again, there was ample evidence of poor planning towards the lower end of the cohort. Candidates
overrunning on Requirement 1 (for example, by analysing operating profit when they were not asked to) inevitably
jeopardised their chances on the others. They would have benefited from planning at the outset the structure for
each part – an important discipline for this exam.
Another cause of failure lay in the quality of recommendations. The lower end of the cohort was characterised by
an inability, across all three requirements, to offer appropriate, commercial advice (which, after all, is what the client
would ultimately be paying for) based on their work.

Assimilating and Using Information (A&UI): A&UI was the strongest skill on this exam, reflecting the use of
effective appendices in all three requirements. The vast majority of candidates achieved passing grades for
their numerical work. The main weaknesses were in not doing a flexing calculation for Requirement 2 and not
including the advisory fees at Requirement 3. Candidates demonstrated the ability to articulate the business
issues and wider context in Requirement 1, but in Requirements 2 and 3 weaker candidates did not mention
fundamental features of the scenario.
Structuring Problems and Solutions (SP&S): Many displayed excellent analytical skills in their number-work and
related analysis for all three requirements (boxes 1 and 2). Lower grades were obtained throughout in box 3. At
Requirement 1, around half failed to gain passing grades for box 3 (identification of zipwires issue), mainly by
not calculating any provision. At Requirement 2, few candidates scored a passing grade for box 3 (ethical /
business trust issues), because they failed to articulate the situation with LTT or to question the source and
basis of Eversley’s quote. In Requirement 3, the main shortcoming was again at box 3 (ethics / business trust),
where candidates did not appreciate the potential conflict of interest created by the proposed advisory work.
Applying Judgement (AJ): AJ was again poor across all three requirements, particularly in relation to ethics and
business trust, and was a differentiator among marginal candidates. At Requirement 1, unusually, candidates
did better in box 2 (evaluation of cost of sales and profit) than in box 1 (evaluation of revenue). Box 3, dealing
with the zipwires issue, gained the lowest marks. For Requirement 2, candidates did well at box 1 but were less
proficient at evaluating the assumptions and other specifications in box 2. For box 3, the weaknesses in SP&S
carried through into AJ. AJ achieved a low number of passing grades throughout Requirement 3; evaluation of
ethical/business trust issues was especially poor here, partly a function of the weak analysis work in this area.
Conclusions and Recommendations (C&R): There was a polarised performance here. As is often the case, at
each of the Conclusions boxes, more than half of candidates gained a passing grade; but only a minority did so
on each of the Recommendations boxes. For Requirement 1, weaker candidates did not provide a reason for
changes in cost of sales or conclude on the accounting impact of the zipwires issue. As often with Requirement
1, they found it hard to make commercial recommendations. For Requirement 2, conclusions followed logically
from candidates’ analysis and judgement work. Among recommendations for both Requirements and 2 and 3,
candidates did best in advising Playfree to negotiate on terms and conditions, but other suggestions were often
thin and/or misguided.
Requirement 1 was, in one tutor’s words, “a very fair exam requirement which was consistent with previous
exams”. Appendix 1 was mostly well done and at a sufficient level of detail. The challenge was then to integrate
the additional financial and non-financial data at Exhibit 16 into a coherent narrative on Playfree’s performance.
Weaker candidates struggled to address in appropriate depth the changes in I&M revenue and gross profit. For
the second part of the requirement, a surprising number of candidates failed to quantify a provision for the faulty
zipwires even though they were specifically asked to consider accounting adjustments.
Requirement 2 was well answered. Most calculations were correct and offered alternatives with and without the
problematic surfacing material LTT. Good candidates flexed their figures, for example to show the effect of
different cost increments. Differentiation lay in addressing the assumptions and the other specifications.
Candidates in general failed to consider the size of the sites or recognise that the 2016 costs being used as a
benchmark would be out of date. While some of the specifications were straightforward, others needed a more
involved approach. Of the two ethical issues, the possible use of LTT was addressed adequately but only better
candidates questioned the source and reliability of Eversley’s bid. Many had trouble coming to a decision on
whether or not Playfree should tailor its fee to match Eversley’s.
Requirement 3 again yielded the lowest scores of the three requirements. A majority followed a logical pathway to
produce a clear and accurate appendix; lower down the cohort, candidates muddled their numbers and/or periods
or omitted some or all of the advisory fee calculation. They did well in discussing operational and strategic issues
but not so well in evaluating them, with some misunderstandings in respect of IT. Coverage of ethical issues was
a significant differentiator at the pass/fail margin. Most candidates discussed the toxic paint but few were
exercised by the difficulty in working out advisory cost savings and the disputes that this could lead to.
In summary, the Playfree case dealt with an industry that was understandable by candidates and with an
appropriate level of numerical content for students on the verge of qualifying as ICAEW Chartered Accountants.
Tutors noted that it was “a time-pressured exam … very much in line with expectations, based upon past exams,
examiners’ conference remarks and clues in the AI” and “a fair exam with nothing unexpected or difficult for a
well-prepared candidate”. The Examiners concur with these assessments.

The case relates to Playfree Limited, a company formed in 2012 and based in the south of England. It designs
playgrounds and installs playground equipment for a variety of venues across the region, as well as providing
inspection and maintenance services to playground operators. For Playfree’s purposes, the south of England
comprises five counties – Surrey, Essex, Sussex, Kent and Hampshire – with a total population of 7.1 million, of
whom 1.5 million are children aged 16 and under.
Over 80% of revenue comes from design and installation (D&I), the rest from inspection and maintenance (I&M).
However, D&I is unpredictable as all projects are effectively new each year; I&M mostly represents recurring
assignments and is thus a more dependable source of income. Revenue for the year ended 30 June 2018 was
£7.2 million (up 16.5% on 2017), generating gross profit and operating profit of £1.6 million and £0.5 million
respectively, both also significantly up on 2017. This growth has been across all activities.
The candidate is in the role of Daryl Ross, a final-year trainee ICAEW Chartered Accountant working in the
business advisory unit of Kemp Crossley (KC), a firm with offices across the south of England, and reporting to
the partner, Rosemary Connor.
Four weeks prior to the examination, candidates were provided with a package of information, containing a series
of exhibits relating to Playfree and the industry, comprising:
1 About you (Daryl Ross), your employer (Kemp Crossley) and your client (Playfree Limited)
2 The playground equipment industry
3 Playfree: History and development
4 Playfree: Review of the management accounts for the three years ended 30 June 2018
5 Playfree: Management accounts for the three years ended 30 June 2018
6 Playfree: Design and installation (D&I)
7 Playfree: Inspection and maintenance (I&M)
8 Playfree: Case studies
9 Playfree: Supply chain
10 Playfree: Strategic plan
11 Playfree: Warranties
12 Playfree: Example inspection report – executive summary
of Playfree and the industry, using facts and figures from across the material. Candidates should be aware of
(Additional examiner commentary is given in this font, highlighting links between exhibits.)
Exhibit 1 sets the context and summarises Daryl’s work, with emphasis on financial analysis and adding value.
Exhibit 2 explains where playgrounds are found and the different types of equipment. It notes that the UK industry
is highly diversified: companies differentiate themselves through the quality and sustainability of materials or their
health and safety record. Many operate regionally. Some make their own equipment; others buy it from specialist
suppliers. In addition to basic design, manufacture and installation, they may offer other services, eg, inspection,
maintenance and general advisory work, which can generate higher margins but on much lower revenue. The
overall UK market is expected to remain flat until 2021, reflecting two offsetting trends: closures of playgrounds in
municipal parks; and steady growth in playgrounds at schools/nurseries or at sites run by private leisure operators.
Exhibit 2 sets the scene and provides the context in which the remaining case material can be understood.
Exhibit 3 documents Playfree’s history. It was formed in 2012 by Rohit Jadav and Tina Cleves, two colleagues
in an architects’ practice who had identified a new business opportunity during a summer holiday in Sussex with
their families. The first project – modernising the neglected playground at Seascape Hotel in Brighton – suffered
teething troubles and yielded only a small profit but led to further work at other venues, including inspection and
maintenance. Staff were recruited and trained, and a network of suppliers was created. The business developed
and now has a board of five directors: Rohit (MD), Tina (FD); Francis Toynbee (D&I); Gary Gibbs (I&M); Oliver
Johnstone (Sales and Marketing); and Miranda McCasey (Supply Chain, Risk and Safety). Other key features:

 Playfree sources the equipment used in its installations – as well as surfacing materials and ancillary items,
eg, benches, signage (‘site-work’) – from a range of manufacturers and other suppliers. There is a menu of
products from which customers choose.
 Customers are in two groups: schools and nurseries; and leisure (operators of visitor attractions, etc).
 Playfree does not carry out any work for municipal playgrounds.
 Playfree is recognised for its exemplary safety record and it has won awards, notably for inclusion of
children with impaired mobility. Its emphasis on quality enables it to charge premium prices.
(This sets the scene for the next two exhibits, as well as linking ahead to the detail in later case material.)
Analysis of Exhibit 4 (business review) and Exhibit 5 (June 2018 management accounts, with comparatives for
2016 and 2017) would reveal the following. (Note: The analysis below is a synthesis of these two exhibits, together with
some additional calculations based on their contents. It should be readily apparent that the two documents are to be reviewed
in conjunction with each other; looking at either of them in isolation would tell only part of the financial story.)
Exhibit 4 begins by distinguishing how revenue is recognised for each stream. It is crucial to understand this for a
full appreciation of the financial information throughout the case, not just in Exhibits 4 and 5 themselves. In broad terms,
(a) D&I and inspection work start and finish within the same year while maintenance can straddle two years; and (b), as a
result, there will be little if any deferred or accrued income. Exhibit 4 also presents a table showing revenue and the
number of sites for each division, as well as the number and value of D&I tenders undertaken in the year. Again,
this non-accounting data is essential context for an understanding of the accounts.
Statement of profit or loss – revenue, cost of sales and gross profit
Revenue – overall
 After rising by 25.3% to £6,190k in 2017, total revenue grew by a further 16.5% in 2018, to reach a total of
£7,213k (D&I: £6,184k; I&M: £1,029k). (These figures highlight the fact that growth, though still good, is slowing.)
 Revenue has increased across both divisions, but with a larger proportionate rise in I&M, taking its share up
from 12.8% to 14.3%.
 Site numbers for all three streams have risen across the period.
Revenue – D&I
 Growth in 2017 was the result of an improved tender success rate by number (from 39% to 40%), more
refurbishments and more installers. This continued in 2018, with the success rate climbing further to 43% –
and then “into the new year [2019] … we do better on the lower-value ones, perhaps reflecting a stronger
profile among schools and nurseries and the greater level of competition in the leisure sector.” It is important
to recognise that success rate by value also rose (from 37% to 38% to 40%), as did the number of tenders in which
Playfree participated. However, because (as Exhibit 6 will make clear) the tender process can take time, a successful
tender reported in (say) 2016 may not generate revenue until 2017, so the correlation between tender numbers and
revenue will not be exact.
 In 2018, Playfree “also expanded our design team … [and] continued to invest in state-of-the-art IT and
surveying equipment (allowing us to identify issues such as ground subsidence” – a response to one of the
issues encountered at Tyron – see Exhibit 8). Design work is identified as a USP.
 Growth also reflected a significant referral from an existing customer (Boldon – Exhibit 8), reinforcing this as a
method of winning new business (Exhibit 3) and the fact that D&I work is non-recurring in nature (Exhibit 6).
 Site numbers are up from 65 in 2016 to 79 in 2017 and then 88 in 2018. This means that the average fee
per site has also gone up (£66k to £68k to £70k) …
o “despite a higher proportion of projects for schools and nurseries (historically of lower value and so likely
to keep the average fee down; the case studies at Exhibit 8 give a further indication of this size variation) …
o “… caused by a rise in the amount of site-work carried out on most new sites following recent changes
in the standards and best practice recommendations (highlighting the impact of these external factors on
Playfree’s business – see Exhibit 10) …
o … and a new, improved surfacing material from Cormorant (as opposed to the questionable LTT material:
Exhibits 9/13d) – an attractive feature that enabled us to win several important tenders despite quoting a
higher fee than competitors (reinforcing the quality of Playfree’s work and its reputation: Exhibit 3).”
Revenue – I&M
 Separately established in 2015, I&M achieved two milestones in 2018: £1 million combined revenue and
1,000 inspection sites.

 Inspection revenue went up by £52k (14.1%) to £421k in 2017 and then by £75k (17.8%) to £496k in 2018;
maintenance by £109k to £370k (41.8%) in 2017 and then £163k (44.1%) to £533k in 2018. Maintenance has
therefore more than doubled in the two years since 2016.
 Inspection site numbers are up from 871 in 2016 to 933 in 2017, then 1,067 in 2018. The figure would be
expected to rise each year as Playfree expands its ‘stock’ of inspection sites; the level of growth depends mainly on
the number of new referrals, offset by any sites lost (not renewed, closed down, etc).
 Average inspection revenue per site is up from £423 to £465, “despite the fact that we kept our basic fees
unchanged; it was caused mainly by an increase in the amount of work required to remedy defects ...”
Analysis of the figures confirms this: assuming that half of inspections are invoiced at £300 and half at £500 (see
Exhibit 7), pure inspection revenue should be £400 x 871/933/1,067 = £348k/£373k/£427k for 2016/2017/2018.
Comparing these with actual revenue means that rectification revenue was £21k, £48k and £69k respectively. In
percentage terms, £69k represents 16% on top of the calculated basic 2018 inspection revenue – in line with the
comment at Exhibit 7 that rectification work can add 15-20% to the fee.
 Maintenance site numbers grew from 265 in 2016 to 488 in 2018. This largely reflects natural growth from the
new D&I sites, as explained further in Exhibit 7, but also new engagements from other sources. The increase is less
than that for revenue, indicating that average revenue per site has been rising more slowly. This may reflect changes in
mix between ‘large’ and ‘small’ sites. However, it is important to realise that the average calculation for maintenance
is complex as new contracts begin throughout the year, unlike D&I and inspection work, both of which are completed
within a single financial year. (By way of illustration, if the 65 new 2016 D&I sites all opened on 1 January, and half
were small and half large, they will have earned only 6 months of maintenance revenue in that year (ie, 65 x 0.5 x
£1,200 [average of £900 and £1,500 – see Exhibit 7] = £39k) but then a full year of revenue (ie, £78k) in 2017; and so
on. No information is given about dates on which sites were completed and maintenance contracts started, though the
business seasonality explained in Exhibit 6 could be used to refine the calculation further.)
 In 2018, Playfree also “took on more inspectors and maintenance engineers. Though this led to some idle time
(ie, there is some spare capacity in the business: see Exhibit 7 re seasonality) it enabled us to meet customers’ needs.”
Cost of sales and gross profit
 Cost of sales comprises five categories – four for D&I, one for I&M. All five have registered increases in
each of the two years but by varying amounts. In general, there should not be major fluctuations as D&I
projects are priced with reference to these costs. By far the largest line (almost 70% of total D&I costs) is
equipment and site-work components. The smallest is design, at around 8%.
 These overall costs – and the relationships between them – must be understood in the context of the two projects
given at Exhibit 8, for which equivalent information is provided.
 In 2018, Playfree “experienced higher costs from some of our suppliers”. These must apply only to equipment
and surfacing materials as all other expenses are internal.
 Two of the captions – installation and surfacing – include depreciation on the relevant types of machinery
and will thus be affected by any new additions in the year.
 The increase of only 6.1% in installation costs in 2018 is also partly explained by efficiency improvements.
 For I&M, the increase in costs was more in 2018 than 2017, mirroring the changes in revenue. Reasons for
the changes include more staff and the cost of increased rectification work.
 As a result of the changes in revenue and cost of sales, gross profit rose by £347k (38.1%) to £1,260k in
2017, then by £346k (27.5%) to £1,606k in 2018. The margin has risen steadily, from 18.5% in 2016 to 20.4%
in 2017 to 22.3% in 2018. Again, there are variations between divisions: the figures for D&I are 18.8%, 19.5%
and 20.9%; for I&M, 16.3%, 26.0% and 30.6%.
 D&I’s GP% growth for 2017 is explained by improved efficiency (“a small fall in the average number of
person days to complete projects” – see Exhibit 6, which explains the range in length of installations, and Exhibit 8
for an illustrative calculation). For 2018, where possible, Playfree passed on supplier cost increases to
customers, which helped take the margin above the psychological 20% barrier.
 For I&M, the more formal structure created in 2016 had led to a doubling of profit and vastly improved
margin in 2017, partly due to “rectification work, which … commanded a premium price”. (As I&M cost of
sales is not separated out, it is not possible to determine the margins for inspection and maintenance individually.)
Statement of profit or loss – administrative expenses and operating profit
 There are three categories of administrative expenses: personnel; premises and IT; other. In total, these
correspond to just under 15% (£1,064k) of 2018 revenue, up from 12% (587k) in 2016. All three have risen
in both years.
 Personnel costs represent the largest component, currently around 60% of total expenses. No information
is given about staff numbers but it is clear from the rest of the AI that, other than the directors, most employees are
involved in the practical work of the business and their salaries are included in the relevant cost of sales captions.
The Tyron illustration at Exhibit 8 gives a typical installer salary as £30k but there is insufficient data to carry out
any further analysis.

 The biggest cumulative increase is for premises and IT, which has more than doubled over the two years
and which includes depreciation on the design system and other IT improvements.
 As a result of all the changes at gross profit level and in administrative expenses, operating profit increased
steadily over the period: 2016: £326k; 2017: £370k; 2018: £542k (margins of 6.6%, 6.0% and 7.5%).
 PPE has remained consistent at around £400k over the period. This reflects the roughly offsetting effects of
additions/disposals and depreciation. There could be more significant additions in 2019, as Playfree needs to replace
its old, inefficient surfacing machinery.
 Trade receivables have moved fairly steadily with revenue growth. This is explained in the 2017 commentary:
“We tightened the terms of trade with D&I customers and transferred all maintenance customers to monthly
payments. This resulted in a decline in trade receivables days …” and then in 2018: “Despite our revised
credit control procedures, there was a slight deterioration in collections.” Overall trade receivable days can be
shown to have fallen from 35 in 2016 to 31 in 2017 and 2018. However, if maintenance – for which there should be little
if any amount outstanding at any stage – is excluded, the adjusted figure is 33 days in 2017 and 34 in 2018. This is still
very manageable – and much lower than in 2016 – but it should be monitored.
 The situation is also partly mitigated by a rise in trade payable days (calculated as trade payables / cost of
sales) from 27 in 2016 to 28 in 2017, and then 31 in 2018 because Playfree “negotiated more favourable
payment terms with two of our major suppliers.”
 Inventory is not a significant balance for Playfree but it is worth noting that the amount held has almost trebled
over two years, so that inventory days (inventory / cost of sales) in 2018 are 9 vs. 5 days in 2016.
 The cash balance has fluctuated over the period: 2015: £263k; 2016: £210k; 2017: £486k; 2018: £880k. The
small decline in 2016 was the result of a sharp rise in trade and other receivables. Since then, it has steadily
risen, with net operating cash being roughly equal to operating profit.
could then analyse the results by division and activity as well as highlighting the issues likely to be important in carrying out
such analysis, whether for the company as a whole or for its components. As one tutor remarked: “The opportunity to
perform financial analysis on the data provided in the AI was plentiful. The commentary provided by the examiner, to
accompany the management accounts, proved to be very useful to the candidates as it allowed candidates to practice [sic]
attaching business changes and issues to what they were seeing in the financial results.”
Exhibits 6 and 7 expand on the key features of the two divisions. They explain important operational and
financial points that reinforce material in the management accounts and elsewhere in the AI.
D&I
 Most D&I work is non-recurring and won by tender.

 The lead time for a project, from initiation to final testing and certification, can vary from one to six months.
 An installation takes 1–2 weeks (10–50 person days) from start to finish, depending on a range of factors.
 Installation also includes ancillary work (‘site-work') and surfacing, both crucial for health and safety.
 Recent experience is that agreed customer timetables are met. However, that has not always been the case:
the initial project for Seascape (Exhibit 3) and the Tyron example (Exhibit 8) suggest that it could happen again.
 Playfree invoices in full once a playground is certified. A typical fee is £20k-£100k per site. This explains the
average reported fee ranging over the reporting period (£66k-70k) – see above on Exhibits 4/5.
 The target margin is 20-25%. Any unrecovered costs can affect reported gross margins. This is in the same
range as actual reported margins for D&I work (Exhibit 5) over the period. It should also be compared with the later
Tyron and Boldon ‘case studies’ (Exhibit 8) and take account of the irrecoverable costs. These costs arise especially
in design work but there is also the implication that not all labour is recovered, which in turn indicates that Playfree is
not at full capacity. This could have the further implication that there is scope for taking on more work.
 Two-thirds of leisure work occurs in January-June; two-thirds of schools/nurseries work in July-August.
This means that September-December is a relatively quiet time of year for Playfree.
I&M
 The number of Playfree’s I&M sites grows each year because (i) it is awarded the maintenance contract
for almost all its new installations; (ii) the number of new engagements exceeds the number not renewed.
This trend can be seen in the table at Exhibit 4 discussed above.
 I&M generates higher margins than D&I, enhancing overall profitability. The overall gross margin on I&M work is
higher than for D&I but the assignments are individually much smaller.

 There is no seasonality to the I&M business as both elements produce a steady flow of work over the year.
 Inspections are annual visits to ensure that playgrounds are operating safely. They often lead to add-on
rectification work for Playfree.
 Playfree has a simple tariff of inspection fees: £300 for small sites, £500 for large ones, split roughly 50:50.
Profit depends on efficiency in the overall process and extent of any minor repairs needed. Rectification can
add 15-20% to the basic fee. The average basic annual fee can thus be determined as £400: see above on Exhibits 4/5.
However, actual average fees will be affected by the extent of any rectification work.
 Maintenance involves routine monthly visits to playgrounds after installation. Any repairs needed are typically
covered by warranty.
 Annual maintenance fees are £900 for small sites (around half), £1,500 for large sites. These are designed to
give good margins but margins can be lower if visits take longer than planned or if inefficiencies arise.
 Once the five-year warranty period expires, fees increase to reflect the greater need for rectification. An
annual increment of £300 is typical. In the year to 30 June 2019, 50 installations are coming out of warranty.
The average basic annual fee is £1,200 but this should rise in 2019 because of increments on these sites.
Example inspection and maintenance arrangements show how the revenue has arisen in the accounts for
certain customers, including Tyron (see Exhibit 8) and Seascape Hotel (Exhibit 3).
Exhibit 8 builds on Exhibit 6 in particular by offering two ‘case studies’ describing the work done by Playfree for
two customers, one in the leisure sector (Tyron) and the other a chain of nurseries (Boldon).
Tyron
 Tyron asked Playfree in early 2016 to tender for the redevelopment of the play areas at its six ‘budget’ holiday
parks in the south of England.
 Tyron started the project with a pilot at one site, Arundel (in Sussex).
 Playfree was chosen from three bidders, signing an agreement to proceed at a fee of £98k on costs of £70k.
 Work on Arundel was completed on plan within two weeks. The new play area opened to acclaim on 1 April.
 Playfree then successfully quoted for the other five sites, for a total fee of £400k on costs of £300k.
 As a result of delays caused by various factors, the new sites opened later than scheduled, on 30 June 2016.
 Actual cost was 10% over budget (£330k). Playfree chose not to pass on any of the overruns.
 After installation, Tyron signed a maintenance agreement for all six sites (total annual fee £9k).
 On 1 July 2018, Playfree entered into a maintenance agreement with Hols4U, a local company recently
acquired by Tyron, for a £30k annual fee.
Budgets are provided for Arundel and the other five sites, showing costs for: equipment; site-work components;
installation and surfacing. The basis of calculating the labour element is explained. Average budgeted cost of
equipment and site-work components for the five sites was lower than for Arundel because of volume discounts.
Design cost was £8k for Arundel, £12k for the other five sites – reducing the effective profits.
Boldon
 From a shortlist of four companies, Playfree was selected to design and install the playgrounds for Boldon,
a group of three nurseries in Surrey formed in 2017.
 Despite a protracted design process, and problems with a swing supplied by YoYo (Exhibit 9), the three
nurseries opened as scheduled on 1 September 2017.
 Boldon is looking to open more nurseries in the coming year.
 Boldon also engaged Playfree to carry out the maintenance for an annual fee of £2.7k.
The case study is accompanied by a summary combined budget, in the same format as for Tyron. This shows a
total fee of £140k against installation costs of £100k and design costs of £9k.
A close study of this exhibit would highlight the similarities and differences in the two examples, one for each of Playfree’s
two customer groups; the issues that can arise on an installation, and the interaction between D&I and I&M. The case studies
bring to life the descriptions in Exhibits 3/6, and show how the figures in the accounts build up from individual projects.
Exhibit 9 overviews Playfree’s supply chain, briefly describing the types of equipment that it offers, followed by
short sections on its five suppliers: Auchen (which recently launched a new range of faster zipwires); Swingz (an
established family business in discussions with Playfree on updating the product range); YoYo (which invests
10% of its annual revenue in product innovation and testing); Cormorant (which supplies around two-thirds of
Playfree’s annual needs for surfacing materials and site-work components); and Surfacing Services (which has
become a market leader through its new material, LTT). The exhibit then explains the product development and

testing processes; the need for continuous improvement; and Playfree’s supplier Code of Conduct and web
portal. Distribution is mostly direct from supplier to customer, but for flexibility Playfree maintains some inventory.
All five of the companies described here are mentioned elsewhere in the AI.
Exhibit 10, prepared by the board in July 2018, sets out the context for Playfree’s future development (the
problem of physical unfitness; tightening regulations); the key risks and uncertainties that it faces (supply chain
disruption; level of competition); and the opportunities available (within the context of a growth in population
and in playground settings), in six broad areas relating to expansion in customer types, geographical coverage
and nature of work. In respect of competition, vignettes are presented for three rivals – Rox, MerryGo and
Eversley. Exhibit 10 goes on to explain the financial considerations (“All of these opportunities would require
… rigorous financial evaluations … based on … the need to achieve an acceptable profit margin and a
maintainable business model …”) and the importance of effective use of IT across the business.
As with any Case Study, the company’s strategy and future plans should be digested carefully as they will inevitably be a
reference-point in the exam. Candidates should have found that the risks and opportunities listed link back to other case
facts – whether in relation to the wider industry, Playfree itself or both – or that they are logical extensions of these facts.
As with the suppliers in Exhibit 9, two of the rivals in Exhibit 10 also feature later in the AI (Exhibits 13d/e).
Exhibit 11 is a one-page synopsis on warranties. Playfree’s typical warranty is five years (some companies
give three years). There are back-to-back guarantees with manufacturers so that Playfree is covered if a
customer has a complaint about the equipment rather than the installation work. A previous such event with
Auchen (see Exhibit 9 above) is recounted. Other companies have found that, as the warranty period nears its
end, customers make claims while they still can. This could become an issue for Playfree as its installations
start to reach that stage. Claims may also arise early in the life of an installation if a basic fault is identified,
possibly leading to a recall or re-installation. Under Playfree’s standard terms, for a claim to be valid the site
must have been properly maintained.
This exhibit addresses a theme mentioned in several earlier exhibits. It should be apparent that the Playfree warranty is an
important feature of its business – one that differentiates it from some other players. However, it should also be apparent
that, because the company has been in existence for not much more than five years, it has not yet had to deal with a large
volume of claims or therefore to test the rigour of its back-to-back supplier arrangements.
Exhibit 12 is an example inspection report for a school, summarising the findings in relation to the site and
ancillary items; surfacing; and equipment. The risk level of each issue identified is stated, together with
recommendations for action by the customer.
This exhibit serves as a short illustration of the output from a normal Playfree inspection, as referred to in Exhibit 7.
Exhibits 13a-f, with which the AI concludes, are a series of media articles dealing with: the trend in closures of
municipal playgrounds in London and resulting protests; the discovery of toxic chemicals in paint on equipment
at parks in the north of England; the recent introduction of equipment management schemes (sometimes
outsourced) by companies and the related benefits; accidents to children at some playgrounds with LTT
surfaces installed by Eversley, raising questions about LTT’s suitability and also about Eversley, whose latest
accounts reveal minimal profits; the dismissal of an engineer by MerryGo for taking too long to certify completed
installations; and the rise in gym equipment (in some cases sponsored) for adults at some municipal
playgrounds.
(Such articles in the AI shed more light, and offer a different perspective, on issues mentioned elsewhere, “thus reinforcing
the importance of these issues” – tutor comment) – as well as referencing two of the competitors mentioned earlier.
Overall, in one tutor’s words: “The AI provided candidates with the opportunity to develop a comprehensive
understanding of the company. Industry exhibits made it clear that Playfree’s market segment was experiencing,
and was expected to continue to experience, high levels of growth. Along with clear details on the level of
competition in the industry, candidates should have been able to become very familiar with the nature of risks and
opportunities in the industry and avoid a need for any extensive external research.”

Information provided in the Case Study Exam (CSE)
The Exam contained seven new exhibits comprising new information:
14 Email dated 24 July 2019 from Rosemary Connor to you: Playfree: Draft management accounts and
business developments
15 Playfree: Draft management accounts for the year ended 30 June 2019
16 Note dated 23 July 2019 from Tina Cleves: Additional information relating to the management accounts; and
new zipwires
17a Email dated 24 July 2019 from Francis Toynbee to Rosemary Connor: Tyron – new playgrounds
18a Email dated 23 July 2019 from Oliver Johnstone to Rosemary Connor: Playground equipment management
Exam requirements
Please draft for my review a report addressed to the Playfree board. The report should comprise the following.
1. A review of Playfree’s management accounts for the year ended 30 June 2019 in comparison with the year
ended 30 June 2018.
Your review should be based on the management accounts as set out in Exhibit 15. It should cover,
both overall and separately for each of the two divisions: revenue, cost of sales and gross profit. You
should refer to the additional information in Exhibit 16. You should also respond to the request for
advice on the new zipwires (Exhibit 16).
2. An evaluation of the invitation to tender for the installation of five new playgrounds for Playfree’s existing
customer Tyron, as set out in Exhibit 17a.
Using the information in Exhibit 17a and Exhibit 17b, you should calculate the cost of this work, assess
the adequacy of the assumptions and recommend and justify a price at which Playfree should bid for the
work. You should also evaluate Tyron’s specifications and discuss the ethical and business trust issues
that Playfree should consider when bidding.
3. An evaluation of the approach from Kent County Council for Playfree to assist it with managing and
monitoring its playground equipment and to provide ongoing advice (Exhibit 18a).
You should evaluate, with relevant calculations, the financial, operational and strategic issues, including
IT issues. You should incorporate any ethical and business trust issues for Playfree, including those
arising from Exhibit 18b.
For Requirement 1, they should then have begun a more detailed review, enabling them to assess Playfree’s
2019 results in light of their analysis of 2018 carried out in preparation for the exam and the new information
(Exhibit 16). For Requirement 2, it was essential to read Exhibits 17a/17b carefully to identify all critical
assumptions and other issues to be discussed. Finally, for Requirement 3, candidates had to relate Exhibits
18a/18b to relevant material within the case – notably Playfree’s strategic plans and the AI media coverage.
Analysis of Case Study Exam information
 After strong increases in both 2016 and 2017, growth in revenue and profit was slower in 2018. A number
of issues had caused this.
 There was an extra item to address at Requirement 1 (zipwires).
 The Tyron and KCC evaluations depended on a range of factors, both financial and non-financial. A deep
knowledge of Playfree’s business model was essential.

A more detailed review of the CSE should then have elicited the key facts to be addressed in the exam.
Candidates should have recognised, for the first part of Requirement 1, the importance of making relevant
use of the additional information provided at Exhibit 16 and how it linked to both the accounts themselves and
the foregoing AI material. A comparison of the 2019 management accounts and ‘other information’ against the
original 2018 management accounts (Exhibit 5) and business review (Exhibit 4) would then reveal that:
 Revenue is up by a modest 5.2%, from £7,213k to £7,590k, after stronger growth in 2016 and 2017.
 All three areas of the business have reported increases in both revenue and site numbers.
 I&M now accounts for 16.9% of revenue (up from 14.3%), reflecting the fact that it is still in a growth phase – and
that its growth comes in part from previous D&I assignments.
 Maintenance has achieved the biggest % revenue increase (42.0%), partly the result of £300 fee increments
on sites no longer under warranty (foreshadowed in Exhibit 7). It now accounts for 10% of total revenue.
 However, these increments have not been enough: gross margin on the sites in question is only 9.1%.
 The increase in D&I revenue is 2%, below Playfree’s forecast growth rate (20% over four years – Exhibit 10).
 The 93 installations during the year (up from 88) include 50 new nurseries, a higher percentage than usual.
These nurseries have had new fencing costing £40k installed at zero mark-up.
 The higher number of sites reflects the impact of the design software introduced in 2018. The tender success
rate by site is up from 43% to 47%. However, the number of tenders and their average value are both down.
 Design costs are down 9.5%, again reflecting efficiencies from the new software. The other three cost of sales
components are all up, by varying amounts.
 Inspection revenue has risen, but the average per site has fallen from £465 to £456 as all new sites were
invoiced at a 50% discount in a bid to thwart Rox (one of the competitors mentioned in Exhibit 10).
 The surfacing machinery, which was at the end of its useful life, has been replaced (anticipated in Exhibit 4),
but it has taken time for Playfree to realise the intended benefits. As well as the £32k extra costs stated in Exhibit
16, there must also have been a depreciation charge for the 9 months since inception.
 Gross profit is down, both in absolute terms (by £34k to £1,257k) and in margin terms (from 22.3% to 20.8%).
The margin is down for both divisions, especially I&M, reflecting the dual impact of the insufficient maintenance fee
increases and the 50% inspection discount.
 The new Auchen zipwires (Exhibit 9), which cost £5k each, have not been running as fast as promised,
resulting in a stream of warranty claims. Playfree needs advice on whether/how to adjust the draft management
accounts for these claims and how to deal with the practical problem (Exhibit 12).
Candidates will have expected to analyse the 2019 management accounts and to make use of information on numbers of sites
and tenders: these were all well signposted in the AI and were clearly key business drivers. They will have been relieved to
see all these figures provided in a familiar table format. Despite this, there was plenty of new information to analyse. They
should also have noted that the analysis was to stop at gross profit: there was nothing to gain by analysing the rest of the
statement of profit or loss or any of the primary statements – except where they shed light on the figures being asked about.
For Requirement 2, in Exhibit 17a Francis Toynbee (Director of D&I) explains that Playfree has been invited by
its customer Tyron to tender for the installation (but not the maintenance) of the playgrounds at five holiday
parks opening in March 2020. These are ‘new-style’ and larger than the ones that Playfree successfully installed
for Tyron in 2016 (Exhibit 8). Its rival Eversley (Exhibit 10/13b) is also tendering, at a rumoured price of £420k.
Tyron has not said precisely how the new parks will differ; only that they will be “more upmarket” (Exhibit 17b).
 Playfree’s initial survey and design work, costing £8k (cf £12k for the previous 5 sites), has already been done.
 Being larger, the new sites will be more expensive: indicative increments in each cost category are provided.
 Using the controversial material LTT (Exhibits 9/13d) – preferred by Eversley – would halve surfacing costs.
 There could be problems with sourcing Tyron’s preferred swings from YoYo or Swingz (Exhibit 9).
 The playgrounds must be suitable for children of all ages, and Playfree must give a five-year warranty.
 If the work is not done by 31 January 2020, Playfree would be liable for overruns on time and cost – a salutary
reminder of the difficulties experienced on the first Tyron project.
These exhibits gave candidates a clear set of data with which to work for each part of the requirement: calculation;
determination of tender price; assessment of assumptions; evaluation of specifications; discussion of ethical and business
trust issues. It should have been apparent that: a logical approach was needed for the calculation, using the previous Tyron
illustration at Exhibit 8; there were numerous assumptions to query; and a pricing decision was needed which involved
weighing up an apparently low rival bid and one of the factors determining that bid (low-quality material). As well as the
calculation, many of the points raised should have echoed other exhibits in the case material, including the media articles.

Exhibit 18a is an email from Oliver Johnstone (Director of Sales and Marketing), supplemented by a press
advert and media article (Exhibit 18b). These provide candidates with the following facts for Requirement 3:
 In a new venture for a public body, Kent County Council (KCC) has asked Playfree to assist and advise it
on managing and monitoring the equipment at the 150 children’s playgrounds under its control. Both the
work type and the customer type (though not the geography) are new for Playfree – but in line with its strategic
objectives (Exhibit 10) and with work being done by other organisations (Exhibit 13c).
 KCC requires Playfree to compile a database of the equipment (£600 fee per playground), keep it updated
(£200 each) and liaise with the companies with which KCC holds maintenance and inspection agreements
– which will inevitably include some of its rivals: an interesting ethical challenge.
 The database is to be created by temps and must be ready by 31 October 2019 – a demanding deadline for a
wholly unknown task. Cost data – which can be partially benchmarked against the AI – is given.
 KCC is also seeking Playfree’s advice on replacing old equipment, identifying playgrounds for closure and
rationalising its supplier portfolio, for a monthly retainer of £1k for two years plus 10% of any cost savings
achieved by KCC (targeted annual savings of £100k) from the advice. This looks like a complex arrangement!
 By accepting the advisory work, Playfree could not do D&I or I&M work itself on any KCC playgrounds. This
adds further to the ethical ‘mix’.
 A new mobile app on the market promises complete and accurate records of playground equipment.
 Toxic chemicals have been found in the paint used on equipment installed at 25 municipal parks in Kent.
This confirms the findings of the study on 50 northern playgrounds (Exhibit 13b), which have only recently
been reopened after a £250k repainting programme. This brings yet another ethical issue into the discussion.
With proper preparatory work on the AI, candidates should have been able to respond to a requirement of this type. The
challenge lay in integrating the new information with that previously seen, primarily in Exhibits 10/13, and planning the
structure of their answers so as to cover all parts of the requirement, including calculations.
The CSE develops a number of features of Playfree’s business from the AI, each needing a different technique
 Requirement 1 entails a clear focus on financial statement analysis, covering all the items specified,
together with the evaluation of an operational and accounting issue.
 Requirement 2 involves financial data analysis, together with the ability to unravel two (interrelated) ethical
and business trust issues and a commercial awareness.
familiarity with Playfree’s strategy and the wider scenario is needed.
With proper time allocation, careful planning and a logical approach, candidates should have been able to
complete all the requirements within the four hours.
Grades were awarded under five topics: Review of Playfree’s financial performance; Evaluation of request from
Tyron; Evaluation of proposal from KCC; Executive summary; Overall Assessment Criteria. For each of the three
main requirements, under each of the four Professional Skills, there were two or three ‘boxes’ representing specific
areas in which the skill was to be demonstrated. At each box, one of five available grades was awarded: CC
(Clearly Competent); SC (Sufficiently Competent); IC (Insufficiently Competent); ID (Insufficiently Demonstrated);
NA (Not Attempted). The number of boxes per topic and skill (below) reflects an even balance between the three
main requirements, as indicated in the CS Exam rubric.

Review of Playfree’s financial performance 3 3 3 2 11
Evaluation of request from Tyron 3 3 3 2 11
Evaluation of proposal from KCC 3 3 3 2 11
9 9 9 6 33
Executive summary 6
40

A&UI was the strongest skill on this exam, reflecting the use of effective appendices in all three requirements.
For each requirement, there were three boxes available under A&UI, the first two for use of numerical
information in the case and the third for referring to Playfree’s business issues and wider context.
For boxes 1 and 2 at Requirement 1, the vast majority of candidates achieved passing grades. The same was
true for box 2 in Requirement 2, but box 1 proved trickier, with only a small number of candidates attempting
any flexing calculation. Boxes 1 and 2 were both well answered in Requirement 3; the most common reason
for not achieving CC grades was a failure to include the advisory element of the fee when calculating revenue
and profit.
Box 3 is often the weakest within A&UI. That was also the case on this occasion but performance was still good,
particularly in Requirement 1. For Requirement 2, weaker candidates did not mention fundamental features of
the scenario, notably the status of the design work / survey and the uncertainty (mentioned in Exhibit 17b) as to
how the new Tyron sites would differ from the existing ones. Similarly at Requirement 3, candidates did not
always set out clearly the key facts underpinning the approach from KCC.
Candidates generally displayed excellent SP&S skills, with a majority of passing grades being earned in the
first two boxes for all three requirements. This is largely because they followed the instructions. Lower grades
were obtained throughout in box 3.
Box 1 at Requirement 1 (revenue) was answered well, with candidates drilling down effectively into individual
streams. Weaker ones tended not to cover tenders, even though there was equivalent data in the AI that they
should have analysed in their preparation. Box 2, dealing with cost of sales and gross profit, was covered in
more depth than is sometimes the case. A little over half gained passing grades for box 3 (identification of
zipwires issue): perhaps surprisingly, fewer candidates calculated a provision – which they were asked to do –
than discussed the issue of back-to-back warranties, which required good knowledge of the AI.
At Requirement 2, most candidates scored a passing grade for boxes 1 (Tyron calculation) and 2 (assumptions
and other specifications). However, very few obtained a passing grade for box 3 (ethical / business trust issues),
because they failed to articulate the situation with LTT or to question the source and basis of Eversley’s quote.
In Requirement 3, good marks were achieved for cost and profit calculations, and for identifying operational
and strategic issues (boxes 1 and 2). The main shortcoming at box 3 (which, as for Requirement 2, covered
ethical / business trust issues) was in not appreciating the potential conflict of interest created by the proposed
advisory work.
AJ was again poor across all three requirements and was a differentiator among marginal candidates. Many
failed to develop what was often satisfactory analysis work.
At Requirement 1, unusually, candidates did better in box 2 (evaluation of cost of sales and profit) than in box 1
(evaluation of revenue). They struggled to develop their numerical work on revenue, for example by not
commenting on the unacceptable margins being earned on the out-of-warranty maintenance contracts or on the
ramifications of a first-year discount on new inspections. On costs, as an inevitable consequence of not covering
design and equipment/site-work costs under SP&S, many candidates missed the first two points. Better ones,
when considering the higher surfacing costs, recognised that there would also have been a bigger depreciation
charge.
For Requirement 2, candidates did well at box 1, with good coverage of the issues. Better ones calculated and
commented on the additional maintenance revenue that could arise and on the financial impact of any overruns
or penalties for late completion. They were much less proficient at evaluating the assumptions and other
specifications: surprisingly few realised that Tyron might have an ‘agenda’ to keep the fee low (though the
spelling error ‘Tryon’ did feature in some scripts), or did any simple mathematics to query the cost increments
being suggested: “It is not obvious that costs should move linearly with size. For example, a 20m x 20m site will be four

times bigger in area than a 10m x 10m site but only twice as big in perimeter (ie, for fencing).” For box 3, the
weaknesses in SP&S carried through into AJ.
AJ achieved a low number of passing grades throughout Requirement 3. For box 1 (evaluation of overall
financial impact), only a minority compared the revenue or profit from the contract with Playfree’s existing
results. For box 2 (evaluation of operational/strategic issues), the most pleasing feature was that candidates
applied professional scepticism to discuss whether there might be some missing costs – especially the
advisory work, for which only a revenue figure had been given. Evaluation of ethical/business trust issues
(box 3) was especially poor, partly a function of the weak analysis work in this area. Toxic paint – mentioned
in Exhibit 18b having first appeared in the AI – was tackled the best here.
There was a polarised performance here. As is often the case, at each of the Conclusions boxes, more than half
of candidates gained a passing grade; but only a minority did so on each of the Recommendations boxes.
For Requirement 1, where candidates were marked down for their conclusions it was generally because they
did not provide a reason for changes in cost of sales figures; or – consistently with their foregoing work – they
did not conclude on the accounting impact of the zipwires issue. As frequently with Requirement 1, they found
it hard to make commercial recommendations. On this occasion, sensible advice could have been given in
respect of the enhanced maintenance contracts or the discounted inspection fees.
For Requirement 2, conclusions most candidates concluded on most aspects, following from their analysis and
judgement work. Among recommendations, candidates did best in advising Playfree to negotiate on terms and
conditions and to review the logistics and staffing needs.
It was very similar for Requirement 3. Candidates again concluded on the key points (ethics / business trust was
the one most usually excluded) and, again, the most frequent advice was to negotiate on terms and conditions.
The introduction of CBE has brought about a different set of challenges for candidates in how they present
their work. While illegibility is now a thing of the past, they have found new ways to test markers’ patience and
resilience. Fewer than half of the cohort achieved passing grades for OAC. Layout was adequate: the main
failing here was in not including enough headings. Most candidates correctly included a disclaimer of liability.
Under language, there was perhaps less informality and tactlessness than in the past, though there were
some amusing examples, such as “When visiting playgrounds having toxic chemicals, care should be taken not to
poison the temporary staff” (so Playfree would be less exposed if it used its own employees for this work?)
However, where candidates did perform worse than before was in respect of grammar and (especially)
spelling: many scripts could be marked down on this from the opening pages of their executive summaries.
Among many bad examples, this paragraph (addressing the same ethical issue at Requirement 3) would be
hard to beat:
Executive summary
Overall, marks and the number of passing grades were fairly consistent between the three columns on the
marking key. A positive feature was that a majority of candidates brought forward their key figures into the
executive summary and also made at least one recommendation at each requirement. Box 2 for Requirement 1
was the least well done: candidates did not attach enough importance to the key problems affecting I&M
performance in the year (low fees for the new inspections and the out-of-warranty maintenance sites).
A new feature of the marking key (announced in advance) was a bullet for ‘Appropriate summary of report section’
in respect of each requirement. It was gratifying that candidates heeded this advice and, as a result, the markers
were not faced with a deluge of executive summaries that were neither executive nor summaries. (Illustrative
script 1 offers a good example.) An issue in the past has been that the weakest and/or least well organised
candidates run out of time, leading to a very short summary – or none at all. Under CBE, there is less chance of
this happening – and indeed it didn’t: ‘NA’ grades for this page of the marking key were for once relatively rare.

As is now established practice, the marking key offered considerable flexibility. Thus, candidates could have
discussed both revenue and gross profit (or margin) either overall or by division/stream at Requirement 1;
evaluated any assumption at Requirement 2; and commented on any operational or strategic issue at
Requirement 3. Also as before, the key included specific points that the examiners considered to be critical, such
as in relation to the two ethical topics at Requirement 2.
In Requirement 1, candidates were good at bringing forward their key numerical findings on revenue, cost and
profit. Fewer discussed the tender success rate or (a natural consequence of their work at Requirement 1 itself
– see below) the accounting adjustment to be made for the zipwires.
In Requirement 2, the vast majority of candidates gave a fee but not all included the costs on which it was
based. Most discussed assumptions but only about half of the cohort mentioned issues of logistics, staffing or
capacity in their executive summary.
In Requirement 3, most candidates included a profit figure. Only a small minority commented that the ongoing
database work would break even or considered the unknown elements of the advisory fee/profit calculation.
Most candidates mentioned at least one key operational or strategic finding but IT, despite being highlighted in
the requirement, was frequently neglected. A small minority did not state the way forward. In line with the main
body of the report, toxic paint was the most popular ethical issue.
Requirement 1: Analysis of Playfree’s financial performance
Candidates should have been well prepared for a review of the 2019 management accounts. The challenge was
to integrate the additional financial and non-financial data at Exhibit 16 into a coherent narrative on Playfree’s
performance by working through the information systematically, and without spending time on excessive – or
irrelevant – analysis (a surprising number reviewed administrative expenses and operating profit even though
these were not asked for). Candidates also had to leave themselves time to address the zipwires issue.
Appendix 1 was mostly well done and at a sufficient level of detail, showing key movements, with both absolute
and percentage figures – heeding the examiners’ explicit pre-exam advice. Where lower grades were awarded,
this was usually because candidates had not broken down I&M into its two components. Presentation was
mostly clear, indicating that candidate had taken the time to hone their CBE technique in advance.
Candidates were presented with a table of information on revenue, site numbers and tenders, in the same
format as they had seen in the AI (for each of three years). If they had spent the necessary time studying
these tables and the accompanying narrative (see Part 2 above), they should have come to the exam fully
equipped to tackle a requirement of this nature. As one tutor said: “These issues should have taken priority in
candidates’ analysis. Weaker candidates may have ignored these changes and instead provided pre-prepared
answers based solely on the AI and which therefore did not reflect these business changes.” Some of the
issues should have been familiar from the AI (new surfacing equipment, increased fees for out-of-warranty
maintenance contracts); others could not have been so easily anticipated and needed careful thought.
With two divisions but three revenue streams, candidates had to decide how best to structure their answer.
The vast majority produced good-quality analysis of the main numbers in their appendix and report. On this
occasion, the discussion of costs and profit was as good as that for revenue – they are usually the poor
relation. Better candidates made appropriate comparisons to Playfree’s own growth expectations and to recent
industry data. They were able to draw together several strands of the scenario, integrating the AI with new
information, for example: referring to the new Hols4U business from Tyron in explaining the increase in
maintenance sites; linking the high proportion of new nurseries among the D&I work to the lower average
tender value; computing the (higher) rectification revenue from inspections; realising that the higher surfacing
costs must include 9 months of depreciation on the new machinery; calculating the reduced design costs and
commenting on their impact on profitability.
Among those who analysed the enhanced maintenance contracts, most failed to notice that the increase was
from 1 January 2019 and so they took the total fee increment as being £15k rather than £7.5k. Only the best
candidates dealt fully with these contracts, which involved calculating the rectification revenue (see Appendix
1) and concluding that the increment was not enough to earn a good profit (this had in fact already been hinted
at in Exhibit 7). Similarly, only the very good candidates worked out that, after adjusting for the various one-off
items, the I&M GP% was lower than in the previous year.
New zipwires
One tutor remarked that “this was a good test of a candidate’s understanding of Playfree’s warranty, its
relationship with its suppliers and the importance of a strong ongoing relationship with its clients”. In general, it
was not as well done as the main part of Requirement 1. Candidates were specifically asked to deal with two

aspects of the zipwires: (a) the action that Playfree should take and (b) any necessary accounting adjustments.
For (b), a surprising number failed to quantify the provision, let alone realise the need for it to include an
estimate of any re-installation costs. The financial case could in fact have been argued in several ways, so it
was curious that so many ignored it altogether – especially since they were good at discussing the back-to-back
warranty with the supplier Auchen.
Requirement 2: Evaluation of request from Tyron
Requirement 2 produced good results at this session. Appendices were well done. Most of the cohort gained a
passing grade, setting out their numerical work clearly and including two sets of figures to reflect the possible
alternative surfacing material. Where candidates scored less, it was mainly because they had not flexed their
figures, for example to show the effect of different cost increments (see Appendix 2) or the cost and hence
reduced margin if there was a 10% overrun. Presentation was again mostly clear, but labelling wasn’t always
sufficient.
The vast majority of candidates produced a methodical calculation with the intended outcome (see Appendix 2
below) – namely, total costs of £425k and a fee of £567k, with lower figures for both if Playfree used LTT. Errors
were gratifyingly rare: the most common were to confuse mark-up with gross margin or to apply the wrong %
increments to the various costs. Different approaches were taken towards the design costs: in practice, these
were not material anyway and so did not really impact the overall finding.
As a result, the area of differentiation was in addressing the assumptions and the other specifications. As one
tutor noted: “There was a clear heading for ‘assumptions’ … numbered from 1 to 4. This should have provided
candidates with a structure around which to base this section of their answer. Better candidates may have
broadened this to consider other project assumptions such as the relative size of each playground [and] may
have also explored information that might be missing from the assumptions such as details on the labour time
and costs”.
While some of the specifications were straightforward (warranty period; access), others needed a more involved
approach. In particular, at first sight the timetable might have looked easily achievable, but with more reflection
this was not necessarily the case: “Given past issues with Tyron and the clause that Playfree would be liable for any
overruns or delays, it should build plenty of slack into the timetable. A typical large installation can take 50 person days. If
the new sites took 50% longer, this could mean 375 person days, or 5 installers for 75 days each (15 working weeks).
Assuming no hold-ups (eg, in gaining access to sites) and an August start, they could be completed by 30 November.”
Candidates in general did not address in any depth the proposed percentage increments, and they failed to make
the obvious point that the 2016 costs being used as a benchmark would be out of date. Better ones wove
together information from the AI and earlier in the exam: “Surfacing cost is proportional to surface size [Exhibit 6], so it
is important to know precisely how much bigger the new sites will be. Costs may also be lower pro rata than the past Tyron
work in view of the new surfacing machinery, assuming that recent efficiency improvements can be maintained.”
As one tutor observed, “a challenging area would have been the requirement to discuss ethical and business trust
issues”. There were two distinct – but in fact linked – issues: the possible use of the controversial LTT surfacing
material to cut costs; and the source and reliability of Eversley’s bid. In general, the first – for which the context
had been provided in the AI – was answered quite well. The second, which could not have been predicted, was
overlooked by quite a few candidates. Among those who did discuss it, many had trouble coming to a decision on
whether or not Playfree should tailor its fee to match Eversley’s (which would have meant an extremely low gross
profit margin), whether by using LTT or staying with the existing surfacing material.
Requirement 3: Evaluation of approach from KCC
Requirement 3 again produced the lowest scores for the session. There were several parts here too: candidates
had to address the financial, operational and strategic issues, as well as ethical and business trust issues, relating
to the approach from KCC.
As is now standard, they had to include calculations in an appendix, just as with Requirements 1 and 2. As one
tutor remarked, the initial numerical work “should not have been challenging and should have provided
candidates with much to discuss in the financial evaluation of the strategy. Better candidates would have
considered margins on the strategy relative to existing margins as well as considering the overall impact on
Playfree’s existing financial position.”

The task here was to work out the revenue and profits from the project, for which there were several streams,
each with different information provided for different time periods. A logical pathway would have led to a clear and
accurate appendix – and a sweep of passing grades. A majority did indeed manage this, but – especially lower
down the cohort – it was common to find candidates muddling their numbers and/or periods – for example, in
trying to time-apportion costs across financial years – or omitting one or both parts (retainer; percentage of
savings) from the advisory fee calculation.
Candidates did well in discussing operational and strategic issues but not so well in evaluating them. As one tutor
said, such issues “should have been plentiful from the information provided in the exhibits. However, given the lack
of benchmarks and specifics in the AI candidates may have struggled to exhibit their skills in using relevant
information from their pre-exam preparation”. Some thought that Playfree would have difficulty in working with adult
gym equipment, with which they had no experience, when in fact this was likely to be easier to work with because
the equipment was newly acquired and so the relevant data should be readily available. In addition, the work in
overall terms was in some ways more straightforward than Playfree’s regular I&M projects as it was simply a
question of obtaining information rather than having to express an opinion. Better candidates had realised from
their analysis of the accounts and other case information that Playfree was not operating at full capacity and
therefore some of its permanent staff could be seconded to this project rather than employing temps.
Under this heading, they were asked to discuss IT. The project itself was an inherently IT-based exercise, so it
should have been easy to recognise basic requirements in respect of data security, confidentiality and back-ups.
GDPR was often mentioned, but as there was no personal data involved it was unlikely to be an issue here.
There was some misunderstanding about the new mobile app, which could have been used by Playfree to
streamline the project: it wasn’t (necessarily) an alternative route for KCC. Candidates also ignored the costs of
the app as potentially affecting their opening calculations.
Coverage of ethical issues at Requirement 3 was disappointing and a significant differentiator at the pass/fail
margin. Fewer than half of the cohort achieved a passing grade in either the SP&S or the AJ box.
There were a number of ethical issues in addition to those relating to IT: advice to close playgrounds; toxic paint;
access to competitor information; and determination of the advisory cost savings. Paradoxically (given that KCC
approached Playfree because “we do not have a conflict of interest”), these mainly fell under the heading ‘conflict
of interest’. Issues that had been mentioned in the AI tended to be identified more often than those presented for
the first time. Thus most candidates discussed the toxic paint, referring back to the AI media article, but few were
exercised by the difficulty of working out advisory cost savings and the disputes that this could lead to.

PART 4: APPENDICES
APPENDIX 1: FINANCIAL STATEMENT ANALYSIS: Playfree’s financial performance
2019 2018 Change Change 2019 2018

£000 £000 £000 % Share % Share %
Revenue
D&I 6,310 6,184 126 2.0 83.1 85.7
Inspection 523 496 27 5.4 6.9 6.9
Maintenance 757 533 224 42.0 10.0 7.4
I&M 1,280 1,029 251 24.4 16.9 14.3
7,590 7,213 377 5.2 100.0 100.0
Cost of sales
Design 361 399 (38) (9.5) 7.2 8.1
Equipment/site-work 3,468 3,369 99 2.9 68.6 68.9
Installation 697 677 20 3.0 13.8 13.8
Surfacing 527 448 79 17.6 10.4 9.2
D&I 5,053 4,893 160 3.3 100.0 100.0
I&M 956 714 242 33.9
6,009 5,607 402 7.2
Gross profit
D&I 1,257 1,291 (34) (2.6) 79.5 80.4
I&M 324 315 9 2.9 20.5 19.6
1,581 1,606 (25) (1.6) 100.0 100.0
Gross profit %
D&I 19.9 20.9
I&M 25.3 30.6
20.8 22.3
Analysis per site – revenue (average fee)
2019 2018 Change

Sites Ave. fee Sites Ave. fee in ave. fee
No. £ No. £ %
D&I 93 67,849 88 70,273 (3.4)
Maintenance 623 1,215 488 1,092 11.3
Inspection 1,148 456 1,067 465 (2.0)
Analysis – tenders
2019 2018
Design costs per tender (site) (£000) 1.8 2.0
Tenders (sites) 200 204
Value of tenders (£000) 14,800 15,500
Average value (£000) 74.0 76.0
Tender success rate – by no. of sites 47% 43%
Tender success rate – by value 43% 40%

Working: I&M changes

Revenue CoS GP GP
£000 £000 £000 %
I&M total 1,280 956 324 25.3
Less: Updated maintenance contracts (Note 1) (110) (100) (10) 9.1
1,170 856 314 26.8
New inspection arrangements (81 x 400 x 50%) (Note 2) (16) (22) 6 (35.8)
1,154 834 320 27.7
Note 1: Analysis of revenue on these sites
£
25 x [£1,500 + (£300 x 6/12)] 41,250
25 x [£900 + (£300 x 6/12)] 26,250
67,500
Hence rectification revenue (balancing figure) 42,500
110,000
Note 2: Split of inspection revenue
Revenue would normally be £32k @ GP of say 30%, ie, cost of sales of £22k.
Existing sites (say 50% small, 50% large), all kept for 2019; so basic fee on these for both 2018 and 2019 =
£400 x 1,067 = £427k; new sites = £16k as above; thus rectification revenue:
2018: £496k – £427k = £69k

2019: £523k – £427k – £16k = £80k
Working: changes in surfacing, equipment and site-work costs
Equipment
Surfacing and site-work
£000 £000
New fencing - 40
Subcontract labour 32 -
Depreciation (say) (180 / 5 x 9m) 27 -
59 40
Actual change 79 99
Remainder 20 59

APPENDIX 2: FINANCIAL DATA ANALYSIS: Calculation of Tyron tender costs and price
(i) Base calculation
Exh 8 New New

(original (with usual (with LTT
budget) surfacing) surfacing)
£000 £000 £000
Equipment – OPE (+50%) 60 90 90
Equipment – AE (+50%) 100 150 150
160 240 240
Site-work components (+50%) 40 60 60
Installation (+25%) 60 75 75
Surfacing (+25%; -50%) 40 50 25
Total cost before design 300 425 400
Actual/suggested fee 400 567 533
Profit (before design costs) 100 142 133
Margin 25% 25% 25%
Design costs (12) (8) (8)
Actual profit (before overruns) 88 134 125
(i) Flexed calculation
Variation 1 Variation 2
(all costs (all costs
25% more) 50% more)
£000 £000
Equipment – OPE 75 90
Equipment – AE 125 150
200 240
Site-work components 50 60
Installation 75 90
Surfacing 50 60
Total cost before design 375 450
Actual/suggested fee 500 600
Profit (before design costs) 125 150
Margin 25% 25%
Design costs (8) (8)
Actual profit (before overruns) 117 142

APPENDIX 3: Calculations of revenue and profit from KCC proposal

Fee calculations
(1) Set-up
Upfront fees No. Price Total
£000 £000
150 0.6 90
90
Less: costs:
Staff 8 6.0 (48)
Cars 8 1.5 (12)
(60)
Profit 30
Gross margin 33%
(2) Annual fees (excluding mobile app) 2 years

Revenue (150 x £0.2k x 2) 60
Less: costs (24m @ £2.5k per month) (60)
Profit -
(3) Advisory work

Total basic fee (2 x 12 x £1k) 24
Additional fee (10% of 2 x £100k saving) 20
44
Less costs (say) (4)
Profit 40
Gross margin 91%
(4) Overall summary (2¼ years)

Revenue 194
Costs (124)
Profit 70
Gross margin 36%

JULY 2019 - Playfree Ltd
First Marking
DATE CANDIDATE NO.
TIME MARKER NUMBER
CC
SC
IC
ID
NA
Total 7 11 11 11 40
PF Playfree
D&I Design & Installation
I&M Inspection & Maintenance
Insp Inspection
Maint Maintenance
KCC Kent County Council
TEAM LEADER CHECKER

SIGNATURE SIGNATURE
Changes made?
EXECUTIVE SUMMARY
R1 - Review of Playfree's financial performance
ES.OAC ES.R1.1
Appropriate layout eg headings, paragraphs, sentences Revenue: qualitative comment on overall/D&I/I&M with fig
Appropriate disclaimer of liability and report from firm Tenders: success rate / average value
Suitable language eg formal, tactful, ethical GP/GP%: qualitative comment on overall/D&I/I&M with fig
Reasonable spelling and grammar Impact of zipwire claims on accounts
ES.R1.2
50% discount on new inspections unsustainable
£300 post-warranty additional fee not enough
Commercial recommendations re zipwire issue
Appropriate summary of report section
NA ID IC SC CC
R2 - Evaluation of request from Tyron R3 - Evaluation of proposal from KCC
ES.R2.1 ES.R3.1
Gives total cost with fig Profit on proposal (set-up/ongoing/advisory) with fig
Justifies suggested tender fee with fig Ongoing at breakeven / Advisory has unknown costs/savings
Evaluates/questions assumptions Concludes on operational/strategic issues (not IT)
Considers logistics / capacity / staffing Concludes on way forward
ES.R2.2 ES.R3.2
Business Trust: only use LTT with full investigation Concludes/recommends on IT issues
Ethics: advise PF not to match £420k Eversley bid Concludes/recommends on ethics/business trust issues
Commercial recommendations on contract Commercial recommendations on proposal
Appropriate summary of report section Appropriate summary of report section
CC
SC
IC
ID
NA
Total 7
REQUIREMENT 1 - Review of Playfree's financial performance
R1.AUI.1 R1.SPS.1
Presents 2019 figures D&I: inc in sites / fall in ave rev/site / inc tender success rate >
Presents 2018 figures Insp: inc in sites / fall in ave rev/site / 50% discount >
Analysis of average revenue per site / analysis of tenders Maint: inc in D&I sites / inc in ave rev/site / 20 Hols4U sites >
Analysis of any individual COS line Tenders: fall in ave value / ave value more than ave rev/site >
( £74k v £76k £74k v £68k )
Mix: move to I&M 16.9% v 14.3% / Maint mix now 10% v 7.4%
Overall revenue growth: lower than last year 5.2% v 16.5%
R1.AUI.2 R1.SPS.2
AI/CSE information (report/appendix) Financial analysis: COS/GP/GP% (report)
Overall revenue: up £377k / up 5.2% COS D&I design: down £38k / down 9.5% >
D&I revenue: up £126k / up 2.0% COS D&I equip/sitework: up £99k / up 2.9% / largest cost 69% >
OR
I&M revenue: up £251k / up 24.4%
COS D&I surfacing: up £79k / up 17.6% >
Inspection: up £27k / up 5.4%

OR COS I&M: up £242k / up 33.9% / due to rectification costs >
Maintenance: up £224k / up 42.0%
GP D&I: down £34k / down 2.6% / GP% down 19.9% v 20.9%

Overall GP: down £25k / down 1.6%
OR
Overall GP%: 20.8% v 22.3% GP I&M: up £9k / up 2.9% / GP% down 25.3% v 30.6%
R1.AUI.3 R1.SPS.3
Business issues / wider context Identification of zipwire issues
Market: industry expects flat growth / competitive (eg Rox) 20+ complaints based on speed of zipwire >
PF growth: 20% inc (expected over 4yrs) / inc in nurseries Warranty only valid if zipwire maintained as per guidelines >
GP%: industry 20% / PF margin generally set at 20-25% Provision: 20/30 zipwires at £5k each to replace = £100k min >
New regulations re nursery fencing Provision will impact OP/OP% with fig
5 yr warranties now expiring Back-to-back warranty / past issues with warranties (treehouse)
Complaints may impact PF's good reputation for quality
R1.AJ.1 R1.CR.1
D&I: inc in sites offsets fall in ave rev/site Revenue: qualitative comment on overall/D&I/I&M with fig
Insp: discount unsustainable / others may want discount COS: reason for change of an individual COS line with fig
Maint: inc (£300) not enough / doesn't cover costs GP/GP%: qualitative comment on overall/D&I/I&M with fig
Tenders: winning the lower value tenders (nurseries) Concludes on impact of zipwire issue on accounts
D&I: fall in ave with reason eg cost cuts by customers
I&M: rectification inc with fig / more repairs as sites age
R1.AJ.2 R1.CR.2
Evaluation of COS/GP/GP% analysis Makes recommendations
Design: new software leads to efficiencies Further analysis by revenue stream / further cost analysis
Equipment: excluding extra fencing still shows increase Monitor profit on post-warranty maintenance / inc £300
Surfacing: eg extra depn / inefficiencies / subcontractors Reassess policy of 50% discounts for new inspections
I&M: post-warranty Maint contracts low GP% (9.1%) Seek alternative suppliers for zipwires
GP%: COS inc faster than rev / poor cost control Other commercial recommendations
Overall GP%: move to higher-GP% I&M didn’t inc GP%
R1.AJ.3
Evaluation/Recommendations: zipwire
Safety complaints would be more worrying/urgent
Check maintenance work up to date / warranty limitations CC
SC
Provision to include installation costs / investigate costs
IC
Contingent asset: recognise if certain / disclose if probable ID
NA
Liaise with Auchen/arbitrator/customers to decide action
Total 11
Tested by PF on installation / retest to verify claims
NA ID IC SC CC
REQUIREMENT 2 - Evaluation of request from Tyron
R2.AUI.1 R2.SPS.1
Appendix 2 Calculation for Tyron (report/appendix)
Numbers labelled and clearly derived Includes £8k design costs / explains sunk cost
Calcs cost and fee without LTT Appropriate use of mark-up/margin
Calcs cost and fee with LTT Calculates suggested fee with fig (not Eversley's £420k)
Considers cost overruns/flexes numbers in calculations GP%: compares to 2019 (20.8% / 19.9%)
R2.AUI.2 R2.SPS.2
AI/CSE information (report/appendix) Assumptions and other specifications
Equipment £240k/£90k+£150k (£160k + 50%) Figures provided by Tyron >
Sitework £60k (£40k + 50%) 25%/50% uplift seems reasonable for 'larger' park >
Installation £75k (£60k + 25%) 25%/50% uplift seems reasonable for higher quality/extra items
Surfacing £50k (£40k + 25%) Considers achievability of timescale (31 Jan 2020 deadline) >
Surfacing £25k/50% if using LTT New swing: out of stock with YoYo / Swingz reliability
Awards for inclusivity / PF meets required 5yr warranty
R2.AUI.3 R2.SPS.3
Business issues / wider context Comments on ethical / business trust issues
Tyron is existing customer / past Tyron experience LTT: not fully tested / quality concerns / injuries have occurred >
Unclear what 'new-style' or 'large' means LTT: Tyron may be tempted by cheaper material >
Eversley: only other/low bidder / £420k / 3yr warranty LTT: PF duty of care to playground users >
Site survey/design pack cost already incurred (£8k) Basis/reliability of Eversley figure unknown / rumour only >
No maintenance quote requested by Tyron Pressure to meet deadlines may affect quality >
R2.AJ.1 R2.CR.1
Evaluation of calculations Draws conclusions (under a heading)
Significant contract / calc of relative size with fig Gives total costs with fig
Potential future maintenance contract with fig Justifies suggested fee with fig
Past cost overruns not passed on / PF liable (again) Evaluates/questions assumptions
Cost overruns/penalties would erode margins Concludes on ethical/business trust issues
Considers logistics / seasonality / capacity
Any changes in assumptions will impact fee/GP
R2.AJ.2 R2.CR.2
Evaluation of assumptions / other specs Makes recommendations
Figures may be biased / Tyron's agenda is to reduce fee Further research needed on costs
Size of park won't affect all costs in the same way Negotiate T&C (eg penalty clauses, equipment required)
Based on out-of-date 2016 costs / 3 yrs inflation missing Consider logistics / capacity / staffing
Calculates person days needed Emphasise maintenance credentials for the future
Previous discounts (20%) may/may not be achievable LTT: discuss with supplier eg getting 5 yr warranty
Considers other costs: eg new machinery, fencing, design Other commercial recommendations
R2.AJ.3
Evaluation/recs: ethical/business trust
LTT: product risk not justified / needs full investigation
LTT: discuss use with Tyron / warning signage needed CC
SC
LTT: using LTT could damage safety/quality reputation
IC
Using £420k risks bidding at/below breakeven / ignore ID
NA
Emphasis on safety/quality / ensure sufficient testing time
Total 11
NA ID IC SC CC
REQUIREMENT 3 - Evaluation of proposal from KCC
R3.AUI.1 R3.SPS.1
Appendix 3 Cost/GP calcs (report/workings)
Numbers labelled and clearly derived Costs: 3 months' staff £48k (8 x £6,000)
Calculates set-up cost/profit Costs: 3 months' motor £12k (8 x £1,500)
Calculates ongoing cost/profit Costs: ongoing annual £30k (12 x £2,500)
Calculates advisory fees/profit Cost: uses own figure for advisory costs
Calcs set-up profit £30k / ongoing profit £0
Calcs GP% (33% on set-up, 20% in total over 2 yrs) >
R3.AUI.2 R3.SPS.2
Revenue calcs (report / appendix) Operational and strategic issues
Revenue: set-up £90k (£600 x 150) Deadline 31 Oct 2019: short timescale / need to start soon
Revenue: ongoing £30k (£200 x150) In line with stated strategic objectives
Revenue: advisory £1,000 per month App: use by KCC / considers running costs
Revenue: 10% of any cost savings Temps: recruitment / training / past problems
Considers volume of work / logistics / capacity / seasonality
R3.AUI.3 R3.SPS.3
Business issues / wider context Comments on ethical/trust issues
KCC new customer / no conflicts of interest Access to/abuse of competitor information >
300+ public authorities in UK / budget constraints PF incentive to close sites (fee is 10% of cost saved) >
New stream for PF (councils/advice) / diversification Asked to count users to facilitate closure of sites >
2 yr contract / 31 October 2019 deadline Toxic paint found at 25 sites >
KCC has approached PF IT issues: database security / confidentiality / back-up >
R3.AJ.1 R3.CR.1
Evaluation: overall financial impact Draws conclusions (under a heading)
Set-up: £600 in line with other inspection fees (£300-£500) Profit on proposal (set-up/ongoing/advisory) with fig
Ongoing: £200 per year very low / just breaks even Concludes on operational/strategic/IT issues
Ongoing: renewal on same terms not acceptable Concludes on ethical/business trust issues
Advisory work means foregoing potential D&I/I&M fees Concludes on way forward
Small contract / calculation of relative size
Compares GP% 33%/20% to existing GP% 20%
R3.AJ.2 R3.CR.2
Evaluation: operational/strategic issues Makes recommendations
Potential for further work with other councils Further research needed on costs involved
Missing data on old equipment / KCC don't have records Negotiate T&C (eg set-up time, fees, break clause)
Lots of additions (gym equip) will increase update costs Due diligence on KCC
Potential missing costs eg IT, training, advisory Research new mobile app
Ongoing: lot of work for 1 person / reliant on accurate set-up Recruit/train staff / appoint manager / review capacity
Advisory savings: difficult to estimate / danger of dispute Other commercial recommendations
R3.AJ.3
Evaluation/recs: ethical/trust issues
Competitor info shouldn’t be main reason to accept work
Closures have financial implications (loss of ongoing fee) CC

SC
Against PF ethos / causes ill-feeling / impact reputation IC
ID
May be "too costly to repair" (£125k) / discuss plan with KCC
NA
Total 11
Ensure in line with best practice
NA ID IC SC CC
FIRST SAMPLE SCRIPT AND EXAMINERS’ COMMENTS
This script was within the top 10% of all assessed scripts. It is a clearly-presented report,
exploiting the CBE software to best advantage. It addresses the case requirements as presented
and deals with many of the key issues, offering sound commercial advice where applicable.
The script earned 32 passing grades, of which around half were Clearly Competent (CC) and half
Sufficiently Competent (SC)). Of these, 7 (maximum 7) were for the Executive Summary and
Other Assessment Criteria. The rest were spread fairly evenly over the three main sections, with
a particularly strong answer to Requirement 3. This indicates good overall planning: weaker
candidates frequently do not leave themselves enough time to do justice to Requirement 3.
Professional skills grades were as follows (maximum 33): in 8 out of 9 grade boxes for
Assimilating and Using Information; in 8 out of 9 for Structuring Problems and Solutions; in 6 out
of 9 for Applying Judgement; and in 3 out of 6 for Conclusions and Recommendations.
The script contains little irrelevant material. This indicates a candidate who was focused on the
task at hand and who knew the Playfree case well. The three main sections are roughly equal in
size. The overall report, including appendices, demonstrates good planning and careful thought.
Executive summary
The executive summary covers the three requirements evenly, in all cases providing a synopsis of
key issues, relevant numbers and commercial recommendations. The candidate uses £ and %
analysis throughout to provide precision and focus to the commentary. It is long – but not
unreasonably by reference to the length of the overall script – and the key findings have been
adapted appropriately from the main report.
In respect of financial performance, the candidate has presented the main overall figures in
comparison with 2018 as well as the market and the growth achieved in the previous year. Excellent
detail is also included for the individual revenue streams. The only omissions here are (a) a
reference to the discounted inspection work; and (b), consistent with the main report, the accounting
implications of the zipwires issue.
On Requirement 2, the main numbers are again stated clearly at the start, and again the key issues
and findings are brought forward and skilfully summarised. The only major shortcoming is that, as in
the body of the report, the reputed Eversley bid of £420k is treated as fact and not questioned.
Similarly in Requirement 3, the executive summary reflects the main report in excluding a key item –
the revenue and profit from the advisory work. Otherwise, the report brings together the critical
points, including both IT and ethics.
The script is well structured and laid out with paragraph breaks and formatted appendices. Clear
headings are used within each requirement, serving as an aide-mémoire to address each key
component. Overall, it has more than met the main requirements and demonstrates a strong
commercial understanding of the case scenario. There is an appropriate disclaimer and the
language is suitably professional, albeit with the occasional lapse. However, in common with
very many scripts at this first CBE sitting, there are a large number of spelling mistakes. (Where
extracts from the script have been quoted, these have where necessary been corrected for ease
of the flow of this commentary.)

Review of Playfree’s financial performance [Requirement 1]
This part of the report earned passing grades in three of the four skills. The weakest area was
C&R. The text is divided into six sections: revenue; profit; cost of sales; zipwires; conclusion;
recommendations. Such a structure ensures that all the principal parts of the requirement will be
covered – although the positioning of cost of sales after profit is slightly illogical. In general, the
candidate has used a disciplined approach to avoid spending too long on this requirement.
Appendix 1 tabulates the key figures, showing changes both in absolute terms and as percentages
for both Playfree overall and the two divisions, together with revenue mix. It also presents average
revenue per site for each activity, together with the tender success rate, providing a springboard for
more developed commentary. The candidate makes sensible use of business issues and the wider
context – the industry growth rate; typical gross margins; Playfree’s own prior-year growth rate; the
regulatory environment – all aptly integrated into the narrative rather than being presented as a
standalone opening section. In evaluating the improved tender success rate, the candidate
recognises its interaction with the revenue figures.
The candidate drills down into the figures for I&M to identify the changes in each of the two
activities, breaking these changes down into their price and volume components. He/she
appreciates that D&I growth is a driver of maintenance, as well as commenting on the fee
increments on 50 maintenance sites – but fails to spot that the increment was annual and so the
impact on 2019 (effective from 1 January) was extra revenue of only £7.5k rather than £15k. There
is also no mention of the 20 new Hols4U sites (Exhibit 8) that would have added to both revenue
and site numbers for maintenance. The comment on the decline in inspection “price” (strictly,
average fee) correctly refers to the competition from Rox.
In the case of profit, coverage is superficial – a function of trying to address it before cost of sales. In
addition, by using the one-word section heading “Profit”, the candidate unnecessarily considers
operating profit, which was not asked for. He/she correctly calculates the margin earned on the out-
of-warranty maintenance contracts, but could have gone on to analyse in more depth the impact of
these on the overall maintenance stream.
Cost of sales is well discussed, with sensible comments on the new surfacing machinery (“As
installers adjust to the new machine, it is likely to generate future efficiencies”) and, in particular, on design
costs, where the candidate offers a link to the tender data and displays a sound understanding of
the business model: “… tender success rate increased to 46%, therefore a higher proportion of design costs
were recovered”.
The section on the zipwires issue covers the operational aspects well, with some apposite advice,
but fails to quantify the size of any provision – a clear shortcoming given that the requirements
specifically asked for the accounting impact. This also means that there is no financial conclusion
on the zipwires; the remaining conclusions cover the main features of the accounts. The
recommendations are adequate.
Overall, this part of the report indicates a candidate with strong business awareness, familiarity
with the case material and an ability to give logical explanations for movements in financial
statements.
Evaluation of request from Tyron [Requirement 2]
spread across the four skills, reflecting a logical pathway through the various elements of the
requirement. The candidate has appreciated the critical importance of Exhibit 8 (previous Tyron
work) to the scenario, which in particular gives an anchor for the critique of the assumptions.

The script is structured with relevant headings: financial considerations; assumptions; specifications;
ethics and business trust; conclusion; and recommendations. Again, this has generally ensured that
all the key components of the task were completed.
The calculations at Appendix 2 are set out neatly and suitably labelled. Figures are presented for
both alternatives (with and without LTT), and appropriate profit margins are applied in working out
the fees. However, the candidate has lost marks by using an incorrect scaling factor for two of the
cost categories (120% rather than 125% for installation and surfacing). The (sunk) design cost is
also factored into the calculation. There is no flexing of the numbers (eg, for changes in cost
increments) or consideration of the impact of cost overruns.
The main section of the report begins with a clear restatement of the results of these calculations
and an indication of its potential impact on Playfree’s results. (The reference to 10% dominance is
misguided as (a) this is an annual figure, (b) it is just a guide rather than a limit and (c) in any case
there is no information to suggest that it would be breached.) In considering which margin to apply,
the candidate refers to both the latest accounts and the company’s normal target. He/she goes on to
calculate correctly the additional maintenance revenue that could be earned from Tyron and (making
good use of the article at Exhibit 17b) potential future D&I work.
Coverage of assumptions is mostly very good. The candidate recognises: that the project is bigger
than Playfree’s previous work for this – or any other – customer; the dilemma involved in trying to
match Eversley’s much lower bid; and the need to meet Tyron’s ‘high specification’ (a further
allusion to Exhibit 17b). When looking at individual costs, the candidate questions with balanced
arguments whether the scaling factors are logical, given the size implications in each case. He/she
also considers possible volume discounts. However, as these were already factored into the 2016
prices being used as a benchmark, there may be limited scope to achieve any more. Also, with
these past figures being three years old, there is no mention of inflation. The comment that Playfree
“may benefit from … efficiencies from their new surfacing machinery” is a clever extension of
Requirement 1, reinforcing the examiners’ repeated advice to tackle the requirements in the order
presented. The ‘Assumptions’ section ends with a single sentence about overruns: this could have
been developed into a flexing of the numbers.
The section headed ‘Specifications’ addresses appropriately the issues raised in Exhibit 17a,
revealing good knowledge of the AI. The discussion about achieving the deadline could have been
expanded to show whether Playfree’s normal timescales would be realistic for a bigger project that
will inevitably take longer to complete.
On ethics and business trust, coverage of the LTT issue is good and well-balanced. The candidate
is mindful of the risks involved for a company with a proud health and safety record. There is no
mention of the other key ethical topic: where the Eversley quote originated or how reliable it might
be.
The conclusions are thorough, with an appropriate mix of figures and comments and the succinct
advice to go ahead. The recommendations are adequate.
In summary, this was a good section of the report. It could have been improved by an extension of
the assumptions into some flexed calculations; a more considered assessment of the timetable; and
an analysis of the ethical aspects of the Eversley bid.
Evaluation of approach from KCC [Requirement 3]
Requirement 3 achieved a clear majority of passing grades, across all four professional skills. The
use of section headings has again helped to ensure comprehensive coverage of the key topics.
This method suggests that the candidate has spent time planning the answer and its structure.
For Appendix 3, the candidate has presented a combined calculation for the initial database set-up
and ongoing work, including overall profit margin, but the advisory element has been missed out
altogether.

In evaluating the contract, the candidate recognises that it is small but that there is scope to build
on it, both with KCC itself and with the many other UK local authorities. He/she compares the
calculated profit with Playfree’s norms – though given the size of the project, the absolute
differential would be minimal. The proposed annual fee is sensibly benchmarked against the usual
range of inspection fees, the best available reference-point. Though not included in the calculation,
the advisory work is discussed. There are some irrelevant comments, for example in discussing
opportunity costs (as temps are being used) and the cash position.
Coverage of strategic and operational issues is good, linking to Playfree’s objectives (Exhibit 10).
The candidate appreciates the challenges of getting the database set up within the required three
months, with a shrewd reference to the company’s seasonality: “the use of temps … allows PF to
manage capacity”. The candidate also recognises that, while the project would give Playfree
access to the growing adult gym equipment market (another strategic aim), its involvement would
be limited as KCC isn’t offering any D&I or conventional I&M work here. The candidate has not
developed his/her thinking into other issues, for example: how the costs of doing the database
work will be affected by new equipment or, conversely, site closures; or whether any costs might
have been excluded.
The separate section on IT issues ensures that this part of the requirement is addressed. It
discusses the new mobile app, data security and Playfree’s existing capabilities. Some of the
points misunderstand the case facts and/or are a little tenuous.
Under ‘ethics’, the focus is entirely on the toxic paint issue, which is addressed in some detail.
Other ethical points are raised briefly in other parts of the answer and have earned marks in this
area of the marking key.
The conclusions are again comprehensive, relating to each main element of Requirement 3 and
climaxing with rationalised advice not to accept the approach: “Given the austerity cuts affecting
public playgrounds, growth may be limited. Therefore it is not recommended that PF continue with the
project. They should consider advisory work for a more dynamic market.” Recommendations here are
the best of the three requirements, offering a range of commercial suggestions.
Overall, this was among the stronger answers to Requirement 3. It could have been enhanced by
a clearer calculation, specifically including the advisory element of the work.

Line 10 not used

Line 13 not used

Lines 16 – 180 unused.

Lines 63-180 not used.

Lines 18 and 19 not used

Lines 37 – 182 not used.

Line 17 not used.

The commentary below follows the order and numbering of the script, with reference to the topics
in the marking key. It should be read in conjunction with the review of the First Illustrative Script
and full Examiners’ Report for this session.
This script failed the exam. Although it addresses some of the key issues and contains some good
sections, it has not gained enough passing grades (Clearly Competent (CC) and Sufficiently
Competent (SC)).
Overall, the candidate earned 21 passing grades. Of these, 4 (from a total of 7 available) were
achieved for the Executive Summary and Overall Assessment Criteria (OAC). For the rest of the
script, the remaining 17 were balanced across the report, with enough competent grades obtained
in Requirements 1 and 2 but not enough in Requirement 3. In terms of professional skills, passing
grades (maximum 33) were achieved in 7 out of 9 boxes for Assimilating and Using Information
(A&UI); 5 out of 9 for Structuring Problems and Solutions (SP&S); 1 out of 9 for Applying
Judgement (AJ); 4 out of 6 for Conclusions and Recommendations (C&R). The report is fairly
evenly balanced between the three requirements, but there is in general not enough focused
analysis or evaluation. In particular, the failure to deal with the advisory aspect of Requirement 3
was a major reason for failure.
Executive summary
overall review under tailored headings, followed in each case by a list of “key concerns” and then
recommendations. In contrast to the balance of marks for the requirements themselves, one passing
grade has been obtained for each of Requirements 1 and 2 but two for Requirement 3. In general, the
candidate has been reasonably selective in reproducing the main points from the main body of the
report. However, especially for Requirement 1, the executive summary is too long by comparison with
rest of the document.
For Requirement 1, the candidate has included figures and commentary for revenue, cost of sales
and gross profit, both overall and for each stream. On the zipwires issue, the operational issues are
discussed and there is a figure for the impact on the accounts – but, as at Requirement 1 itself, this is
erroneously described as an additional fee.
Requirement 2 starts with the headline figures but omits the total costs on which the suggested fee is
based. It goes on to assess the assumptions and logistical challenges. On ethical issues, the
reference to LTT is terse and there is no mention at all of the Eversley quote.
Coverage of Requirement 3 is the best part of the executive summary. Consistently with the main part
of the report, there is no mention of the advisory work, but otherwise the section brings forward the
results of the revenue and profit calculation, links back to Playfree’s strategy and addresses some of
the IT and ethical issues.
The report begins with an appropriate disclaimer. However, the report has not met the standard for
the other assessment criteria. The overall structure within the body of the report is adequate, with
suitable headings and subheadings, but the appendices also require clear descriptive headings
rather than just being numbered. The language is in places informal (eg, “in a nutshell”) or tactless
(eg, “customers may just deliberately make claims for more money” ). Misspellings and typos are frequent
(as was the case for many candidates at this session). This is exacerbated by the liberal use of
‘copy and paste’, which has resulted in some errors being repeated more than once, for example in
analysis/evaluation, conclusions and the executive summary. (Where extracts from the script have
been quoted, these have where necessary been corrected for ease of the flow of this commentary.)

Review of Playfree’s financial performance [Requirement 1
This was weaker than Requirement 1 answers for most of the cohort. Although the key headings are
addressed, and there is a clear, detailed appendix (see below), coverage is superficial in places and
the numerical work is insufficiently well developed.
The candidate has scored well for A&UI, and in boxes 1 and 2 under SP&S, by identifying the (£ and
%) movements in the main captions from the accounts, setting the business context and performing
initial calculations. The appendix covers the core financial information but also considers average
revenue per site for each stream and offers more analysis of the tender figures than in most scripts.
The basic commentary on revenue, costs and gross profit is also good and detailed, notably the
paragraphs on tenders and also the comparison of revenue growth with both industry trends and
Playfree’s own expectations. The candidate, unlike many others, has recognised that surfacing
costs include depreciation on the new machinery, albeit without a calculation of the amount involved.
However, the subsequent evaluation is weak and in some cases misguided. Specific shortcomings
were:
 Making only limited use of the revenue per site figures calculated in the appendix.
 Stating that the maintenance revenue of £110k on out-of-warranty installations was additional,
when in fact the additional element was only £7.5k.
 Not calculating or commenting on the rectification revenue in either inspection or maintenance.
 Attributing the fall in I&M gross profit to “relatively bad cost control” without appreciating the
margin impact of the inspection fee discounts or the maintenance fee increments.
 Not offering a reason for the fall in design costs.
 Explaining the change in surfacing costs as due to fencing, which is actually part of site-work.
 Including a section on administrative expenses and operating profit although this was not part of
the requirement.
While the candidate has made appropriate reference back to previous issues with the supplier
Auchen, coverage of the zipwires issue overall is poor and also reveals some fundamental
misunderstandings. In particular, the candidate has used the wrong part of Exhibit 12 and so
believes that the claims have come close to expiry date when in fact these are examples of claims
being made at the start of a warranty period. Even more alarmingly, although he/she has correctly
calculated a figure of £100k, this is presented not as a provision but as revenue.
Passing grades were achieved for Conclusions, where the candidate has reproduced faithfully much
of the foregoing detailed accounting analysis. Recommendations are largely generic or inappropriate
(for example, in respect of the surfacing machinery and administrative expenses).
Evaluation of request from Tyron [Requirement 2]
As with Requirement 1, the answer to Requirement 2 gained more than 50% passing grades but
was weaker than for most of the cohort. This is epitomised by the first box under AU&I, which has
lost marks for not labelling the appendix to explain the cost increments used; not doing an
alternative calculation for LTT; and not flexing the numbers. However, passing grades have been
achieved in the other boxes relating to the mathematical work. A margin of 25% has been correctly
applied to the costs, and the final lines showing the relative size of the contract add helpful value.
The appendix is followed by a ‘wider context’ section, which has gleaned marks by setting out some
of the key business issues underpinning this scenario, eg, past work for Tyron and the competition
from Eversley. There are also some gratuitous attempts to bring in pre-prepared material, such as
the references to Playfree’s cash position and its strategic aim to work with landscape gardeners.
When assessing the output from the calculations, the candidate makes sensible comments about
the margin and the size of the contract relative to Playfree norms. However, the point that “normally
a single customer can only contribute 10% of total revenue” is not a relevant use of AI information.

Identification and evaluation of the assumptions and related matters are both poor. In particular, there
is no consideration of the size and quality standard of the playgrounds, other than the vague remark
that they “are not exactly the same as the old sites”; no mention of inflation; no reference to overruns and
penalties. There are some sensible commercial points in this section – notably linking back to the new
surfacing machinery from Requirement 1 and the benefit for Playfree in emphasising its maintenance
credentials – but these are in the minority.
Coverage of ethical issues is insufficiently focused. While there is a paragraph on LTT, the discussion
is limited. Likewise with the Eversley fee, the candidate does not question its source or spell out the
risks for Playfree.
The section on Tyron’s specifications is good, enabling the candidate to obtain marks across the key.
He/she appropriately highlights Playfree’s ethos, compares the warranties offered by Playfree and
Eversley and reflects on the logistical aspects by assessing whether the project would be achievable
by the deadline, given Playfree’s seasonality and other factors. A calculation of the time that the work
might take in view of the project size would have enhanced it further.
The answer to this requirement ends strongly, with conclusions that bring together the key numbers
and findings, followed by a good set of commercial recommendations. The conclusions are, however,
long; valuable minutes could have been saved here to allow more time to be spent on Requirement 3.
Evaluation of proposal from KCC [Requirement 3]
Requirement 3 was the weakest section of this script. Appendix 3 is very brief, coalescing the two
parts of the database revenue calculation with no indication of the period(s) to which it relates and
omitting any figures for the advisory work. There is also no profit margin figure. In general, the
appendix as presented would be of little assistance to any potential reader.
As for Requirement 2, the appendix is followed by a discussion of the wider context. Again, this
includes an irrelevant reference to the cash balance – a project of this nature would need only a
minimal upfront investment. Evaluation of the financial output is thin, largely a function of the length
and quality of the appendix. There is no benchmarking of the proposed fees against existing work.
The following sections, addressing strategic and operational issues, identify some of the key issues
involved in undertaking this new type of work. The candidate has made appropriate links back to
Playfree’s strategic plans (Exhibit 10). Notable too are the paragraphs dealing with logistical features
such as the tight deadline, past problems with freelancers and the scale of the task. Some of the
comments on strategy are confused, eg, in relation to the adult gym equipment (all that Playfree has
to do is count and record it!)
The candidate has identified a number of the ethical issues – for example, access to competitor
information – but only in respect of the toxic paint has he/she evaluated them to the necessary
depth. By omitting the advisory fees from his/her calculation, the candidate has deprived
himself/herself of any of the related marks under ‘ethics’ and indeed in the rest of the key.
The section ends with a good set of conclusions and recommendations. The conclusions include the
relevant figures and other critical items from the preceding narrative, ending with the advice that
Playfree should proceed with the work. Recommendations highlight the main operational issues to
be addressed, eg, “discuss resourcing with staff and create an operational plan” and “negotiate … for a
later start”, displaying a sound commercial awareness.
Overall, the candidate could have earned higher grades for Requirement 3 by spending more time at
the outset on the calculation. This would have ensured that the advisory fees were included. In
omitting these, and then not made reference to them anywhere else in the answer, the candidate
has overlooked an important part of the KCC proposal.

Illustrative script 2 July 2019


Lines 52 -180 not used

Lines 39 – 184 not used


ADVANCED LEVEL EXAMINATION
(4 HOURS)
CASE STUDY
1. Please read the instructions on this page carefully before you begin your exam. If you
have any questions, raise your hand and speak with the invigilator before you begin.
2. Please alert the invigilator immediately if you encounter any issues during the delivery
of the exam. The invigilator cannot advise you on how to use the software. If you
believe that your performance has been affected by any issues which occurred, you
must request and complete a candidate incident report form at the end of the exam; this
form must be submitted as part of any subsequent special consideration application.
3. Click on the Start Exam button to begin the exam. The exam timer will begin to count
down. A warning is given five minutes before the exam ends. When the exam timer
reaches zero, the exam will end. To end the exam early, press the Finish button.
4. You may use a pen and paper for draft workings. Any information you write on paper
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5. The examiner will take account of the way in which answers are structured. Respond
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Your answers will be presented to the examiner exactly as they appear on screen.
ICAEW/CS/N19
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ICAEW/CS/N19
November 2019 Case Study: Doughby Limited
List of exhibits
1 About you (Viv Mores), your employer (Pine Andrews) and your client (Doughby Limited)
2 Bread and related products
3 Doughby: History and development
4 Doughby: Financial and operating history
5 Doughby: Management accounts for the three years ended 30 September 2018
6 Doughby: Review of the management accounts for the year ended 30 September 2018
7 Doughby: Bread Varieties (BV)
8 Doughby: Morning Goods (MG)
9 Doughby: Artisan and Specials (A&S)
10 Doughby: Customers
11 Doughby: Suppliers
12 Doughby: Strategic plan
13 Doughby: Competitors and marketing
15 Email dated 6 November 2019 from Sundari Rai to you: Doughby draft management
accounts and business developments
16 Doughby: Draft management accounts for the year ended 30 September 2019
17 Note from Freida Delores: Additional information relating to the management

accounts; inventory issue and bank meeting
18a Email dated 5 November 2019 from Meryem Kaya to Sundari Rai: Proposal from Jiffa
to switch to own-labelling Jiffa MG products
19a Email dated 5 November 2019 from Fiorella Bianchi to Sundari Rai: Proposal from a
new customer, Sans-En (S-E), to supply it with a range of A&S gluten-free products
Doughby Limited: Case Study requirement
You are Viv Mores, a final-year trainee ICAEW Chartered Accountant working in the business
advisory unit of Pine Andrews, a firm of ICAEW Chartered Accountants with offices
throughout the UK. One of your clients is Doughby Limited, a large baking company. You
report to a partner, Sundari Rai.
Requirement
You are required to prepare a draft report for the Doughby board, as set out in the email dated
6 November 2019 from Sundari Rai to you (Exhibit 15). Your report should comprise the

Marks allocation

 Assimilating and using information 22.5%
 Structuring problems and solutions 22.5%
 Applying judgement 22.5%
 Drawing conclusions and making recommendations 15.0%
 Demonstrating integrative and multidisciplinary skills 17.5%
under each of the four elements of your report. Accordingly, not demonstrating your judgement
or failing to include appropriate conclusions and/or recommendations in each element of your
report will affect your chances of success.
BLANK PAGE
EXHIBIT 15
EMAIL
From: Sundari Rai
To: Viv Mores
Subject: Doughby draft management accounts and business developments
We have just received the latest draft management accounts from Doughby. We need to
review these and to address two business developments. I am attaching the following:
 Doughby’s draft management accounts for the year ended 30 September 2019 (Exhibit 16)
 A note from Freida Delores: Additional information relating to the management accounts;
and request for advice concerning an inventory issue (Exhibit 17)
 An email from Meryem Kaya to Sundari Rai concerning a proposal from Jiffa to buy MG
products from Doughby, using Jiffa’s own label (Exhibit 18a), together with related
media coverage (Exhibit 18b)
 An email from Fiorella Bianchi to Sundari Rai setting out a proposal from a new
customer, Sans-En (S-E), to supply it with A&S products (Exhibit 19a), together with
related media coverage (Exhibit 19b).
Please draft for my review a report addressed to the Doughby board. The report should
1. A review of Doughby’s management accounts for the year ended 30 September 2019 in
Your review should be based on the management accounts as set out in Exhibit 16. It
should cover revenue and gross profit for each of the three main business streams and the
overall business; total cost of sales and total operating profit. In your review you should refer
to the additional information in Exhibit 17. You should also respond to the request for
advice on the inventory issue and bank meeting (Exhibit 17).
2. An evaluation of the new own-label proposal under the terms detailed by Jiffa, as set out
in Exhibit 18a.
Using the information in Exhibit 18a and Exhibit 18b, you should calculate the revenue,
cost of sales and gross profit of the proposal, for both the MG stream and Doughby
overall. You should also calculate and evaluate the impact of losing the entire Jiffa
contract on the revenue and gross profit of both the MG stream and Doughby overall.
You must assess the adequacy of the assumptions and advise on the commercial,
operational, ethical and business trust issues that Doughby should evaluate when
deciding whether to accept this proposal. You must advise Doughby, with reasons, on
how to proceed in its trade with Jiffa.
3. An evaluation of the proposal from Sans-En (S-E), a chain of gluten-free food retailers
and outlets, for Doughby to manufacture and supply S-E with A&S gluten-free baked
products (Exhibit 19a).
You should evaluate, with relevant calculations, the financial, operational and strategic
issues relating to this proposal. You should highlight in your evaluation any potential
ethical and business trust issues for Doughby, including those that may arise from
Exhibit 19b. You must calculate and justify a price for the proposed contract.
BLANK PAGE
EXHIBIT 16
Doughby: Draft management accounts for the year ended 30 September 2019
Statement of profit or loss for year ended 30 September 2019
Note £000
Revenue 1 100,497
Gross profit 22,401
Overheads 3 (21,898)
Finance costs (473)
Taxation (6)
Profit for the year 24
Statement of financial position at 30 September 2019
Note £000
Non-current assets
Property, plant and equipment 4 11,085
11,085
Current assets
Inventories 1,603
16,829
Total assets 27,914
6% bank loan 5,000
5,000
Current liabilities
Bank overdraft 982
Total current liabilities 10,945
Statement of cash flows for year ended 30 September 2019
£000
Adjustments for:
Depreciation and loss on disposals 2,353
Finance costs 473
2,856
Change in trade and other receivables (1,197)
Taxation paid (81)
Finance costs (473)
Net cash from operating activities 1,350
Purchase of PPE (1,451)
Proceeds from disposal of PPE 55
Net cash used in investing activities (1,396)
Net cash from financing activities -

Cash and cash equivalents at end of year (982)
Notes to the draft management accounts
Note 1 Revenue (all UK) 2019

£000
Bread Varieties (BV) 50,675
Morning Goods (MG) 19,404
Artisan & Specials (A&S) 30,418
100,497
Note 2 Cost of sales 2019

£000
Ingredients 53,378
Labour 10,045
Production 14,673
78,096
Note 3 Overheads 2019

£000
Administration and marketing 9,875
Transport and distribution 12,023
21,898
Note 4 Property, plant and equipment (PPE)
Land & IT and

Buildings Equipment Vehicles Total
Cost £000 £000 £000 £000
1 October 2018 3,717 15,103 8,748 27,568
Additions - 836 615 1,451
Disposals - (412) (319) (731)
30 September 2019 3,717 15,527 9,044 28,288
Depreciation
1 October 2018 1,297 8,929 5,300 15,526
On disposals - (364) (283) (647)
30 September 2019 1,395 9,968 5,840 17,203
Carrying amount
30 September 2019 2,322 5,559 3,204 11,085
Note 5 Trade and other receivables 2019

£000
Other receivables 2,121
15,226
Note 6 Trade and other payables 2019

£000
Other payables 897
9,963
BLANK PAGE
EXHIBIT 17
Note from Freida Delores, 5 November 2019
Additional information relating to the management accounts
In relation to the year-end review, please note the following issues, which are reflected in the
draft management accounts:
 Costs of ingredients were affected by the dry summer, from July to September 2018.
 For the first 6 months of the year, until 31 March 2019, ingredient costs were 10% higher
on average than the average for the full year to 30 September 2018 (2018).
 For the second 6 months, from 1 April to 30 September 2019, ingredient costs fell back to
the average for 2018.
 As a result, the average ingredient cost increase has been 5% for the year to 30
September 2019.
 For brown bread and all A&S products, we passed on these ingredient cost increases to
customers by raising our prices. The increases meant that prices for these items were on
average 5% higher than the corresponding 2018 prices.
 Both brown bread and A&S products also recorded volume increases. We achieved the
increase in A&S products by increasing our customer base. Total gross profit on A&S
products was £9,774k.
 For white bread, prices were held at 2018 levels. Total revenue from white bread was
£17,002k.
 For MG products, we reduced our prices in comparison with 2018, and achieved the same
volume of sales as in 2018. We also maintained the same customer base as in 2018. Total
MG gross profit was £343k.
 All Doughby overheads have remained tightly controlled during the year.
Inventory issue and bank meeting
Owing to an IT error in September 2019 (a failure to update cost prices), the value of a portion
of raw materials inventory at 30 September 2019 may have been overstated by £30k.
We have just become aware of this issue, and we are checking it as it would have an impact
on the draft management accounts – it has not as yet been the subject of any adjustment.
Request for advice
Later this month we are due to meet our bank’s business client manager, Graham Blakely, to
discuss the 30 September 2019 draft management accounts, and we should prepare for that
meeting. Fortunately, we know him very well: he has become a close friend of Andy Marks.
Please determine the potential impact of this inventory issue on the following in the draft
management accounts:
 The statement of profit or loss

 The statement of financial position
 The statement of cash flows
 The bank overdraft
What effect might this inventory issue have on our ability to comply with the bank’s terms and
covenants, and how should we address this issue at our meeting with Graham Blakely?
EXHIBIT 18a
EMAIL
From: Meryem Kaya

To: Sundari Rai
Subject: Proposal from Jiffa to switch to own-labelling Jiffa MG products
Jiffa has raised the issue of the prices that it pays for its MG purchases from Doughby. It is
proposing to change the contract for purchasing MG products from Doughby to become Jiffa
own-label products, at a lower price, with effect from 1 January 2020.
Doughby must evaluate this proposal, for a 12-month period, identifying its effect on the MG
stream and Doughby overall.
As a comparison, Doughby must also calculate and assess the impact of the possibility of
losing the entire Jiffa contract, again with its effect on the MG stream and Doughby overall.
The following figures relate to the year to 30 September 2019:
Average MG
customer Jiffa
£000 £000
MG revenue 396 5,032
MG cost of sales
Ingredients 272 3,473
Labour 33 521
Production 84 872
389 4,866
Assumptions
The following assumptions concerning this proposal are based on Doughby’s initial
discussions with Jiffa:
1. For the first 12 months, the price that Jiffa would pay for own-label products would be 5%
lower than it currently pays for the same volume of MG products.
2. Doughby’s ingredient costs would remain the same as in the year ended 30 September
2019 (2019).
3. The cost of labour would remain the same as in 2019.
4. There would be a specific 2% increase in production costs for labelling and packaging
Jiffa own-label products.
5. Jiffa own-label products would still require delivery and other relevant shared services
and costs of MG products, which would remain the same.
The following assumptions have been made by Doughby and may apply if the proposal is not
accepted:
 By not proceeding with the own-label production proposal for Jiffa, Doughby could lose the
entire Jiffa contract.
 If the Jiffa contract ends, Doughby could save 100% of related ingredient costs; 90% of
related labour costs; and 70% of related production costs.
 Doughby would not save any overheads.
 The impact of the publicity may cause other customers to change production requirements
(or supplier).
EXHIBIT 18b
Financial News October 2019
Jiffa is casting a creative eye over its costs
Following the retirement of its long-standing CEO, Fred Powers, and the appointment of its
new CEO, Ms Gloria Swift, in December 2018, Jiffa has been reassessing its market position
and strategic direction. In June 2019, it purchased the failing business operation of Pronto
Cafés with its 25 outlets located in the centre and northern district of Birmingham.
At the time of the Pronto Cafés purchase, Ms Swift stated that this acquisition helped to
complete the coverage that Jiffa was seeking in the Birmingham region. It was noted at the
time that there were some geographically overlapping business operations, and that this may
lead to rationalisation in the coming trading year.
However, Jiffa has wasted no time in making changes and announced the closure of five of
these outlets from September 2019, which it described as unprofitable. This has led to much
public criticism from employees and the customers of the five outlets that the businesses were
being assessed too harshly and decisions were being made too abruptly.
Ms Swift’s response has been to state that all organisations need to be aware of the costs of
running each operation set against revenue earned. Jiffa is engaging in a thorough review of
all its costs and is actively negotiating with all suppliers of goods and services. It will be putting
pressure on all of them in order to obtain reductions of 10-20% in supplier prices to Jiffa over
the next two years.
EXHIBIT 19a
EMAIL
From: Fiorella Bianchi

To: Sundari Rai
Subject: Proposal from a new customer, Sans-En (S-E), to supply it with a range of A&S
gluten-free products
We have been having discussions with Sans-En (S-E), a company which operates a chain of
gluten-free food retail outlets and related take-out food businesses. As of now, S-E requires
a new supplier of A&S gluten-free breads and baked products for its operations. It has a
number of operational and financial issues:
1. The products will have to be produced according to gluten-free standards.

2. Doughby’s baking staff will have to be fully familiar with, and be able to create, the full
range of products required by S-E.
3. S-E requires additional labelling for these products to be included in the production
process – with a clear reference to their healthiness.
4. Initially S-E proposes to use Doughby for 11 of its food outlets. Currently these provide
25% of S-E’s revenue. If successful, S-E will consider using Doughby to supply all other
outlets after the first year of operating this proposal.
Doughby has provided the following responses to these S-E issues:
 Doughby can create a separate sealed mixing and baking section in the A&S factory with
the appropriate machinery and IT controls so that gluten-free standards are met. The cost
of this is included in the financial summary below.
 Doughby managers and main bakers believe that they can become fully familiar with the
required S-E gluten-free products and the manufacturing process.
 Doughby can recruit and pay appropriate additional staff as necessary to meet any
increased workforce needs.
 The ingredients required are available from various suppliers and should meet the
appropriate standards for S-E.
 The 11 outlets are located within 20 kilometres of Doughby’s site. The other S-E outlets
are between 30 and 60 kilometres from Doughby’s site.
All additional estimated costs are with reference to the financial summary below.
Financial summary
The A&S product information below is for the year ended 30 September 2019. It
relates to the weekly activity of a typical customer for A&S products:
Average
weekly
2019
£
Revenue 2,303
Cost of sales
Ingredients 996
Labour 329
Production 238
1,563
The following information relates to the new S-E proposal:
1. The 11 S-E outlets are all of equal size. They will each require the same quantity of A&S
products as the average 2019 customer for A&S items (above).
2. The different gluten-free ingredients required will make ingredient costs for this contract
30% higher than average ingredient costs.
3. The need for increased training and supervision of this production process will increase
Doughby’s weekly labour costs for the S-E contract by 20%.
4. Because of the need for extra cleaning of equipment and the isolation of the production
process to avoid any cross-contamination, Doughby’s weekly production costs for the S-E
contract will increase by 35%.
The Doughby board has discussed this S-E proposal and knows that it will have to negotiate
on the prices with S-E. A range of possibilities on pricing has been considered: from pricing
that would result in weekly revenue 15% lower than Doughby’s A&S average, in order to win
the contract; through to pricing that would result in weekly revenue 15% higher than
Doughby’s A&S average, because of the various increases in the components of cost of
sales. It would also be important to know the breakeven weekly revenue in any negotiation.
BLANK PAGE
EXHIBIT 19b
Birmingham Daily News October 2019
Sans-En – changing the image of the specialist dietary supplier
Sans-En (S-E) has been one of the success stories among the growing number of outlets
for consumers who are allergic to certain food products. Within the leafy suburbs and trendy
districts of Birmingham, S-E outlets are a well-established and respected chain of retail
operations and cafés – with both eat-in and take-out options. Modelled on similar operations
which exist in various cultural capitals around the world, these outlets are popular with
young adults: parents; professional and craft workers; and students who require specialist
dietary food and an informal meeting place with a good atmosphere.
Bright jazzy surroundings contrast with the often dowdy and somewhat dull appearance of
other such outlets. Walls are covered in arty posters and slogans providing product facts
and advertising the products on sale. Well-informed staff explain the product range, offer
samples and promote new products. The prices of these products are not cheap, but they
are not overly expensive.
In the three years since it started in 2016, S-E has established a reputation for good-quality
specialist dietary products and has grown from a single outlet to 33 outlets today. Its
consumers are both those seeking appropriate dietary products and those in search of a
healthy range of products. This company is leading the way in creating the right environment
for these consumers. If its rate of expansion continues, it will soon be rivalling many well-
known coffee shop chains, with S-E outlets on almost every street corner in Birmingham and
its neighbouring towns.
Chai Te, its young creator and current CEO, stated in a recent interview that the biggest
concerns for an organisation such as S-E are “appropriate bank support; good premises in
thriving locations; enthusiastic staff; and top-quality products”. From the obvious evidence of
its success, S-E has the appropriate premises, staff and products – and, one assumes, given
the rate of S-E’s expansion, bank support must also be there.
Contents
Page
Introduction 2
Information provided in the Case Study Exam (CSE) 9
Exam requirements 9
Analysis of Case Study Exam information 10
Requirement 1: Review of Doughby’s financial performance 14
Requirement 2: Evaluation of proposal from Jiffa 15
Requirement 3: Evaluation of proposal from Sans-En (S-E) 15
Part 4: Appendices
Appendix 1: Financial statement analysis: Doughby’s financial performance 17
Appendix 2: Financial data analysis: Jiffa own-label calculation 19
Appendix 3: Commercial data analysis: Calculation of revenue and costs for Sans-En proposal 20
Part 5: Marking key
© ICAEW 2019 Page 1 of 20

Introduction
This report covers the November 2019 Case Study (CS) exam. It is issued in conjunction with two illustrative
scripts and related Examiners’ commentaries. The first script was within the top 10% of all assessed scripts; the
Attached to this report are three appendices giving examples of the sort of financial analysis that candidates
did or might have done. The two illustrative scripts offer further insights into this area.
candidates demonstrated their higher skills using the four hours effectively to produce analytical, balanced and
relevant scripts that answered each element of the requirements. Their reports contained high-quality financial
analysis and commentary, together with good judgement, commercial recommendations and appropriate
executive summaries. Candidates demonstrated good business awareness and appropriate professional
skills. They had prepared well, making the necessary effort to assimilate and understand the Advance
Information for themselves and had developed their exam technique so as to maximise the use of CBE.
The case relates to Doughby Limited, an established baking company based on the outskirts of Birmingham in
the UK. It manufactures bread and related products in its three factories located on the same site. Each factory
produces different products: Bread Varieties (BV); Morning Goods (MG) and Artisan and Specials (A&S). The
candidate is in the role of Viv Mores, a final-year trainee ICAEW Chartered Accountant working in the business
advisory unit of Pine Andrews (PA), a firm with offices throughout the UK, reporting to the partner, Sundari Rai.
1. An analysis of Doughby’s management accounts for the year ended 30 September 2019 by
comparison with 2018 which should cover revenue and gross profit for each of the three main business
streams and the overall business; total cost of sales; and total operating profit. There was also a
request for advice on an inventory issue and bank meeting.
2. An evaluation of the proposal from Jiffa to supply it with own-label MG products. Candidates had to
calculate the revenue, cost of sales and gross profit of the proposal, for both the MG stream and
Doughby overall. They also had to evaluate the impact of the possible loss of the entire Jiffa contract
on the revenue and gross profit of both the MG stream and Doughby overall. Candidates had to assess
the adequacy of assumptions, discuss any ethical and business trust issues and how to proceed in
trading with Jiffa.
3. An evaluation with relevant calculations of the financial, operational and strategic issues relating to the
proposal from a new customer, Sans-En (S-E), to make and supply it with gluten-free products.
Candidates had to calculate and justify a price for the proposed contract given a set of criteria. They also
had to highlight in the evaluation any potential ethical and business trust issues for Doughby.
Reasons for failure were familiar. Inevitably the quality of these answers, in terms of coverage and depth, was
weak across the whole report. These candidates tended to refer less to factors in the AI – which may indicate a
lack of thorough preparation, or an inability to relate the new exam information back to the initial scenario. It was
particularly apparent in relation to factors which were not easily anticipated, or which arose “in situ” as well as any
less obvious business trust and ethical issues.
These scripts tend to be unbalanced within each requirement with the Assimilating and Using Information (A&UI)
and Structuring Problems and Solutions (SP&S) sections being stronger than the Applying Judgement (AJ) and
Conclusions and Recommendations (C&R) sections. This was similar to previous CS exams.
There was, as always, evidence of poor time planning towards the lower end of the cohort. Candidates doing too
much work on Requirement 1 (for example, by analysing cost of sales in detail when they were not asked to)
inevitably took the time which they should have spent on other sections. As a result, later requirements were either
more rushed or incomplete. As is mentioned in the ICAEW Learning Materials, candidates would have benefited
from better planning at the outset and adhering to a strict time limit on each section of this exam.

Assimilating and Using Information (A&UI): A&UI was a strong skill on this exam, reflecting the use of well-
prepared and well-presented appendices in all three requirements. Most candidates achieved passing grades
for their numerical work. The main weakness was in not presenting a clear MG and Jiffa financial context for
Requirement 2. In both Requirement 1 and 2, candidates demonstrated the ability to articulate the business
issues and wider context but found this more difficult in Requirement 3 with weaker candidates failing to bring
in fundamental facts from the AI.
Structuring Problems and Solutions (SP&S): As always, this is a fundamental skill which is crucial to overall
success. Most candidates demonstrated strong analytical skills in their number-work and related analysis for all
three SP&S boxes (including the inventory issue) in Requirement 1. At Requirement 2, candidates had difficulty
with the calculations for Box 1 (losing Jiffa) and few candidates scored a passing grade for box 3 (ethical /
business trust issues). In Requirement 3, candidates did well on Box 1 (financial calculations) but there were
problems with Box 2 (operational and strategic issues) and difficulties in passing Box 3 (ethics and business
trust), where candidates did not look critically enough at labelling issues, analysing S-E or regulatory issues.
Applying Judgement (AJ): AJ was very patchy in the three requirements. At Requirement 1, candidates did very
well in Box 1 (evaluation of revenue). They were weak in Box 2 (evaluation of COS, GP, OP) and also in Box 3
(evaluation of inventory issues). In Requirement 2, candidates did well at box 2 (evaluation of assumptions) but
were weaker at Box 1 (evaluation of commercial issues). The results for Box 3 (ethics and business trust) were
extremely disappointing. In Requirement 3, Box 1 (evaluates overall financial impact) was weak. However, both
Box 2 (operational / strategic evaluation) and Box 3 (ethics and business trust) were well answered.
Conclusions and Recommendations (C&R): There were different performances in the three requirements. In
Requirement 1, the Conclusions box was very good, but it was followed by weak results in Recommendations –
which were often uncommercial. There was an almost identical position in Requirement 2 – except that
Recommendations were worse. However, in Requirement 3, unusually, there was an equally adequate
performance in both Conclusions and Recommendations with candidates following through logically on their
clear understanding of this topic.
Requirement 1 was the review of Doughby’s 2019 results against 2018, with a subsequent inventory reduction
issue (which affected the bank covenant) to evaluate. The comparative analytical appendix was very well done
with sufficient detail. Candidates then had to integrate the financial and non-financial data at Exhibit 17 with that
analysis to provide a clear report on Doughby’s performance for its three business streams. Strong candidates did
well throughout; weaker candidates struggled more with that integration. On the inventory reduction issue, weaker
candidates failed to identify the critical fact that Doughby was in difficulty, regardless of the bank covenant issue.
Requirement 2 produced marginally lower results at this session. The reason for this might have been the nature
of the overall MG issue (in decline) and that context, which was not always fully grasped. MG was fast becoming
a failing business stream. Doughby already had a problem to solve before Jiffa added to its MG woes. Jiffa’s
proposal simply forces Doughby to face the predictable problem concerning the overall MG stream – candidates
had to deal with that. The ethical and business trust element of this section of the report was also somewhat
weak. Jiffa’s changing demands towards Doughby – essentially a demand for increased service at a reduced
price – is an aggressive trading policy. It had to be identified as such along with other evidence to support it.
Requirement 3 was adequately answered. Almost all candidates produced an appropriate relevant appendix as
required. Candidates had to do only one calculation for the three costs shown and, using the same adjusted cost
information, they could determine the gross profit on each pricing possibility as a starting point for negotiation.
Operational and strategic issues centred around the size of the new proposal and its potential for growth, as well
as the need for a new separate operation for the gluten-free products. Logistics and IT issues were also factors.
Coverage of the ethical and business trust issues at Requirement 3 was adequate, with large numbers picking up
passing grades under this heading. This requirement was well attempted by candidates.
In summary, the Doughby case dealt with an industry and its products that were understandable by
candidates and with an appropriate level of numerical analysis. Tutors noted that “overall, the content of the
exam requirements was clear and not unexpected. There was detailed guidance to candidates on how to structure their
answers to all three requirements. Those that had prepared well, and made use of all the information provided in the
Exam Exhibits in their discussions, should have found this Case Study well within their capabilities”. The Examiners
agree with that assessment.

The case relates to Doughby Limited, an established baking company based on the outskirts of Birmingham in
the UK. It manufactures bread and related products in its three factories located on the same site. Each factory
produces different products: Bread Varieties (BV); Morning Goods (MG); and Artisan and Specials (A&S). BV
sales, which comprise brown and white bread, are the most important in terms of revenue – providing more than
50% of Doughby’s total revenue. MG is an important but declining product whereas A&S is a growing business
stream.
Revenue for the year ended 30 September 2018 was £94.7 million (up 9.3% on 2017), generating gross profit
and operating profit of £22.2 million and £0.3 million respectively.
The candidate is in the role of Viv Mores, a final-year trainee ICAEW Chartered Accountant working in the
business advisory unit of Pine Andrews (PA), a firm with offices across of the UK, and reporting to Sundari Rai, a
partner in the firm.
Four weeks prior to the examination, candidates were provided with a package of information, containing a series
of exhibits relating to Doughby and the industry, comprising:
1 About you (Viv Mores), your employer (Pine Andrews) and your client (Doughby Limited)
2 Bread and related products
3 Doughby: History and development
4 Doughby: Financial and operating history
5 Doughby: Management accounts for the three years ended 30 September 2018
6 Doughby: Review of the management accounts for the year ended 30 September 2018
7 Doughby: Bread Varieties (BV)
8 Doughby: Morning Goods (MG)
9 Doughby: Artisan and Specials (A&S)
10 Doughby: Customers
11 Doughby: Suppliers
12 Doughby: Strategic plan
13 Doughby: Competitors and marketing

By carefully studying and analysing the AI, candidates should have formed a detailed picture of Doughby, its
products and the industry, using facts and figures from across the material. Candidates should be fully familiar
with the main contents of the AI so that they can easily locate key topics in the exam hall. Key points are
summarised below. (Additional examiner commentary is given in this font.)
Exhibit 1 sets the context and summarises Viv’s (the candidate’s) work, with emphasis on the use of financial
analysis to identify key issues and in decision making.
Exhibit 2 provides a brief history of bread making and its current commercial production in the UK. It also provides
information on the UK bread market in terms of size (£3 billion annually), its diversification and some of its current
developments – which are reflected in Doughby’s business streams and operations.
Exhibit 3 details Doughby’s history and development. It has its origins in a bakery created in 1904 and “its
success is the result of the continuing manufacture of good-quality bread and related products … with an
environmentally friendly ethos”. Its ingredients are sourced locally, and its customers are based in the region. It
manufactures and delivers bread every day of the week.
Exhibit 4, prepared by Freida Delores (FD), describes Doughby’s financial and operating history up to September
2017. It provides a general review of Doughby’s previous financial history and highlights points that cannot easily
be discerned from the management accounts which follow. The general review includes details such as that in the
four years to 30 September 2015 there was an increase in demand for A&S products. There was also a decline in
white bread sales, offset by an increase in brown bread sales. These trends have continued. In the year to 30
September 2016 (2016), BV sales increased overall to £42.6 million – with brown bread revenue increasing by
13.9% against a decline in white bread revenue of 1.7%. Similarly, in the year to 30 September 2017 (2017),
brown bread revenue increased by 8.3% against a decline in white bread revenue of 3.4%. MG revenue declined
marginally in £23.2 million (2015) to £23.0 million (2016) to £21.5 million (2017). The declines in revenue from

white bread and MG reflect a national decline in both these products. The increase in A&S revenue has been
sustained: up from £15.8 million (2015) to £18.7 million (2016) to £21.3 million (2017). Doughby’s revenue and
ingredient cost of sales are heavily affected by prices of wheat and other harvested products. A drop in the cost of
wheat because of a good harvest leads to a decrease in revenue as customers expect these beneficial price
variations to be passed on to them. This happened after the good harvest in 2017.
The main financial transactions, apart from trading, were the repayment of the existing £2 million bank loan on 1
October 2015 and the creation of a new £5 million bank loan on the same day together with a new, lower,
overdraft limit of £1.5 million. These new financing arrangements are subject to four covenants:
1. Operating profit to remain above £500k each year

2. Debt/equity ratio (bank loan plus overdraft, divided by total shareholders’ equity) not to exceed 50%
3. Working capital (defined as current assets minus current liabilities) to remain positive
4. The company to provide a rolling quarterly cash flow forecast to the bank for its review
The first three covenants are calculated and measured by reference to the annual management accounts.
(It should be clear that these covenants must be understood, and test-calculated by candidates ahead of the exam)
Exhibit 5 presents five pages of Doughby’s management accounts and notes for the year to September 2018
together with comparatives for 2016 and 2017, containing the following key information:
 Doughby achieved growth in revenue of £2,333k (2.8%) from 2016 (£84,342k) to 2017 (£86,675k)
impacted by the good wheat harvest which forced sales prices down in that period; but there was stronger
growth of £8,038k (9.3%) from 2017 to 2018 (£94,713k) as a result of increases in ingredient prices, which
were passed on. (Further analysis of revenue may be available through the notes below and subsequent exhibits.)
 Absolute gross profit improved in 2017 by £544k to £20,568k and in 2018 by £1,607k to £22,175k. (Given
the increase in sales, these increases in GP would appear to be acceptable.)
 Gross profit % has remained almost the same for the three years, ranging from 23.7% (2016) and again
23.7% (2017), down marginally to 23.4% (2018). (This marginal change, during a period of fluctuating
ingredient costs, indicates tight cost control and good negotiating skill with customers by Doughby management.)
 There are small percentage changes in total overheads as a percentage of revenue: 22.8% (2016); 22.7%
(2017); 22.5% (2018) – whilst the absolute figure for overheads is increasing these total costs are moving
in line with revenue and at this time there appears to be no cause for concern. (The issue is that overheads
are a significant size in percentage terms against revenue and they have a major impact on operating profit – which is
one of the covenant criteria – and must be carefully controlled.)
 Operating profit improved marginally in absolute terms from £766k (2016) to £849k (2017) but has
declined marginally to £832k (2018). Operating profit in percentage terms (against revenue) remains low
at only 0.91% in 2016, 0.98% in 2017 and down to 0.88% in 2018. (These levels of OP are low and Doughby
must be aware that any changes in GP% will have a significant impact on OP and OP%.)
 Finance costs have increased marginally over the three years. In absolute terms, they are £384k (2016);
£397k (2017); and £408k (2018). (In each year there is interest cover of approximately 2 x against OP which
appears to be adequate. Although this is not one of the bank covenants it should be monitored by Doughby.)
 Profit before tax (PBT) increased from £382k (2016) to £452k (2017) but declined to £424k (2018). This
small decline reflects the fact that PBT (and PBT%) is impacted heavily by all changes in costs. (Doughby
appears to be a high-volume, low-profit business – relying on volumes to achieve its profits. It could be susceptible
to cost increases which cannot be passed on.)
 The statement of financial position (SOFP) indicates that there is a steady net decline in the investment in
PPE. Given that this is a function of additional investment minus disposals together with the impact of the
annual depreciation charge, it requires further analysis. (An analysis of the relevant note 4 (below) reveals
more.)
 In 2016 year-end inventory was £1,128k against an ingredient cost of £41,448k, which is less than 3%. In
the year 2017, it was 3.1% and a similar figure in 2018, indicating very good control over inventory in this
baking business. (This indicates that Doughby has excellent control of purchasing, inventory levels and related
cash flow in line with activity.)
 Using the figures in the SOFP, 2016 trade and other receivables were 12.7% of revenue. This figure is
13.9% in 2017 and 14.8% at 30 September 2018. (This slackening of the percentage over the three years has a
detrimental impact on Doughby’s cash flow and overdraft and may indicate weaker controls by Doughby, which is a
concern.)

 The level of trade and other payables is increasing steadily in absolute terms from £9,041k in 2016 to
£9,482k in 2017, to £9,667k in 2018. (These are relatively small increases which seem in line with Dougby
business activity. These increases indicate that Doughby is paying its creditors promptly. This is important for
corporate credibility and good corporate ethos – see further analysis below.)
 The statement of cash flows (SCF) – reconciling to the bank overdraft – indicates that the levels of cash
generated from operations is significant, but it is being reduced by the impact of changes in the
components of working capital. This means that control of each element of working capital (particularly
trade receivables) is crucial (see comment above). The net investment in PPE in 2016 of £3,228k is
mostly financed by the net long-term financing from the new bank loan (£5,000k – £2,000k = £3,000k).
Subsequently, the significant PPE expenditure has exceeded the net cash from operating activities in both
2017 (by £165k) and 2018 (by £195k), having a detrimental impact on the bank overdraft, which has
increased from £576k (2016) to £741k (2017) and to £936k (2018). (As always, the SCF tells a very important
story and requires detailed reading and understanding. It is worth noting that Doughby has not taken out any further
long-term loan to match its PPE investment – as a result, that investment has drained working capital and is causing
Doughby’s overdraft to increase. The SCF should be reviewed again after the information on the notes to the
accounts has been assimilated, together with other exhibits later in the case, to ensure full comprehension.)
 From the Notes to the accounts, the following additional information can be seen:
o Revenue: this provides information on the three main product lines (or business streams). BV has
increased from £42,572k (2016) to £43,887k (2017) to £48,013k (2018). In terms of mix, BV as a
proportion of total revenue has remained at approximately the same level throughout (just over
50%). MG has decreased from £23,036k (2016) to £21,513k (2017) to £20,337k (2018). Similarly,
in terms of mix, MG as a proportion of total revenue has declined from 27.3% (2016) to 24.8%
(2017) to 21.5% (2018). A&S has increased from £18,734k (2016) to £21,275k (2017) to £26,363k
(2018). A&S as a proportion of total revenue has increased from 22.2% (2016) to 24.6% (2017) to
27.8% (2018). (The main facts are that this company has an overall solid BV business stream whilst the
other two streams are rapidly moving in opposite directions. The decline in MG revenue is continuing
despite prices being held down to encourage sales – this is a major concern. The compensating strong
growth in A&S is important for Doughby’s future.)
o Cost of sales (COS): these costs are not split between product lines. Total COS has increased in
absolute terms from £64,318k (2016) to £66,107k (2017) to £72,538k (2018) but has remained
almost static as a percentage of revenue at 76.3% (2016), 76.3% (2017) and 76.6% (2018), giving
GP margin as 23.7% (2016), 23.7% (2017) and 23.4% (2018). The components of COS have also
remained stable as a proportion of total COS: ingredients 64.4% (2016), 64.8% (2017) and 66.6%
(2018); labour 13.5% (2016), 13.5% (2017) and 13.3% (2018); production 22.0% (2016), 21.7%
(2017) and 20.1% (2018). (The main observation is that COS is clearly very tightly controlled. Doughby
has stated that variations in ingredient costs are the subject of negotiated changes in sales prices of products
(particularly BV) in both directions. Other COS components remain constant with revenue.)
o Overheads: these have increased from £19,258k (2016) to £19,719k (2017) to £21,343k (2018)
but they have remained almost static as a percentage of revenue at 22.8% (2016), 22.8% (2017)
and 22.5% (2018). There are similarly only fractional changes between the two main components
of overheads compared with revenue: administration and marketing (at or just above 10%) and
transport and distribution (around or close to 12.4%). (The consistency in the figures relating to
overheads indicates good control, or effective spending, given that costs such as marketing could be seen as
a factor driving sales, and that transport and distribution are a cost which is a function of sales activity.
Doughby appears to be effectively managed in relation to these costs.)
o PPE: information is provided for all of the three years since the beginning of October 2015, broken
down into the major categories and showing the related depreciation. (This is an important note from
which it is possible, in combination with the SCF information, to determine the continuous high level of
investment in PPE (necessary in this industry) and the profits and losses on disposals of PPE (which are
reasonably small – indicating an accurate, strict, depreciation policy by Doughby). The impact of the PPE
investment on cashflow is discussed above. The funding of PPE investment may need to be reviewed.)
o Trade and other receivables: given the low level of other receivables (below £2m in each year),
the major consideration lies in the analysis of trade receivables. These have changed from
£9,322k (2016) to £10,423k (2017) to £12,117k (2018). As a percentage of revenue these are
11.1% (2016), 12.0% (2017) and 12.8% (2018); in receivable days these convert to 40.3 days
(2016), 43.9 days (2017) and 46.7 days (2018). (This consistent slippage is having a detrimental
impact on Doughby’s overdraft. A review and enforcement of Doughby’s trading policy is essential.)
o Trade and other payables: more than 90% of this figure is trade payables. Given the low level of
other payables, all changes in this category, in absolute terms, and against relevant purchases,
relate to trade payables. These have changed from £8,344k (2016) to £8,694k (2017) to £8,832k
(2018). As a percentage of relevant purchases, they are 10.0% (2016), 10.1% (2017) and 9.4%
(2018); in payable days these convert to 36.4 days (2016), 37.0 days (2017) and 34.3 days
(2018). (This analysis appears to indicate that Doughby pays its trade suppliers more promptly than its
customers pay Doughby – but this could be due to timings of purchases. Given its overdraft, Doughby

should try to match these two positions, which may help to reduce its overdraft. Such a change to payment
policy can be risky and must be handled carefully.)
Exhibit 6: After reading through the preceding management accounts, this exhibit presents a review of the year
ended 30 September 2018 (2018) and provides information to assist with the understanding of the detail of those
accounts. A key fact is that although there was higher overall growth of revenue (9.3%) in 2018, a portion of that
increase may be explained by higher wheat prices because of poor harvests in the summer of 2018. Other
ingredient prices also increased because of shortages. These increases were passed on to customers and
operational adjustments were made to overcome a problem of shortened shelf-life caused by a carbon dioxide
shortage. Nevertheless, Doughby increased its volume of BV sales (whilst white bread revenue declined) and
added new customers in its A&S product range. The decline in MG product revenue continued despite a change
in recipe (reducing sugar) and a clear marketing campaign. Overall Doughby managed to achieve a gross margin
of 23.4% – very similar to the previous two years. Doughby is meeting the terms of its bank covenants and has a
good, close working relationship with the bank’s business client manager, Graham Blakely, Doughby has an
annual meeting (in November) to “go through a detailed review of our management accounts and our strategy and
prospects”. (Some of the issues which have affected the 2018 accounts will have an impact on the 2019 accounts. The
timing, the content and the tone of the meetings with the bank manager would appear to be important. The scenario is set.)
(These three Exhibits (4,5 & 6) are the financial backbone to the Doughby case. They provide the financial scenario, with
explanations and examples of analysis, that all candidates must study and understand. As in any Case Study, all the financial
information should be read and fully analysed by candidates performing their own calculations, ahead of the exam itself,
in order to understand the detailed financial story and current financial position of the business.)
Exhibit 7 focuses on the key features of BV production and sales, split between brown and white bread. From the
figures provided, the decline in white bread revenue of approximately £650k in both 2017 and 2018 has been
more than offset by increases in brown bread revenue of almost £2 million (2017) and £4.8 million in 2018.
Despite these changes in mix, the gross profit margin has hovered around 25% consistently over the three years,
indicating strong control over costs and a good negotiating stance. This is also probably because an important
feature of this business stream is the power of major supermarkets in determining product price and their
awareness of movements in key costs (such as the price of wheat). (Doughby is a business with quality bread
products and strong customer goodwill, managing its bread operations successfully in changing times.)
Exhibit 8 presents information concerning MG operations. MG decreased by £1,523k from £23,036k (2016) to
£21,513k (2017), a decline of 6.6%, and by £1,196k to £20,337k (2018), a further decline of 5.6%. The trend in
these reductions matches a national UK trend. However, importantly the absolute GP being achieved on MG
products has declined from £5,107k (2016) to £3,804k (2017) and then to £1,969k (2018). Similarly, GP margin
has declined drastically from 22.2% (2016) to 17.7% (2017) and 9.7% (2018). (The additional financial information
on MG customers provides a clear picture of the significance of Jiffa, which represents more than 25% of all MG
revenue, with a GP margin of 19.1% compared with an overall average MG margin of 9.7% in 2018). (It is also
important for all candidates to have performed all this analysis themselves to be confident about the current position and to
confirm any of the approximations given in the exhibit.)
Exhibit 9 presents information concerning the A&S business stream. A&S increased by £2,541k from £18,734k
(2016) to £21,275k (2017), an increase of 13.6%, and by £5,088k to £26,363k (2018), a further significant
increase of 23.9%. The trend and substantial size of these increases are probably fundamental to Doughby’s
future success. Importantly, the absolute GP being achieved on A&S products is also significant, increasing from
£4,204k (2016) to £5,531k (2017) and then to £8,047k (2018). Over the same period, GP margin on A&S has
increased from 22.4% (2016) to 26.0% (2017) and 30.5% (2018). The additional information provided on the
weekly average (mean) revenue which Doughby earns from its (approximately) 240 customers in 2018 shows the
wide spread of customers. (This information provides evidence of the success and importance of the A&S business stream
and the broad customer base implies that this business stream is not reliant on any key customers – thereby minimising risk.)
Exhibit 10 is a short summary of Doughby’s customers: supermarkets; large retail outlets; cafés, restaurants
and small retail outlets; as well as catering organisations. (An important feature is the wide range of all customers
which are being supplied. This means that apart from one or two specific instances, Doughby is minimising the risk of
losing a crucial customer – which might prove financially damaging.)
Exhibit 11 is a summary of the range of Doughby’s suppliers, including those supplying flour and other
ingredients as well as the IT supplier and the suppliers of PPE and vehicles. (This summary gives an insight into
the established organisations that supply Doughby and which share similar corporate values in terms of environmental,
social and governance (ESG) principles.)
Exhibit 12 covers Doughby’s strategic review which identifies three obvious key opportunities (expansion of
brown bread revenue, the A&S business stream and other new products). The risks are split into two main

categories: general industry issues and specific Doughby issues. The general industry issues cover the trend
away from purchasing bread, cost of flour and other ingredient volatility, and supply chain problems. The specific
Doughby issues cover the impact of the general issues on Doughby as well as increasing A&S competition and
price-cutting by all competitors. The issue of customer buying power and pressure to reduce selling prices or a
change to own-label goods by large, well-placed customers is identified. Maintaining bank covenant conditions
and strong IT system and controls are also important. The final point considers the issue of brand strength and
the need to maintain Doughby’s high ESG principles. (This list identifies points that may come up in one form or
another in the exam – however (sadly), it does not suggest in which format or how these might occur or have to be tackled.)
Exhibit 13 provides some information concerning Doughby’s competitors and its marketing. The competition
is different for each product line: for BV it is the national bread manufacturers; for MG, apart from specific
products such as crumpets, it is other regional bakers; for A&S, it is the vast number of small artisan bakers.
Doughby believes that it runs an effective marketing campaign across all business streams, emphasising its
use of local ingredients and the acknowledged quality of its various products. (The main summary is that
Doughby is outperforming, or at least matching, its immediate competitors and that its marketing is effective and
delivering the required message.)
Exhibits 14a-e, covers a variety of media articles dealing with topical business issues:
 The shortage of carbon dioxide, which is needed to keep packaged products fresh, and its impact on shelf-
life of products and manufacturing operations
 A compound issue of a dispute between a bakery and a major own-label customer as well as a failure to
fully integrate IT causes a damaging, possibly fatal, financial problem for the bakery
 The issue of gluten-free as a food intolerance issue (or a marketing success) together with details of
definitions of ‘gluten-free’ or ‘very low gluten’ and the importance or consequences of inappropriate labelling
 The problem for a bakery business when a bank calls in its loan
 Allergic reaction to poorly-labelled goods
(These articles offer examples of topical and real issues affecting companies in the baking and food manufacturing industry
and reinforce some of the issues identified elsewhere in the AI.)
Tutors’ comments included:
“The AI provided candidates with the opportunity to develop a comprehensive understanding of the company …. industry
exhibits made it clear that the bread market was changing. Overall, candidates should have been able to become very familiar
with the nature of risks in the industry and avoided a need for any extensive external research.”
“In line with recent examinations, the AI for this sitting made the examination much less predictable than it had been in
previous years. This forced candidates to broaden their preparation (which is not necessarily a bad thing) and increased their
workload for exam preparation.”

Information provided in the Case Study Exam (CSE)
The Exam contained seven new exhibits comprising new information:
15 Email dated 6 November 2019 from Sundari Rai to you: Doughby draft management accounts and
business developments
16 Doughby: Draft management accounts for the year ended 30 September 2019
17 Note from Freida Delores: Additional information relating to the management accounts; inventory issue
and bank meeting
18a Email dated 5 November 2019 from Meryem Kaya to Sundari Rai: Proposal from Jiffa to switch to own-
labelling Jiffa MG products
19a Email dated 5 November 2019 from Fiorella Bianchi to Sundari Rai: Proposal from a new customer,
Sans-En (S-E), to supply it with a range of A&S gluten-free products
Exam requirements
Please draft for my review a report addressed to the Doughby board. The report should comprise the following.
1. A review of Doughby’s management accounts for the year ended 30 September 2019 in comparison with
the year ended 30 September 2018.
Your review should be based on the management accounts as set out in Exhibit 16. It should cover revenue
and gross profit for each of the three main business streams and the overall business; total cost of sales and
total operating profit. In your review you should refer to the additional information in Exhibit 17. You should
also respond to the request for advice on the inventory issue and bank meeting (Exhibit 17).
2. An evaluation of the new own-label proposal under the terms detailed by Jiffa, as set out in Exhibit 18a.
Using the information in Exhibit 18a and Exhibit 18b, you should calculate the revenue, cost of sales
and gross profit of the proposal, for both the MG stream and Doughby overall. You should also calculate
and evaluate the impact of losing the entire Jiffa contract on the revenue and gross profit of both the MG
stream and Doughby overall. You must assess the adequacy of the assumptions and advise on the
commercial, operational, ethical and business trust issues that Doughby should evaluate when deciding
whether to accept this proposal. You must advise Doughby, with reasons, on how to proceed in its trade
with Jiffa.
3. An evaluation of the proposal from Sans-En (S-E), a chain of gluten-free food retailers and outlets, for
Doughby to manufacture and supply S-E with A&S gluten-free baked products (Exhibit 19a).
You should evaluate, with relevant calculations, the financial, operational and strategic issues relating to
this proposal. You should highlight in your evaluation any potential ethical and business trust issues for
Doughby, including those that may arise from Exhibit 19b. You must calculate and justify a price for the
proposed contract.
Solutions (SP&S), Applying Judgement (AJ) and Conclusions & Recommendations (C&R).
They should have spent time studying Exhibit 15 carefully so as to understand the key elements of each
requirement; digest the other new exhibits; and identify the related AI exhibits to integrate into their answers.
For Requirement 1, they should then have begun a more detailed review, enabling them to assess Doughby’s
2019 results in the light of their own analysis of 2018 carried out in preparation for the exam and the new
information (Exhibit 17). For Requirement 2, it was essential to read Exhibits 18a/18b carefully to identify all
critical assumptions and other issues to be discussed. Finally, for Requirement 3, candidates had to relate
Exhibits 19a/19b to relevant material within the case – notably Doughby’s strategic plans and other AI details.

Analysis of Case Study Exam information
From an initial rapid reading of the new material (Exhibits 15 – 19b), candidates should have made an
assessment of the range of information contained in those exhibits. It would then have been essential to read
Exhibit 15 carefully to understand the requirements before starting a detailed read of the management
accounts and notes and related information.
 Using the new financial information, candidates should assess the draft management accounts for the
year ended 30 September 2019 (2019) in comparison with the year ended 30 September 2018. The exact
financial analysis comprises an analysis of “revenue and gross profit for each of the three main business
streams and the overall business; total cost of sales and total operating profit” against equivalent 2018
results. The review should also refer to the additional information provided in Exhibit 17. Candidates
should also “respond to the request for advice on the inventory issue and bank meeting” (Exhibit 17).
(This meant providing a clear, properly labelled appendix with the necessary detailed analysis. This analysis could
then be incorporated into a candidate’s report combined with elements from Exhibit 17, and the candidates own
evaluation, to enable a thorough review of these accounts to be presented.)
 Evaluating the new Jiffa proposal to supply own-label products meant considering the information as
provided in Exhibit 18a (by both parties), concerning the financial expectations relating to this proposal as
well as other Jiffa factors. Specifically, candidates had to “calculate the revenue, cost of sales and gross
profit of the proposal, for both the MG stream and Doughby overall. You should also calculate and evaluate
the impact of losing the entire Jiffa contract on the revenue and gross profit of both the MG stream and
Doughby overall”. (This meant constructing a projected revenue and cost summary based on the example schedule
given for this Jiffa proposal, using the information provided.) Candidates had to “assess the adequacy of the
assumptions and advise on the commercial, operational, ethical and business trust issues that Doughby
should evaluate when deciding whether to accept this proposal.” (This meant using the list of assumptions
provided and the additional information in Exhibit 18b.) Finally, “you must advise Doughby, with reasons, on
how to proceed in its trade with Jiffa”. (This meant considering how best to negotiate this proposal whilst remaining
aware of what might happen if Doughby lost the Jiffa contract entirely).
 The third requirement entailed evaluating “with relevant calculations, the financial, operational and strategic
issues relating to the [Sans-En] proposal [Exhibit 19a]. You should highlight in your evaluation any
potential ethical and business trust issues for Doughby, including those that may arise from Exhibit 19b.
You must calculate and justify a price for the proposed contract”. (The appropriate template for the
calculation(s), which would be an appendix, was provided in Exhibit 19a.)
With appropriate planning, candidates should have been able to complete these three main tasks, and write
an executive summary, within the time available, in order to produce a well-balanced report.
From reading the other new exhibits, candidates should have established the following.
Exhibit 16 comprises the management accounts for the year to 30 September 2019 together with
accompanying notes. This information show details of revenue, cost of sales, gross profit, overheads and
operating profit; a full SOFP and SCF; and notes relating to PPE, trade and other receivables, and trade and
other payables. The 2019 accounts are in a similar format to the 2018 information presented in the AI and
should not have posed any problem for candidates to assimilate. (This should have been a highly predictable
exhibit – although the actual figures would not have been known in advance. Analysis of the actual results to 30
September 2019 would have been anticipated, particularly in the light of the bank covenant, and would have been normal
and essential preparatory work. Detailed analysis of the AI figures would have focused on the three revenue streams, and
the cost of sales, gross profit and operating profit.)
Exhibit 17 is a note from Freida Delores (FD) providing additional detailed information concerning Doughby’s
operations and financial performance for the year ended 30 September 2019. This is to be used in the
financial statement analysis performed by the candidates in Requirement 1 and as subsequent contextual
information for Requirement 2 and 3. This exhibit also contains details of a potential inventory error negatively
affecting the 2019 results. (The numerical performance analysis should have concentrated on the significant increase in
Doughby’s revenue offset by the increases in cost of sales and therefore the decline in GP% in 2019 by comparison with
2018. Candidates also had to make use of business stream gross profit information given in this exhibit. In addition, as
well as explaining the impact of the inventory error, candidates had to put that £30k drop in gross profit and operating
profit in the context of the failure to meet one of the bank covenants. They also needed to be professionally meticulous
(as well as accurate) in the advice given on this issue.)
Exhibit 18a provides information on the new own-label proposal from Jiffa. There is a mixture of assumptions
and information provided by both Doughby and Jiffa to be used in two calculations: (1) evaluating the new
(lower) revenue and (higher) cost of sales for this proposal, both for the MG business stream and for Doughby;

(2) evaluating the impact of losing Jiffa as a customer for the MG business stream and for Doughby, given the
potential loss of revenue and the proportion of cost of sales saved. (Candidates had to perform straightforward
calculations following the format of the financial schedule in Exhibit 18a with adjusted numbers. The financial and
operational assumptions given had to be assessed, as well as any that were missing. Candidates also had to “advise
Doughby, with reasons, on how to proceed in its trade with Jiffa” – this latter point meant considering the prospect of
commercial negotiations or taking the decision to stop trading with Jiffa in the foreseeable future.)
Exhibit 18b is a media article which includes other information potentially relevant to the own-label Jiffa
proposal. It reports Jiffa’s recent expansion by way of acquisitions and its changing corporate ethos and cost
reduction targets under its new CEO. (The AI had identified Doughby’s operational concerns over customer requests
for own-label products. This article adds to the positive and negative aspects of this change and it needs to be assimilated
and incorporated into the discussion concerning business trust and future trade and operations with Jiffa.)
Exhibit 19a is an email from Fiorella Bianchi to Sundari Rai providing details concerning a new customer
Sans-En (S-E), and its proposal for Doughby to supply it with gluten-free products. There is both numerical
and descriptive information concerning this proposal which has to be analysed and appraised in the context of
Doughby’s current operations. (Candidates have to assess this proposal using the cost assumptions given and different
pricing criteria for S-E. Candidates must also consider all the operational factors concerning gluten-free production, sales
and labelling. The proposal needs to be assessed and a recommendation made.)
Exhibit 19b comprises one media article. This provides details about S-E’s success since its creation three
years ago as an outlet for consumers who are allergic to certain food products. It identifies its rapid expansion
and raises the issue of its financing and bank support. (This article touches on the issue of fast growth and financing
for businesses and should have served to raise awareness (or remind candidates) of the need to deal and interact
transparently with equivalent organisations. These factors should impact Doughby in assessing this new customer.)
The information in the CS Exam follows on from the financial and commercial story told in the AI. The main
facts are that Doughby’s overall revenue has increased but the three business streams show variable results.
There has been a reduction in GP margin with a linked reduction in OP, already down to a critical level before
any inventory reduction. The subsequent scenario developments accentuate the issues that Doughby has to
address: the decline in the MG business stream and the strategy to increase the A&S business stream. (There
is a need for careful, integrated financial analysis of the Doughby results to analyse all changes and the application of
logical judgement to that analysis. There is also the need for a clear explanation of the impact of the inventory issue, both
on the bank covenant and more importantly for Doughby itself.)
With proper time allocation, careful planning and a logical approach, candidates should have been able to
complete all the requirements within the four hours.
Grades were awarded under five topics: Review of Doughby’s financial performance; Evaluation of proposal from
Jiffa; Evaluation of proposal from Sans-En (S-E); Executive summary; Overall Assessment Criteria. For each of the
three main requirements, under each of the four Professional Skills, there were two or three ‘boxes’ representing
specific areas in which the skill was to be demonstrated. At each box, one of five available grades was awarded:
CC (Clearly Competent); SC (Sufficiently Competent); IC (Insufficiently Competent); ID (Insufficiently
Demonstrated); NA (Not Attempted). The number of boxes per topic and skill (below) reflects an even balance
between the three main requirements, as indicated in the CS Exam rubric.

Review of Doughby’s financial performance 3 3 3 2 11
Evaluation of proposal from Jiffa 3 3 3 2 11
Evaluation of proposal from Sans-En (S-E) 3 3 3 2 11
9 9 9 6 33
Executive summary 6
40

Requirement 1 needed candidates to demonstrate A&UI skills by way of (Box 1) a properly presented
appendix showing complete 2019 and 2018 figures, the detailed analysis calculations and the bank covenant
calculations after the inventory adjustment; (Box 2) the initial financial statement analysis work in the report;
and (Box 3) the identification of appropriate relevant business issues and wider context issues for Doughby.
Candidates were universally very strong across all three boxes. (This was a strong section of the vast majority of
scripts.)
In Requirement 2, candidates needed to demonstrate A&UI skills with: (Box 1) an appropriate numerical
appendix using the Jiffa details from Exhibit 18 as the starting point for the own-label calculations; (Box 2) the
initial key criteria numerical analysis using financial data relevant to Jiffa and the MG business stream, in the
report; and (Box 3) the identification of relevant business and wider context issues in relation to this matter.
Almost all candidates demonstrated good numerical A&UI skills for the first box (the new proposal) but
struggled in Box 2 to capture the key financial data relevant to losing Jiffa and its impact on Doughby and the
MG business stream – a stream already in significant decline. Candidates performed well in Box 3 on
business and wider context issues. (This was a strangely unbalanced section, with the lack of financial focus on the
precarious position of the MG business stream an important omission.)
In Requirement 3, by using the structure from Exhibit 19a and the key facts given, the appendix (Box 1) was
appropriately presented by the majority of candidates, who achieved good passes for this aspect of their
report. Again for the detailed numerical analysis in the appendix (Box 2), most candidates achieved high
competency grades. However, at Box 3, the presentation of relevant business issues and wider context
relating to the A&S stream and gluten-free issues was weak with only a minority of candidates identifying the
relevant issues (such as: Doughby’s strategy to grow A&S and the importance and difficulty of all aspects of the
gluten-free market).
The key messages for candidates concerning A&UI are:
 presenting a clearly-derived summary of the financial or numerical context for a scenario by way of a clear,
structured appendix is a basic skill which all candidates should possess;
 including the relevant financial information and data which relate to the issue being considered is an essential part of
the assimilation of the background for the analysis of the relevant scenario and the circumstances for the matters
under review in that section;
 using information from both AI and the CS Exam in compiling each section of the report – particularly the business
issues and wider context – is an essential aspect of each section.
Most candidates demonstrated good skills in SP&S. This is because they followed the structure and steps
indicated in each requirement and performed the analysis which they had to do. SP&S is the core component
in each section of the report and the assessment criteria follow the requirement instructions in each section. In
Requirement 1, it is financial analysis of the statement of profit or loss and the evaluation of an inventory
issue. In Requirement 2, it is the analysis of the new own-label proposal from Jiffa, including a review of
assumptions and the consideration of losing the entire Jiffa contract, and analysis of business trust and ethical
issues. For Requirement 3, it is an analysis of the Sans-En new customer A&S proposal: calculating new costs
and various pricing options in order to consider this proposal in commercial terms (financial, operational and
strategic) and any business trust and ethical issues.
Requirement 1 produced very good-quality answers in all 3 boxes as candidates worked carefully through the
steps of each aspect of the requirement logically, dealing with the points requested in appropriate detail.
Requirement 2 was the most inconsistently answered SP&S section with large numbers of candidates failing
to calculate and analyse the loss of Jiffa appropriately for Box 1. Almost all candidates critiqued the
assumptions correctly in detail for Box 2. However, very few candidates scored passing grades in Box 3 on
ethics and business trust – indicating a lack of perspective concerning the changing policies at Jiffa. In
Requirement 3, a very large number of candidates started by using appropriate numerical analysis for Box 1,
but then failed to identify, question or analyse in sufficient detail the commercial and strategic issues for Box 2,
which was badly answered. There were similar weaknesses relating to the comments on business trust and

ethical concerns (Box 3), which should have been a mix of positive and negative points concerning S-E,
gluten-free and labelling issues.
The key messages for SP&S in this CS Exam are:
 candidates who work through each step requested in the requirement when analysing any financial or numerical
information (or their own calculations) for each section of the report will succeed;
 candidates must always critically analyse the assumptions relating to any matters under review in that section;
 candidates must identify and address all the specific commercial, business trust and ethical concerns as requested in
each section of the report;
 a candidate’s weaknesses in SP&S will affect the subsequent sections of AJ and C&R – although a strength in SP&S
does not always carry into AJ and C&R.
Applying Judgement (AJ) was very patchy in the three requirements. In Box 1 in Requirement 1 there was
appropriate evaluation of the analysis of revenue with a range of points commenting on the detailed changes
in each business stream. However, there was a significant weakness in dealing with the evaluation of the
importance of cost of sales, gross profit and operating profit for Box 2. The judgement relating to the
evaluation of the inventory issue in Box 3 was often very weak – with the issue not being seen in perspective
for Doughby.
Requirement 2 produced the most variable results for AJ. The evaluation of commercial and operational
issues (Box 1) was weak with a poor consideration of the declining trend of MG for Doughby as a factor. There
was some good evaluation of the assumptions in Box 2 with appropriate development of these points.
However, there was an almost universal inability to evaluate the business trust and ethical issues surrounding
Jiffa and this proposal (Box 3) with dismal results in this aspect.
In Requirement 3, the evaluation and judgement relating to the financial impact of the S-E proposal in Box 1
was surprisingly badly done despite very good SP&S sections. However, Box 2 – the evaluation of operational
and strategic issues – was satisfactory, with the majority of candidates achieving passing grades. Similarly
(and surprisingly), there were equally good results for the evaluation of ethical and business trust issues in
Box 3 relating to gluten-free issues and S-E ethos.
Overall in AJ strong candidates applied good judgement built on the analysis which they had conducted but as
always weaker candidates failed to demonstrate good skills in AJ. They failed to develop their analysis by not
evaluating the information or assumptions given or failed to question the critical factors from their own analysis
in the appropriate depth.
The key messages for AJ in this CS Exam are:
 candidates must ensure that they evaluate each step of the analysis as requested (and performed by them) in each
requirement, both financial and non-financial, in a critical, logical evaluation process;
 candidates must always critically evaluate any assumptions relating to the matters under review in that section;
 candidates are always expected to evaluate the specific commercial issues and any business trust and ethical concerns
in each section of the report;
 developing the ability to formulate and communicate good judgement in the report is critical for success in the CS
Exam. A failure in AJ usually correlates with a failure overall.
There were different performances in the three requirements and there was a range of ability between the
strong and weak candidates. Overall, strong candidates provided logical, clear conclusions – under a heading
– which extended the previous analysis and judgement in that section. They also provided appropriate and
commercial recommendations which related to the business circumstances in the section being written.
Weaker candidates made less well developed or logical conclusions. They also made poor, frequently
generalised recommendations, with little development or justification from the analytical work.
In Requirement 1, the Conclusions box was very good – as it normally is in this financial analysis section – but
the Recommendations box was weak, caused by an inability to make the necessary commercial
recommendations to address the declining MG stream and to concentrate on the higher-margin A&S and
brown bread streams. It was a similar situation in Requirement 2 with very good results for the Conclusions
box but a very weak Recommendations box – again because candidates seemed to have difficulty telling
Doughby the bad news about Jiffa and the future of MG (preferring to leave that aside). (The fact is that the trend

in the MG situation is unsustainable and that must be spelt out.) However, in Requirement 3 there was the unusual
situation that candidates did well on both Conclusions and Recommendations boxes – they had obviously
prepared for this type of topic and they related their preparation to the CS Exam facts.
The key messages for C&R are:
 conclusions must be logically drawn, under a heading, from the work done, for each section of the report;
 recommendations must be commercial and specifically related to the context of each section of the report.
The presentation of work by candidates is a cause of concern. A noticeable number of candidates failed to
answer the exam as per the instructions thereby combining and muddling different sections of their answers.
There were apparent examples of haste and lack of careful work in that spelling and grammar were not
adequate. Only just over a third of candidates achieved passing grades for OAC. Speeding and not checking
what they have written appear to be the main culprits in these poor achievements.
Executive summary
Overall, marks and the number of passing grades were not fully consistent between the three columns on the
marking key. Good executive summaries were aimed at the Doughby board – and covered the three aspects of
the report concisely. A good ES was a précis of the relevant section of the scenario and report comprising the
context, the original analysis, the judgements made, and a summary of the conclusions and recommendations
from each section. Good summaries contained the essential numerical information in the ES extracted from the
body of the report. As before, the ES key included specific points that the examiners considered to be the critical
factors in each section, such as the wider implications of the downward trend in MG performance which would be
accelerated by Jiffa’s proposal in Requirement 2.
In the section relating to Requirement 1, Box 1 was well done – reflecting the strength of most reports in financial
statement analysis – and the majority of candidates brought forward their key figures into the executive summary.
However, Box 2 in this section was noticeably weaker as candidates could not identify the key difficult facts from
their report, concerning MG, to the board – this was a clear example of a candidate summarising a weak section
of their report leading to a weakness in the ES. This weakness was despite the fact that most candidates gained
the bullet for ‘Appropriate summary of report section’ in this box in respect of this requirement.
In the section relating to Requirement 2, the majority of candidates obtained passing grades in Box 1 with
appropriate figures being included. However, Box 2 was a weaker box, again because of weaknesses in the
underlying report and also a failure to identify the most significant points, which included facing the possible
loss of Jiffa and the MG stream. Again, the weakness in Box 2 was despite the fact that most candidates
gained the bullet for ‘Appropriate summary of report section’ in this box in respect of this requirement.
In Requirement 3, more candidates did better on Box 2 than on Box 1. This tended to be because in Box 1
there was a lack of precision in justifying the price for the S-E proposal and the main operational concerns for
Doughby. In Box 2, candidates picked up on the main issues concerning labelling and gluten-free as well as
providing other commercial recommendations. Together with the bullet for ‘Appropriate summary of report
section’, that meant that a passing grade was achieved in respect of this box.
Weaker candidates had an ES that was poor in terms of focus on the key issues or factors for each section.
These candidates failed to present the relevant facts – and especially the key points or figures – concerning
the items considered to be important from the report. There remains evidence of poor planning and time
management by a minority of candidates.
Requirement 1: Analysis of Doughby’s financial performance
The main financial statement analysis requirement was fully answered by the vast majority of candidates, with
appropriate use of a well-structured appendix. Candidates should have been, and were, well prepared for a
review of the 2019 management accounts. It was necessary to integrate the additional financial and non-
financial data at Exhibit 17 into a logical narrative on Doughby’s performance by working through that
information relating to the three business streams and performing a few simple additional calculations. These
calculations related to the gross profit details provided and, because of the lack of information on detailed cost
of sales information for each stream, candidates should have focused on the headline increase or decrease of
gross profit – which revealed the state of success or decline for each business stream.

Appendix 1 was universally well done with a sufficient level of detail, showing the relevant changes in both
absolute and percentage terms, as would be expected in any client report. The vast majority of presentations
were clear, which indicated that candidates had properly practised their CBE technique.
Nearly all candidates produced good-quality analysis of the revenue relating to Doughby, both in total and by
way of the three business streams, developing the work from their appendix into the report. For good
candidates, the analysis of total cost of sales, total GP and operating profit was also very good, with most
unpicking the effect of increasing and then decreasing costs for ingredients and the impact that had on the
year’s results. However, weaker candidates lost focus (and time) by considering cost of sales in detail and
trying to consider it for each business stream – a time-wasting task.
The request for advice on the potential impact of the inventory issue was set out in a series of steps. Good
candidates answered all aspects of this request and its impact on bank covenant criteria appropriately and
accurately. Weaker candidates had their own idiosyncratic – and desperate – ideas concerning its impact such
as: “it will affect both the overdraft and receivables”. (There was, however, a common failing amongst both good and
weak candidates which was that although there was a focus on the impact on the bank covenant criteria, very few
candidates pointed out that Doughby’s financial position itself was becoming untenable with PBT of £nil.)
Requirement 1 was the strongest section of most candidates’ reports. As one tutor commented: “Overall this
requirement is very much in line with previous Case Study examinations. Strong analysis of the Advance Information
would have prepared most candidates for the skills required to score well in this part of the exam”.
Requirement 2: Evaluation of own-label proposal from Jiffa
Requirement 2 produced marginally lower results at this session. The reason for this might have been the
nature of the overall MG issue and that context, which was not always fully grasped, or at least not properly
presented in the reports. MG is becoming a failing business stream. Although it is still significant in revenue
terms (2019: £19,404k, which represents 19.3% of Doughby’s total revenue), it is only generating £343k of GP,
a margin of just 1.8%. and a tiny element (1.5%) of Doughby’s total gross profit in 2019 of £22,401k. Candidates
seemed unable to understand and present these important initial facts. Doughby already had a problem to solve
before Jiffa added to its MG woes. Jiffa’s proposal simply forces Doughby to face the predictable problem
concerning the overall MG stream. Candidates seemed unwilling to provide that evidence or make the
necessary subsequent hard decisions.
In this requirement, the basic appendix calculations were well done and correct, with most candidates gaining a
passing grade, setting out their numerical work clearly and labelling it appropriately. As one tutor commented:
“The calculations in R2 are perhaps more extensive than in some exams, but with access to a spreadsheet tool they are
deemed to be reasonable”.
Where candidates scored less well was in using relevant and important numerical information provided
throughout the CS relating to the detailed performance of the MG business stream, and Jiffa specifically. That
financial context or scene setting was not put to full use in considering this own-label proposal. The declining
trend in profitability for this business stream, with volumes of products sold only being maintained by selling at
low-margin prices, is unsustainable. That important, detailed, financial context was frequently addressed only
superficially or else was completely absent from this section. As a result, many candidates did not perform well
in that aspect of the numerical section, and onwards from it. However, most candidates did identify the wider
business context issues, which is a function of both good preparation and sensible thinking during the exam.
The ethical and business trust element of this section of the report was weak. Jiffa’s changing demands from
Doughby – essentially a demand for increased service at a reduced price – is an aggressive trading policy. It
can also be seen to be part of a change in Jiffa’s corporate ethos in the context of both its treatment of its new
acquisitions (closing 5 outlets out of 25 at short notice) and its future aspiration “to obtain reductions of 10-20%
in supplier prices over the next two years”. Complying with Jiffa’s proposal may affect Doughby’s operations,
with a reduction in standards, and its financial performance with wider implications. There was plenty to discuss.
As one tutor accurately commented: “This requirement is likely to be a differentiator in this examination – with those
candidates who developed a logical and structured approach scoring best.”
Requirement 3: Evaluation of proposal from Sans-En (S-E)
Requirement 3 was adequately answered. Candidates had to address the financial, operational and strategic
issues, as well as ethical and business trust issues, relating to the proposal to supply gluten-free A&S products to
Sans-En. They had to calculate and justify a price for the proposed contract.

Almost all candidates produced an appropriate relevant appendix as required. There was a schedule showing the
weekly activity for a typical customer for A&S products in Exhibit 19a – this was similar to an equivalent schedule
in Exhibit 9 in the AI. The new S-E details all refer to similarities or changes against that basic schedule.
Candidates only had to do one set of changes for the three costs shown, based on the assumptions in Exhibit
19a, which could then be applied to any potential different levels of revenue to provide answers for discussion.
Candidates could quickly calculate the three required pieces of information relating to revenue (a decrease /
increase of 15% and breakeven). By using the adjusted cost information, they could determine the gross profit on
each possibility as a starting point for negotiation.
In this negotiation with S-E, as in any negotiation, knowing your company’s breakeven point is essential. The
potential increases or decreases (of 15%) were to offer some guidance to candidates, by way of additional
parameters for that negotiation. From the calculations it could be seen that the breakeven point was either £2,011
(per outlet) or £22,120 (for all 11 outlets being discussed in the proposal). As a result, any pricing below that
would lead to a gross loss on this contract for Doughby and would be unacceptable. It was worth candidates
bearing in mind that not only was Doughby increasing its A&S revenue year on year but it was also increasing its
GP and GP margin year on year – indicating that this was a successful product line which did not have to
discount its prices to achieve sales. Good candidates also discussed pricing this contract using the current
average GP margin for A&S products (£32,566 for the 11 outlets) to provide a comprehensive spectrum – and
one which might be difficult to achieve.
Operational and strategic issues centred around the size of the new proposal and its potential for growth as well
as the need for a new separate operation for the gluten-free products. Logistics and IT issues were also factors.
For stronger candidates, coverage of the ethical and business trust issues at Requirement 3 was adequate, with
large numbers picking up passing grades under this heading. Issues included appropriate labelling, gluten-free
being described as ‘healthier’, similar corporate ethos, reliance on bank funding, and quality controls at all stages.
For weaker candidates there is always a failure to think through the information provided and this section can be
a significant differentiator at the pass/fail margin.
The topic for this section of the report was possibly predictable, although the question itself was not. This was
borne out by one tutor’s comment that “the discursive elements would have been familiar and manageable by most
candidates”. This was apparent and overall this requirement was well attempted by candidates.

PART 4: APPENDICES
APPENDIX 1a: FINANCIAL STATEMENT ANALYSIS: Doughby’s financial performance
2019 2018 Change Change

Revenue £'000 Mix % £'000 Mix % £'000 %
White 17,002 16.9 17,657 18.6 (655) (3.7)
Brown 33,673 33.5 30,356 32.1 3,317 10.9
BV 50,675 50.4 48,013 50.7 2,662 5.5
MG 19,404 19.3 20,337 21.5 (933) (4.6)
A&S 30,418 30.3 26,363 27.8 4,055 15.4
100,497 100.0 94,713 100.0 5,784 6.1

Cost of sales % of revenue % of revenue
Ingredients 53,378 53.1 48,297 51.0 5,081 10.5
Labour 10,045 10.0 9,633 10.2 412 4.3
Production 14,673 14.6 14,608 15.4 65 0.4
78,096 77.7 72,538 76.6 5,558 7.7

GP Mix % Mix %
BV 12,284 54.8 12,157 54.8 127 1.1
MG 343 1.5 1,964 8.9 (1,621) (82.5)
A&S 9,774 43.7 8,054 36.3 1,720 21.4
22,401 100.0 22,175 100.0 226 1.0

GP%
BV 24.2 25.3
MG 1.8 9.7
A&S 32.1 30.6
22.3 23.4
Overheads % of revenue % of revenue
Admin & mktg 9,875 9.8 9,441 10.0 434 4.6
Transport 12,023 12.0 11,902 12.6 121 1.0
21,898 21.8 21,343 22.5 555 2.6
OP 503 832 (329) (39.5)
OP% 0.5 0.9

APPENDIX 1b: FINANCIAL STATEMENT ANALYSIS: Doughby’s bank covenants
Original before adjustment 2019 2018
Operating profit (above £500k) 503 Met 832 Met
Working capital (positive) (16,829 - 10,945) 5,884 Met 4,903 Met
Debt : Equity (50%) (5,982/11,969) 49.98 Met (just) 49.69 Met (just)
After adjustment 2019
Operating profit (above £500k) (503 - 30) 473 Not met
Working capital (positive) (5,884 - 30) 5,854 Met
Debt : Equity (50%) (5,982/11,939) 50.10 Not met

APPENDIX 2: FINANCIAL DATA ANALYSIS: Jiffa own-label calculation
Jiffa Actual Jiffa Proposed

Year to 30 Year to 31 Dec
(i) Own-label Sept 2019 2020 Change
A: Jiffa £'000 £'000 £'000

Revenue 5,032 4,780 (252)
Cost of sales
Ingredients (no change) 3,473 3,473 -
Labour (no change) 521 521 -
Production (2% inc) 872 889 (17)
4,866 4,883 (17)
Gross profit/(loss) 166 (103) (269)

GP% 3.3 (2.2)
B: Overall impact MG Fall % Doughby Fall %
Revenue 19,404 100,497

Revenue lost (252) (252)
New revenue 19,152 (1.3) 100,245 (0.25)
Existing GP 343 22,401

Existing GP% 1.8% 22.3%
New GP (decr 269) 74 22,132
New GP% 0.4% 22.1%
(ii) Loss of Jiffa MG Fall % Doughby Fall %
Revenue 19,404 100,497

Revenue lost (5,032) (5,032)
New revenue (a) 14,372 (25.9) 95,465 (5.0)
Existing COS (Note) 19,061 78,096

Ingredients saved (100%) (3,473) (3,473)
Labour saved (90%) (469) (469)
Production saved (70%) (610) (610)
New COS (b) 14,509 73,544
Existing GP 343 22,401

Existing GP% 1.8 22.3
New GP/(L) (a) – (b) (137) (139.9) 21,921 (2.1)
New GP/(L)% (1.0) 23.0
Note: MG COS calculated as same % of revenue as average for 2019 (389/396 x 100 x £19,404k) = £19,061k. Alternatively, COS =
revenue £19,404k less GP £343k (see Requirement 1) = £19,061k. As a result, the GP would decline by £343k + £137k = £480k – a
major problem for Doughby.

APPENDIX 3: Calculations of revenue and costs for Sans-En proposal
Weekly Annual
Weekly 11 S-E
average outlets Uplift S-E proposal
£ £ £'000
Revenue 2,303 25,333 1,317
Cost of sales
Ingredients 996 14,243 30% 741
Labour 329 4,343 20% 226
Production 238 3,534 35% 184
1,563 22,120 1,150
GP 740 3,213 167

GP% 32.1 12.7 12.7
Directors’ pricing range: 21,533 to 29,133
Annualised (£'000): 1,120 to 1,515
Breakeven Using
11 S-E 11 S-E current
outlets outlets 11 S-E outlets margin
£ £ £ £
15% 12.68% 28.55%
15% reduction increase reduction increase
Revenue 21,533 29,133 22,120 32,566
Cost of sales
Ingredients 14,243 14,243 14,243 14,243
Labour 4,343 4,343 4,343 4,343
Production 3,534 3,534 3,534 3,534
22,120 22,120 22,120 22,120
GP/(L) (587) 7,013 - 10,446

GP% (2.7) 24.1 0.0 32.1

NOVEMBER 2019 - Doughby Ltd
First Marking
DATE CANDIDATE NO.
TIME MARKER NUMBER
CC
SC
IC
ID
NA
Total 7 11 11 11 40
BV Bread Varieties
MG Morning Goods
A&S Artisan & Specials
GF Gluten-free
BB Brown Bread
WB White Bread
DL Doughby Ltd
S-E Sans-En
TEAM LEADER CHECKER

SIGNATURE SIGNATURE
Changes made?
EXECUTIVE SUMMARY
R1 - Review of Doughby's financial performance
ES.OAC ES.R1.1
Appropriate layout eg headings, paragraphs, sentences Revenue: qualitative comment on DL/BV/MG/A&S with fig
Appropriate disclaimer of liability and report from firm COS/GP/GP%: qualitative comment DL/BV/MG/A&S with fig
Suitable language eg formal, tactful, ethical OP/OP%: unsustainable / critical level / close to B/E
Reasonable spelling and grammar Concludes that inventory issue breaches covenants
ES.R1.2
Consider future of MG stream / concentrate on A&S/BB
Must negotiate with customers to pass on cost increases
Commercial recommendations re bank meeting
Appropriate summary of report section
NA ID IC SC CC
R2 - Evaluation of proposal from Jiffa R3 - Evaluation of proposal from Sans-En
ES.R2.1 ES.R3.1
Gives Jiffa/MG/DL revenue/GP for proposal with fig Gives revenue/price that results in a profit with fig
Gives MG/DL revenue/GP for losing Jiffa with fig Justifies profitable price chosen (not just profitable)
Evaluates/questions assumptions Concludes on main operational issues
Concludes proposal not acceptable as presented Potential new GF market available / additional work from S-E
ES.R2.2 ES.R3.2
Plan for possible loss of Jiffa/closure of MG Need to replace declining MG
Likely to breach covenants / discuss with bank Importance of labelling / ensure compliance with GF legislation
Other commercial recommendations Other commercial recommendations
Appropriate summary of report section Appropriate summary of report section
CC
SC
IC
ID
NA
Total 7
REQUIREMENT 1 - Review of Doughby's financial performance
R1.AUI.1 R1.SPS.1
Presents 2019 figures Overall revenue growth: lower than last year 6.1% v 9.3%
Presents 2018 figures BV: biggest stream / mix 50.4% v (50.7%)
Analysis of BV revenue by WB v BB BBvWB: BB growth v WB decline / BB mix 66.4% v (63.2%)

OR WB mix 33.6% v (36.8%)
Covenant calcs on adjustment MG: mix 19.3% v (21.5%) / decrease in share 2.2%
NA ID IC SC CC A&S: mix 30.3% v (27.8%) / increase in share 2.5%
R1.AUI.2 Covenant terms already close to breach before (£30k) adj

AI/CSE information (report/appendix)
NA ID IC SC CC
Overall revenue: up £5,784k / up 6.1%
R1.SPS.2
Financial analysis: COS/GP/OP (report)
BV revenue: up £2,662k / up 5.5%
AND COS: ingredient up £5,081k/10.5% / inc faster than revenue >
MG revenue: down £933k / down 4.6%
AND
A&S revenue: up £4,055k / up 15.4% COS: labour up £412k/4.3% / production up £65k/0.4% >
Overall GP: up £226k / up 1.0% BV GP/GP%: up £127k / up 1.0% / 24.2% v 25.3%

OR
Overall GP%: 22.3% v 23.4%
MG GP/GP%: down £1,621k / down 82.5% / 1.8% v 9.7% >
Overall OP: down £329k / down 39.5%

OR A&S GP/GP%: up £1,720k / up 21.4% / 32.1% v 30.6%
Overall OP%: 0.5% v 0.9%
NA ID IC SC CC Overheads: seem under control / mktg up £434k/4.6% >
NA ID IC SC CC
R1.AUI.3
Business issues / wider context R1.SPS.3
Identification of inventory issues
DL operates in a competitive market (total/stream)
SoPL: reduce PBT by £30k / reduce to £0
Market: BB growth / WB decline / MG decline / AS growth

SoFP: reduce inventory £30k / RE by £30k/£24k / tax by £6k
Consumers: reducing sugar intake / more health-conscious

SoCF: no net impact on cash generated by operations
Bank manager is close friend of Andy Marks

O/D: no impact
Y/e O/D £982k / O/D limit £1,500k

Revised OP: breaches covenant (£473k < £500k)
IT error being investigated / not yet adjusted

Revised Debt:Equity: breaches covenant (50.1% > 50%)
NA ID IC SC CC
NA ID IC SC CC
R1.AJ.1 R1.CR.1
(5%) price rise passed on for BB/A&S Revenue: qualitative comment on DL/BV/MG/A&S with fig
BV volume: increase in BB / decrease in WB COS/GP/GP%: qualitative comment DL/BV/MG/A&S with fig
BV: WB increased costs not passed on to customers OP/OP%: unsustainable / critical level / close to B/E
MG: volume maintained only by reducing prices Concludes that inventory issue breaches covenants
MG: mktg of reduced sugar not working/slowed decline NA ID IC SC CC
A&S: volume up / new customers / diversifying products
NA ID IC SC CC
R1.CR.2
R1.AJ.2 Makes recommendations
Evaluation of COS/GP/OP analysis
Further analysis by revenue stream / further cost analysis
Ingredients: cost incs due to supply/demand/weather
Concentrate on high GP% A&S stream/BB

Labour/prod'n: reason for inc eg A&S labour intensive
Consider future of MG stream

Mix: inc in high GP% A&S offset by fall in MG GP%
Must negotiate with customers to pass on cost increases

MG GP%: falling prices and increasing costs
Investigate reason for IT error / confirm error has been fixed

DL OP/OP%: unsustainable / critical level / close to B/E
Other commercial recommendations

Overheads: reason for change eg MG mktg campaign
R1.AJ.3
Evaluation/recs on inventory issues
Quantify error ASAP / update Y/E accounts for bank
OP near B/E more worrying than missed 50% D:E ratio
Prepare Oct (improved?) accounts / eg order book, CF CC

SC
Discuss honestly with bank / cannot rely on friendship
IC
ID
Breach: bank withdraw finance / change terms / monitor
NA
Total 11
Make plans for refinancing in case bank recalls loan
NA ID IC SC CC
REQUIREMENT 2 - Evaluation of proposal from Jiffa
R2.AUI.1 R2.SPS.1
Appendix 2 Calculation for losing Jiffa (appx or report)
Numbers labelled and clearly derived Revenue: £14,372k (MG) AND £95,465k (DL)
Calculation of Jiffa rev/COS/GP including proposal Revenue: down by 25.9% (MG) / down by 5.0% (DL)
Calculation of MG/DL rev/GP including proposal GP: loss of £137k (MG) AND profit of £21,921k (DL)
Calculation of MG/DL rev/GP if losing Jiffa GP: down by £480k / down by 139.9% (MG) / down by 2.1% (DL)
Considers flexing numbers in calculation GP%: -1.0% (MG) / 23.0% (DL)
R2.AUI.2 R2.SPS.2
AI/CSE information (appx or report) Assumptions
Revenue: £4,780k / down £252k (Jiffa) Proposal: Jiffa wants 5% reduction eg discount may be higher >
AND £19,152k (MG) AND £100,245k (DL)
Proposal: Ingredients same as 2019 eg could be higher/lower >

COS: £3,473k + £521k + £889k / up £17k (Jiffa)
AND £19,078k (MG) AND £78,113k (DL)
Proposal: Labour same as 2019 eg cost could be higher >
GP: £103k loss / down £269k (Jiffa)

AND £74k (MG) AND £22,132k (DL) Proposal: Prod labelling 2% increase eg may be higher >
GP%: loss of 2.2% (Jiffa) / 0.4% (MG) / 22.1% (DL) Losing Jiffa: only a DL assumption / may not be automatic
Losing Jiffa: 90%/70% savings eg may not occur >

NA ID IC SC CC
NA ID IC SC CC
R2.AUI.3 R2.SPS.3
Business issues / wider context Comments on ethical / business trust issues
Ongoing fall in MG Jiffa: closing unprofitable branches resulted in bad PR >
Jiffa is a key MG customer / £5m/25.9% MG rev Losing Jiffa/closure of MG may mean redundancies >
Jiffa relatively high GP% in MG / 3.3% v 1.8% Covenants: proposal/loss of Jiffa likely to cause breach >
Jiffa looking to move to 'own-label' Quality: temptation to reduce in line with price cuts >
Jiffa expanding / purchased 25 Pronto outlets / closed 5 Jiffa quite aggressive to DL eg 5% price reduction demands
R2.AJ.1 R2.CR.1
Evaluation: commercial/operational issues Draws conclusions (under a heading)
Proposal: unacceptable as makes a loss Gives Jiffa/MG/DL revenue/GP for proposal with fig
Proposal: own-label means less brand visibility for DL Gives MG/DL revenue/GP for losing Jiffa with fig
Proposal: others may want own-label/price reductions Evaluates/questions assumptions
Losing Jiffa: makes MG unsustainable Concludes on ethical/business trust issues
Losing Jiffa: improves DL GP% Concludes proposal not acceptable as makes a loss
NA ID IC SC CC
Any changes in assumptions will impact calculations
NA ID IC SC CC
R2.CR.2
Makes recommendations
R2.AJ.2
Evaluation of assumptions Further research needed on costs/savings
Price: CEO looking for larger reductions next year

Negotiate T&C with Jiffa
Ingredients: costs volatile at best / add inflation

Decide on future of MG
(eg change in DL strategy)
Labour: add in payrises / up 4.3% in 2019 / wage inflation
Plan for possible loss of Jiffa/closure of MG
(eg redundancies/overheads)
Prod labelling: DL should know costs / set-up costs
Potential for further work NA ID IC SC CC
Losing Jiffa: will impact overheads eg deliveries
NA ID IC SC CC
R2.AJ.3
Evaluation/recs: ethical/business trust
Possible damage to DL reputation
CC
Staff should be treated appropriately / re-train for BV/A&S SC

IC
Discuss with bank / monitor covenants ID
NA
Quality: must maintain reputation for quality
Total 11
Own-branded packaged goods can't be resold easily
NA ID IC SC CC
REQUIREMENT 3 - Evaluation of proposal from Sans-En (S-E)
R3.AUI.1 R3.SPS.1
Appendix Financial calculations (appx or report)
Numbers labelled and clearly derived Calculates initial proposal GP%: 12.7%
Calculates GP for initial proposal (weekly, x11, annual) Calculates rev using +15%: £2,648 / £29,133 / £1,515k OR
GP using +15%: £638 / £7,013 / £365k
Calculates using a range of prices (±15%)

Calculates rev using -15%: £1,958 / £21,533 / £1,120k OR
GP using -15%: -£53 / -£587 / -£31k
Calculates B/E point
GP%: +15% is 24.1% / -15% is -2.7%

NA ID IC SC CC
Calculates B/E revenue: £2,011 / £22,120 / £1,150k
NA ID IC SC CC
R3.AUI.2 R3.SPS.2
AI/CSE information (appendix) Operational and strategic issues
Revenue: £2,303 / £25,333 / £1,317k (wk/x11/yr) Only 25% S-E revenue / 22 more outlets >
Ingredients: £1,295 / £14,245 / £741k (ave x 130%) Consider costs of transport/logistics for the 11 outlets >
Labour: £395 / £4,345 / £226k (ave x 120%) GF: DL says it can satisfy conditions in factory
Production: £321 / £3,531 / £184k (ave x 135%) DL bakers say they can produce GF products
GP: £292 / £3,212 / £167k Reason for S-E change of suppliers not identified/known
NA ID IC SC CC IT systems may not be compatible
NA ID IC SC CC
R3.AUI.3 R3.SPS.3
Business issues / wider context Comments on ethical/trust issues
Market: growth of GF product ranges/demand S-E wants GF products to be labelled as 'healthier' >
DL strategy to grow A&S Labelling regulations: important / may fail to comply >
Growth of A&S stream (15.4% last year) S-E rapidly expanding >
DL has no experience of GF S-E appears to be a highly ethical company >
GF must be <20ppm gluten to be labelled GF Need for external inspection/certification of GF compliance
NA ID IC SC CC Proposal could have positive impact on covenants
NA ID IC SC CC
R3.AJ.1 R3.CR.1
Evaluates overall financial impact Draws conclusions (under a heading)
Significant/manageable contract / calc of rel size with fig Gives revenue/price that results in a profit with fig
Compares 12.7% margin to existing A&S GP% (32.1%) Justifies profitable price chosen (not just profitable)
To achieve current GP% (32.1%) need to bid much higher Concludes on main operational/strategic issue
Comments on GP% achieved at various price levels Concludes on ethical/business trust issues
Promotes growth of high-margin A&S / replaces fall in MG NA ID IC SC CC
Any changes in assumptions will impact calculations
NA ID IC SC CC R3.CR.2
Makes recommendations
R3.AJ.2
Evaluation: operational/strategic issues Further research needed on costs involved
Potential for more work / other 22 outlets larger on ave

Market research on GF market
Within DL current delivery radius / other 22 will cost more

Negotiate T&C
GF: potential new market area for DL

Due diligence on S-E
GF recipes can be difficult / GF flour supplier needed

Consider DL's funding needs / longer-term capacity
Long-term capacity needs / funding of production set-up

eg recruitment / training / new suppliers
Potential missing costs eg set-up, IT system
R3.AJ.3
Evaluation/recs: ethical/trust issues
GF not necessarily healthier / can't make unfounded claims
Breaches of regulation can lead to penalties/health issues CC

SC
S-E needs to demonstrate ability to pay for proposal IC
ID
S-E has similar ethos to DL / enhance DL reputation NA
Total 11
DL needs internal QCs / supplier chain compliance
NA ID IC SC CC
SAMPLE ANSWER 1 AND EXAMINERS’ COMMENTS
The commentary below follows the order and numbering of the script, with reference to the topics in
the marking key. It should be read in conjunction with the review of the Second Sample Answer and
full Examiners’ Report for this session.
This script was within the top 10% of all assessed scripts. It is noteworthy to state at the outset that
this script should be read as representing what is achievable by a well-prepared candidate who works,
with clear focus and good planning, through all the sections of the report. It is a high standard report
and as a result, the critical evaluation below must be seen in the context of the strength of the script.
The script earned 32 passing grades. This is a very good achievement. Of these, 5 (maximum 7) were
for the Executive Summary and Other Assessment Criteria. The rest were spread fairly evenly over the
three main sections, with strong answers to all three Requirements. This strength across the whole
script, including the appendices, indicates very good-quality report writing.
Professional skills grades were as follows (maximum 33): in 9 out of 9 grade boxes for Assimilating and
Using Information (A&UI); in 7 out of 9 for Structuring Problems and Solutions (SP&S); in 6 out of 9 for
Applying Judgement (AJ); and in 5 out of 6 for Conclusions and Recommendations (C&R). This
strength across the four skills, especially A&UI and including AJ, indicates focused preparation and
evaluative work.
The executive summary (ES) covering the three requirements is representative of the report. The
candidate uses £ and % analysis where appropriate to provide numerical focus to the commentary.
The section of the ES dealing with the Requirement 1 issues does not provide a full synopsis of relevant
numbers or commercial recommendations in dealing with the MG issue and the decline in gross profit
margin. It is slightly less strong than the other sections.
The section of the ES relating to Requirement 2 is very good, covering both the relevant numbers and the
appropriate discussion together with an evaluation of the way forward.
Similarly, in Requirement 3, the executive summary reflects the main report with only a slight omission in
its recommendations concerning the future direction of Doughby. Overall the ES qualified as “an
appropriate summary”.
This whole script is properly structured with paragraph breaks and adequate appendices. There are
sufficient headings within each requirement which divide the report into appropriate sub-sections.
There is an appropriate disclaimer and the report is from the firm. However, as with many candidates,
the language is not suitably professional throughout and there are innumerable spelling errors.
(Where extracts from the script have been quoted, these have where necessary been corrected for
grammar and spelling.)
Review of Doughby’s financial performance [Requirement 1]
The candidate presents an appendix with a clear, columnar, financial statement analytical schedule
relating to the key figures from Doughby’s statement of profit or loss for 2019 compared with 2018.
The analysis of movements between the years for Doughby’s total revenue and the revenue of the
three business streams, the total cost of sales (COS), GP and OP is made in both absolute and
percentage terms. Despite its slightly unconventional layout it is clear and brief. There is also a
section entitled “Covenant watch” which is self-explanatory. This is an excellent appendix.
The provision of good comparative analysis of the items requested in the appendix acts as the basis
for further high grades in A&UI and SP&S. In the body of the report this script also provides good
@ICAEW 2019 Page 1 of 28

business and wider scenario information brought forward from the AI integrated with the new CS
Exam information to provide excellent relevant context. There was, however, a weakness in the AJ
skill with the evaluation of revenue being the only strong section. The script failed to address the
evaluation of COS, GP and OP (this was an NA) and was insufficiently competent on the evaluation of
the inventory issue. The Conclusions were sufficient, but the Recommendations were not sufficiently
competent.
In terms of answering this requirement, this section of the report starts with clear analysis of overall
revenue, which is then appropriately broken down into the business streams: “A reason for this growth
is due to the increase in cost of ingredients which we were able to pass on to Brown bread and A&S customers,
hence we sold these products at a higher price and we also sold more volume”. In the consideration of
revenue there was good integrated analysis and evaluation to make this a thoroughly reviewed topic
with clear references to the operational factors which occurred in the year.
The assimilation and analysis of COS, GP and OP is properly focused at the right level, which
indicates good analytical technique in both the appendix and report, but the evaluation is not
developed in the report.
The initial analysis of the inventory problem was good, but its evaluation was too narrow. This
candidate did not identify that the issue poses an absolute problem for Doughby’s profitability (PBT
falls to £nil) regardless of the bank covenant issues. That bad news had to be communicated.
The report concludes appropriately with clear Conclusions which follow the analysis and evaluation
with relevant numbers. Recommendations were insufficiently commercial to be competent. Apart from
the specific weaknesses identified above, this was a strong section of the report.
 evaluated the COS, GP and OP building on the good analysis already performed
 evaluated the inventory issue in terms of its impact on Doughby
 provided more relevant commercial recommendations.
Evaluation of proposal from Jiffa for own-label MG products [Requirement 2]
This section was answered well. Good passing grades were earned across the four skills.
The calculations at Appendix 2 are appropriate but not always suitably labelled. The calculations are
sensible and efficient in that no attempt is made to prorate the time period. They are based on the
schedule in Exhibit 18. Headings are provided but some of the individual calculations might have troubled
an uninformed reader, or caused them to recalculate, to be sure of their derivation. A point was lost for this
issue. That said, within both the appendix and report there is good use and analysis of the numerical
information. There is also good presentation of the business issues and the wider context.
In SP&S the analysis of the information for losing Jiffa was sufficient, as were the considerations of the
assumptions. That analysis carried through into good evaluations of these topics and passing grades in
both for AJ. The analysis of the ethical and business trust issues was not sufficiently competent and
importantly this weakness carried through into an absence of any appropriate evaluation of these issues.
This weakness in this aspect of the script reflects the fact that this candidate (like many others) has not
reflected sufficiently on the implications of engaging with Jiffa in this new venture and the impact which it
would inevitably have on Doughby’s operations. Conclusions were thorough and clearly competent whilst
Recommendations were thin but sufficient.
In answering this requirement this candidate has clearly understood what calculations were needed and
has been able to incorporate the results of those calculations into the body of the report. It is a
comprehensive analysis and consideration of this proposal which has picked up the main features of
meeting Jiffa’s terms using information from both the AI and CS Exam to demonstrate understanding and
the evaluation of the operational and financial aspects: “DL are assuming they will sell the same volume. There
could be a decrease in sales as DL will not be using its brand and instead it will be selling under Jiffa packaging. DL
is known for quality and customers pick DL items because of the quality.”

The way forward is identified with a properly balanced consideration given: “DL should try and negotiate the
contract by resisting the price decrease. If DL can do this, they should proceed with the contract as it is important to
try and get operating profit of above £500k”. In summary, this was a good section of the report.
To improve Requirement 2, the candidate could have:
 labelled all calculations in the appendix to ensure easy understanding by any reader
 analysed and evaluated the impact of the ethical and business trust issues of Jiffa’s changing
ethos on Doughby.
Evaluation of proposal from Sans-En (S-E) [Requirement 3]
This candidate answered Requirement 3 very well. Good passing grades were earned across the four
professional skills although there were some weaker sections of the report.
For Appendix 3 the candidate presented a series of appropriate, clear and relevant financial workings
and calculations which have made use of the simple schedule from Exhibit 19 (similar to the schedule
in Exhibit 9). The appendix covered the questions posed and the calculations were accurate. This
appendix gave this candidate top grades in A&UI in this section of the report. It also provided a clear
base for subsequent financial analysis and evaluation in the report. The candidate also demonstrated
sufficient business issues and wider context details in this section.
The candidate has provided effective, clearly competent analysis (SP&S) of the financial calculations in
the body of the report and the evaluation (AJ) is sufficiently competent. The analysis (SP&S) of the
operational and strategic issues in the report is insufficiently competent but perversely the evaluation (AJ)
of these issues is clearly competent.
The most impressive part of this script is in the ethical and business trust analysis (SP&S) and the
evaluation (AJ), where this candidate has achieved clearly competent grades. The Conclusions section is
also clearly competent, and the Recommendations section is sufficiently competent.
In answering this requirement this candidate has aptly provided the relevant calculations which are then
used to provide the financial analysis and evaluation in the body of the report. It is a more than adequate
analysis and consideration of this S-E proposal, which has picked up the main features of manufacturing
and supplying gluten-free products. Good use has been made of information from both the AI and CS
Exam to analyse this proposal in its context and there is evidence of being alert to issues such as false or
misleading marketing claims: “DL should be careful in its marketing. Gluten-free products are not always actually
healthier, for example they often contain higher levels of sugar and heavily processed grains which increase the fat
and calories. DL should not market GF products as healthier as it could cause reputational damage to DL.”
The way forward is identified with a properly balanced consideration given: “DL should go ahead with the
opportunity, as long as they have got the bank funding for any initial investment.” This was a good section of this
report.
 provided a more comprehensive analysis of the operational and strategic issues

 placed the analysis and evaluation in a broader and longer-term context.

Lines 11 – 180 unused

Lines 58 – 180

32-180 not used

Line 26 not used

Lines 29-180

SAMPLE ANSWER 2 AND EXAMINERS’ COMMENTS
The commentary below follows the order and numbering of the script, with reference to the topics in the
marking key. It should be read in conjunction with the review of the Sample Answer 1 and full Examiners’
Report for this session.
This script failed the November 2019 Case Study Exam. Despite that fact, it is worth readers noting that this
script contained some strong sections but there were not enough of them and they were not sufficient in
themselves to prevent that failure.
The script earned 19 passing grades. Of these, 3 (maximum 7) were for the Executive Summary and Other
Assessment Criteria. The rest were spread fairly evenly over the three main sections, with marginal answers
to all three Requirements. This weakness across the whole script, and in some appendices, was accentuated
by poorer quality in certain key sections of each Requirement.
Professional skills grades were as follows (maximum 33): in 5 out of 9 grade boxes for Assimilating and Using
Information (A&UI); in 4 out of 9 for Structuring Problems and Solutions (SP&S); in 4 out of 9 for Applying
Judgement (AJ); and in 3 out of 6 for Conclusions and Recommendations (C&R). This situation across the
four skills indicates weak evaluative work.
The executive summary (ES) covering the three Requirements is somewhat representative of the report as a
whole, in that it has strong and weak sections. The candidate uses £ and % analysis where appropriate to provide
numerical focus to the commentary.
The first part of the ES concerning Requirement 1 issues provides a full synopsis of the relevant numbers and
inventory issue and is a clearly competent section. The section dealing with (inter alia) the commercial
recommendations including dealing with the bank includes a classic example of informality: “Graham should be told
by Andy what has occurred in the up and coming meeting” – not very professional in such a report! This Requirement
1 section is slightly less strong than the other sections.
The first section of the ES relating to Requirement 2 is sufficiently competent, covering both the relevant numbers
and the appropriate discussion together with an evaluation of the way forward. However, the subsequent section
has only one main relevant report point.
The first section of the ES relating to Requirement 3 is insufficiently competent, but the next section of the report
is sufficiently competent subsequently because it picks up two points concerning GF compliance and commercial
recommendations. as well as qualifying as “an appropriate summary”.
This script is not properly structured with an absence of headings and some confusing layout. There are not
sufficient headings within each requirement to divide the report into appropriate sub-sections. There is an
appropriate disclaimer and the report is from the firm. However, as with many candidates, the language is
not suitably professional throughout and there are innumerable spelling errors. (Where extracts from the
script have been quoted, these have, where necessary, been corrected for grammar and spelling.)
Review of Doughby’s financial performance [Requirement 1]
The candidate presents an appendix with a two-column, financial statement analytical schedule relating to
the key figures from Doughby’s statement of profit or loss for 2019 compared with 2018. The analysis of
movements between the years for Doughby’s total revenue and the revenue of the three business streams is
given but not the brown and white bread split. Neither is there a section dealing with the covenant conditions.
Both omissions are important.
The detailed analysis of total cost of sales (COS), GP and OP is made in both absolute and percentage
terms. As a result, overall this appendix provides good comparative analysis of the items requested and acts
as a solid basis for competent grades in A&UI and SP&S. In the body of the report this script also provides
good business and wider scenario information, both brought forward from the AI and presented with the new
CS Exam information to provide very good relevant context. The weakness in SP&S and in AJ concerning
the analysis of the inventory issue and its evaluation were somewhat typical of failing scripts. There was no

consideration of the fact that the inventory issue emphasises how close Doughby is to a breakeven profit
before tax. There was a further weakness in AJ because the script failed to address the evaluation of COS,
GP and OP adequately with the evaluation of revenue being the only strong section. The Conclusions were
sufficiently competent, missing only the detail on profit, but the Recommendations were weak.
In terms of answering this requirement this section of the report starts with analysis of overall revenue, which
is then broken down (but not fully) into the business streams. The analysis and evaluation of revenue was
good throughout and made this a thoroughly reviewed topic with clear references to the factors which had
affected the year.
The analysis of COS, GP and OP is properly focused at the right level, which indicates good analytical
technique in both the appendix and report, but the evaluation is not developed adequately.
The analysis of the inventory problem was weak, there was no logical assessment of the impact of this issue
on the three primary financial statements as requested, and the related evaluation was also thin. This
candidate did not identify that the issue poses an absolute problem for Doughby’s profitability (PBT falls to
£nil) regardless of the bank covenant issues. That important piece of news had to be identified and
communicated.
The script concludes appropriately in a section which follows the analysis and evaluation and includes
relevant numbers. However, the Recommendations were neither proactive nor commercial: “Monitor profits”
and “Monitor gearing” sound more like audit actions occurring after the event.
 evaluated the COS, GP and OP in more detail

 analysed and evaluated the inventory issue in terms of its impact on Doughby
 provided more relevant commercial recommendations.
Evaluation of proposal from Jiffa for own-label MG products [Requirement 2]
This section was not answered consistently well. Some passing grades were earned in each of the four skills
but there were skills weaknesses.
The calculations at Appendix 2 are not always accurate or suitably labelled. The candidate made the calculations
more complex by performing two pro-rata calculations, which must have taken time and was inefficient. All
calculations are based on the schedule in Exhibit 18. That said, within both the appendix and report there is good
use and analysis of the numerical information. There is also good presentation of the business issues and the
wider context.
In SP&S the analysis of the information for losing Jiffa was sufficiently competent and was carried into good
evaluation in AJ. However, the analysis of the assumptions was insufficiently competent. That weak analysis
carried through into a weak evaluation of assumptions, and a poor grade in AJ. The analysis of the ethical and
business trust issues was not precise and therefore was insufficiently demonstrated and this weakness carried
through into a similar situation in the appropriate evaluation of these issues. This weakness in this aspect of the
script appears to be a function of not being precise in considering logically the new issues arising in dealing with
Jiffa in this new venture. Jiffa’s demands, personnel and strategy are changing and these all have an impact on
Doughby’s operations which must be carefully assessed. Conclusions were thorough and clearly competent,
whilst Recommendations were sparse and not sufficient.
In answering this Requirement, the candidate has performed mostly relevant calculations and has been able to
incorporate many of the results of those calculations into the body of the report. The weaknesses are in analysing
and evaluating the assumptions and questioning them by considering the impact on Doughby. not on Jiffa:
“Customers have a lot of power in the industry so if they want to pay a smaller price the customer tends to win”. (This may
be correct, but it is not relevant to the analysis and evaluation of assumptions.) Similarly, the section on ethics
and business trust is not focused appropriately.
The Conclusion on the way forward is clearly identified and justified: “[Jiffa’s] new CEO is trying to drop prices
significantly in the next 2 years by 10-20%. This aggressive price drop is unfair for others in the supply chain as will mean
that profits fall significantly. Her actions are not in line with Doughby corporate ethos of fair business practice. We
recommend that Doughby does not go ahead with the proposal”. However, there are insufficient appropriate
Recommendations in this script.

 analysed and evaluated the assumptions more carefully and logically
 analysed and evaluated the ethical and business trust issues of Jiffa’s changing ethos and their precise
impact on Doughby
 provided more appropriate recommendations.
Evaluation of proposal from Sans-En (S-E) [Requirement 3]
This candidate’s answer to Requirement 3 was patchy. Some passing grades were earned across the four
professional skills but there were some weaker sections in this part of the report.
For Appendix 3 the candidate presented a series of short, relevant financial workings and calculations which
made use of the schedule from Exhibit 19 (similar to the schedule in Exhibit 9). The appendix covered the
questions posed and the calculations were accurate. This appendix provided a clear base for subsequent
financial analysis in the report. Unfortunately, the candidate did not demonstrate sufficient business issues
and wider context details in this section.
The candidate presented some effective, clearly competent analysis (SP&S) of the financial calculations in the
body of the report but failed entirely to provide relevant analysis of the operational and strategic issues.
Similarly, the ethical and business trust analysis is not fully relevant. Although the evaluation (AJ) of the overall
financial impact is insufficiently competent, the evaluation of the operational and strategic issues in the report is
sufficiently competent. Similarly, the ethical and business trust evaluation is sufficiently competent.
In answering this requirement this candidate has provided relevant calculations which are then used to provide
good financial analysis and evaluation in the body of the report. However, other aspects of this Requirement such
as the analysis of operational and strategic issues are not analysed or addressed adequately. Similarly, the
requirement to analyse ethical and business trust issues is not adequately addressed. Within evaluation, some
good use has been made of information both from the AI (such as the media article cited in the script) and from
the CS Exam: “S-E are well established and respected in the local area, and therefore it will be good for Doughby to trade
with a brand similar to theirs.”
Unusually the Conclusions section is insufficiently competent, but the Recommendations section is sufficiently
competent. The way forward is not identified with a clearly justified price – that section is a muddle and is
insufficiently competent, but the Recommendations are for precise Doughby actions – which is good – and this
section is sufficiently competent.
Unfortunately, overall, the strong parts in this Requirement are insufficient to carry this section to a pass.
 provided a more comprehensive analysis of the operational and strategic issues

 present better ethical and business trust analysis
 provided more comprehensive and appropriate Conclusions.

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Copyright @ ICAEW 2016. All rights reserved 222389

Copyright @ ICAEW 2016. All rights reserved 222389

1 About you (Bobbie Harding) and your employer (Bux Limited)

2 The UK book publishing industry: An overview

3 Children’s book publishing in the UK

4 Bux: Company overview

7 Bux: Key accounting areas

8 Bux: Key business processes

9a Royalties and advances

9b Examples of advances paid by Bux

12 Bux: Printing and distribution arrangements

These items are newly provided:

Reading and planning 1 hour

Applied to the four elements of your report (as described above)

I look forward to receiving your draft report.

 Total royalties paid comprise: on printed books: £3,137,000; on e-books: £2,815,000.

Statement of profit or loss for the year ended 31 May 2016

Revenue (Note 1) 50,383

Statement of financial position as at 31 May 2016

Total assets 29,304

Total equity and liabilities 29,304

Notes to the management accounts

Note 2: Cost of sales

Note 3: Administrative expenses

Note 6: Trade and other receivables

Note 7: Trade and other payables

Other relevant information (all provided by Liza) is set out below.

Hardback Paperback E-book

We must decide quickly whether to offer a contract to Emily.

I am asking any prospective publishers to commit £50,000 of promotional expenditure to

Painting a Poor Picture (Printing Press, July 2016)

Jax Suffers Hack Attack (Warehousing News, 17 July 2016)

Bookshop Ban (PrinciplesWatch.com website, 18 July 2016)

EXAMINERS’ COMMENTS AND MARK PLAN

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PART 1: EXECUTIVE SUMMARY

The exam requirements comprised:

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The Examiners concur with all these assessments.

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PART 2: THE CASE STUDY EXAMINATION

Scenario for the paper (Advance Information)

1 About you (Bobbie Harding) and your employer (Bux Limited)

Analysis of Advance Information (AI)

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Income statement: revenue

Statements of financial position and cash flow

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Information provided in the Exam Paper (EP)

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Analysis of Exam Paper information

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Exhibit 18 provides candidates with the following information:

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Summary of grades available

A&UI SP&S AJ C&R Total