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T4 Test of Professional Competence – Part B Case Study Examination

T4 – Part B Case Study Examination
Tuesday 26 February 2013

Instructions to candidates

You are allowed three hours to answer this question paper.

You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, make
annotations on the question paper. However, you will not be allowed, under
any circumstances, to begin using your computer to produce your answer or
to use your calculator during the reading time.

This booklet contains the examination question and both the pre-seen and
unseen elements of the case material.

Answer the question on page 17, which is detachable for ease of reference.
The Case Study Assessment Criteria, which your script will be marked
against, is also included on page 17.

Maths Tables and Formulae are provided on pages 24 to 27.

Your computer will contain two blank files – a Word and an Excel file.
Please ensure that you check that the file names for these two documents
correspond with your candidate number.

Page
Contents of this booklet:
Pre-seen material – BVS – Fleet maintenance case 2

Pre-Seen Appendices 1- 5 12

Question Requirement 17

Case Study Assessment Criteria 17

Unseen Material 19 - 22

Maths Tables and Formulae 24 - 27

© The Chartered Institute of Management Accountants 2013

 BVS – Fleet maintenance case

Industry background

Many companies worldwide operate and manage a fleet of vehicles, irrespective of whether they
are leased or owned vehicles. The types of vehicles they operate range from executive cars to
large articulated trucks and lorries. Within most companies, the vehicle fleet is managed by its
own in-house fleet management department, although this can be out-sourced. The fleet
management department is responsible for all aspects of the vehicle fleet. This includes vehicle
acquisition and de-fleeting, vehicle financing, vehicle maintenance, driver management, speed
management, fuel management and health and safety management.

Therefore, fleet management is a function which companies undertake in order to reduce the
risks and the costs associated with a range of activities including vehicle investment, improving
the efficiency of their fleet and providing compliance with respective regulations on vehicle
safety and road-worthiness. All vehicles need to be maintained in order to meet regulations as
well as to maintain operational efficiency and to reduce running costs. A well maintained vehicle
will breakdown far less often and therefore provide a greater degree of operational efficiency.
With the pressure on companies to reduce operational costs and to increase efficiency, it is
more important than ever for vehicle fleet costs to be better managed.

Within Europe alone, the number of commercial vehicles deployed in company fleets is forecast
to grow to four million vehicles by 2014.

Many companies operate their own in-house fleet management department but choose to
outsource the maintenance of their vehicles to one, or more, specialised fleet maintenance
companies.

Fleet maintenance

This case study concerns fleet maintenance specifically and does not encompass the many
other aspects of fleet management, such as the cost and selection of vehicle acquisition.

Fleet maintenance is crucial in order to run a safe, efficient and cost effective transportation
operation. The penalties for a company failing to meet regulations, which are becoming
increasingly more complex, are severe. For this reason most companies choose to outsource
their fleet maintenance requirements to specialised fleet maintenance companies, which are
able to deliver a one-stop service to meet all their needs. These needs are typically routine
servicing of vehicles, mechanical repairs and tyre replacement.

There is a range of large multi-national companies which operate their own fleet maintenance
departments. Some of these large companies offer a maintenance service to other companies.
In addition, there are many specialised fleet maintenance companies which offer services to
small fleets of 30 or fewer vehicles, as well as to larger fleet operators with over 5,000 vehicles.

Background on JAR Fleet Maintenance (JAR FM)

A large telecoms company, JAR, was a state-owned industry in its home European country until
it was privatised in 1994. JAR then established separate fully-owned subsidiary companies for
the various parts of its business. To support the telecoms business, JAR owned and operated a
large fleet of vehicles. JAR had always managed its own in-house fleet which was then split into
two separate subsidiary companies. One was fleet procurement and the other was fleet
maintenance. The fleet maintenance subsidiary company, called JAR FM, operated a large
number of vehicle workshops throughout this European country and it also outsourced a small
proportion of its maintenance to a range of smaller workshops in certain areas of this country.

JAR FM had been loss-making for many years, as its facilities were under-utilised and badly
managed. JAR FM maintained only JAR‟s own fleet of vehicles at this time. As part of the

T4 - Part B Case Study 2 March 2013

re-structuring of JAR during 2005, and in order to improve company-wide profitability, all of
JAR‟s subsidiary companies, including JAR FM, were given profit targets to meet over the 5-
year period ending 31 March 2010. Despite the operating profit targets that had been set for
JAR FM, the level of operating losses continued at around the same level as previously. This
prompted the main Board of JAR to recruit a more experienced Chief Executive for JAR FM.
Toby Baum was appointed to this role in August 2007.

Toby Baum had been recruited from outside the JAR group as he had extensive knowledge of
the fleet maintenance industry. He started a review of business activities and made changes in
the way the company operated. He was trying to improve the quality of the service the
workshops provided to JAR‟s fleet of vehicles. However, he met much opposition and was
unable to reduce headcount, due to opposition from trade unions. Therefore, he considered that
if he could not cut costs in the short-term, he needed to increase the revenues for JAR FM. He
was instrumental in marketing JAR FM‟s vehicle maintenance facilities in order to generate
revenues from new customers.

By 31 March 2008, JAR FM had reduced its operating losses to €3.0 million, the lowest level for
many years. At this stage JAR FM had just 2 new fleet maintenance customers, in addition to
the JAR fleet of vehicles. During the year ended 31 March 2009, Toby Baum was able to secure
vehicle maintenance contracts with a further 6 vehicle fleet operators, which helped to improve
workshop utilisation levels and generate substantial revenues. Additionally, the business had
closed some of its workshops. Operating profit for the year ended 31 March 2009 was €0.5
million. This was the first time JAR FM had been profitable for many years.

The Board of JAR was under pressure to increase group profits and to concentrate on its core
activities. This led to the Board of JAR making the decision in June 2009 to sell off, or close, a
number of its subsidiary companies, including JAR FM. The Board of JAR wished to dispose of
the selected subsidiary companies within 9 months, by 31 March 2010. The Board of JAR
announced in June 2009 that it would be seeking a trade buyer for JAR FM.

Employee reaction in JAR FM to this news was one of disbelief, particularly after the significant
improvements that had taken place over almost 2 years since Toby Baum was appointed. All
employees feared that they would lose their jobs and some of the administration staff sought to
transfer to another company within the JAR group.

At 30 June 2009 JAR FM employed almost 1,500 employees, including Head Office staff and
employees based at the 260 workshops across its home country. During the year ended 31
March 2010 some further contracts were signed with new customers, bringing in maintenance
work for a further 2,800 vehicles, offset by a fall in JAR‟s fleet size. This resulted in an end of
financial year (31 March 2010) figure of 47,500 vehicles being maintained.

Management Buy-Out in April 2010

Toby Baum was not totally surprised at the JAR Board‟s decision to sell off the fleet
maintenance business and he considered that this would be a good opportunity for a
Management Buy-Out (MBO) by some of the current management team of JAR FM.

However, Toby Baum considered that a particular area of weakness was the lack of
management information and financial control of the business due to a weak and ineffective
Finance Director who had worked in JAR FM for many years. However, he had confidence in
Leo Willems, Operations Director and the newly recruited Sales and Customer Support Director,
Phillip Beck. He discussed his ideas of a MBO with his 2 key operational colleagues, Leo
Willems and Phillip Beck, and received confirmation from both colleagues that they would be
prepared to go ahead. They also agreed that the new company (post MBO) would require a new
Finance Director with strong financial skills. Toby Baum identified an experienced accountant,
through a recruitment advisor, and appointed her as a consultant, to work for him personally, in
order to help to prepare a business plan and to try to identify a private equity provider.

Toby Baum also informally approached some of the members of the Board of JAR to establish
whether it would be receptive to a MBO for JAR FM, or whether it had already identified a trade

March 2013 3 T4 - Part B Case Study

buyer for the JAR FM business. He was informed that no buyers had yet been found, due to the
history of losses, and that a MBO would be possible, providing that the required finance could
be raised.

Following approaches to, and negotiations with, banks and private equity providers in late 2009
and early 2010, a deal was finally reached. Raising funds for a MBO was especially difficult
during this period due to the economic environment and restrictions on lending. The new MBO
company was to be called BVS. Toby Baum‟s business plan for BVS, together with his confident
charismatic personality, persuaded a private equity investor, PIE, to take a 60% stake in the
company.

A summary of BVS‟s key personnel is shown in Appendix 1 on page 12.

Negotiations took place with JAR on the valuation of the business, its assets and employee
liabilities. Toby Baum knew the company well, which is always a distinct advantage with MBO‟s,
and had already identified which assets, workshop facilities, and which staff he wished to
employ in the new company. After much negotiation an agreement for a valuation of the JAR FM
business was reached. The agreed valuation was €4.0 million. This net valuation included:

 120 specified workshops that would be transferred and managed by BVS (some owned
workshops and some leased).

 Liabilities for 860 employees that would transfer to the new MBO company.

 Inventory of materials and spare parts.

A 5-year maintenance agreement was also agreed for JAR‟s fleet of vehicles. The agreement
was to be at a fixed price per vehicle, based on vehicle type. The price would vary by the size of
JAR‟s fleet, which was forecast to reduce over the 5-year business plan period. There was also
a clause for the fixed price to be index linked to inflation each year. The 5-year maintenance
agreement for JAR‟s fleet had benefits for both parties. JAR was able to reduce its total fleet
maintenance costs and BVS would commence trading with a guaranteed 5-year contract for
JAR‟s fleet of vehicles, which covered 34,100 vehicles at 1 April 2010.

JAR FM had operated 260 workshops at 30 June 2009. However, Toby Baum did not want BVS
to be overly burdened with the employee and other running costs associated with operating
such a large number of workshops. BVS chose to acquire only 120 workshops from JAR FM, as
it planned to outsource the remaining volume of the maintenance work to a range of carefully
selected outsourced workshops, which met its quality and customer service requirements.

JAR was responsible for the closure costs of the other 140 workshops that BVS was not
acquiring. JAR was also responsible for all of the remaining employees of the JAR FM
subsidiary company, who were not employed by BVS.

News of the impending MBO was announced in January 2010 to all employees in JAR FM.
Negotiations then took place as to which employees would transfer into BVS and which
employees would transfer elsewhere within JAR or be made redundant. BVS would be totally
responsible for all future staff costs and liabilities for the 860 employees transferred into BVS.

Structure of BVS

BVS is a private limited company and not listed on any stock exchange. It has 400,000 shares in
issue, each of €0.50 par value. The company has an authorised share capital of 1,000,000
shares. When the company was established, at 1 April 2010, a share premium of €4.50 was
agreed. All shareholders purchased shares at a cost of €5.00 per share.

Each of BVS‟s 4 executive directors purchased their shares in cash and all of them had to raise
personal loans secured against their homes to generate the required level of financing for the
MBO. Therefore they are all personally very committed to making a success of BVS and to see
the company grow and achieve the business plan.

T4 - Part B Case Study 4 March 2013

The shareholdings are as follows:

Number of shares Percentage

held at shareholding
31 March 2012
%
Toby Baum 70,000 17.5
Leo Willems 30,000 7.5
Phillip Beck 30,000 7.5
Annika Larsen 30,000 7.5
PIE (private equity provider) 240,000 60.0
Total 400,000 100.0

The Board of BVS has not yet declared any dividends.

The agreed acquisition price was €4.0 million, payable to JAR in 4 instalments:

 €2.5 million on the date of acquisition, 1 April 2010.

 3 further instalments of €0.5 million each, of which 2 instalments were payable on 31 March
2011 and 31 March 2012, and the last instalment is payable on 31 March 2013.

Once PIE was signed up for its 60% equity stake, Toby Baum was able to negotiate and obtain
a bank loan for €1,400,000, at an interest rate of 12% per year. This loan is secured against the
assets of the company. The bank loan is repayable on 31 March 2015. The bank also agreed to
an overdraft facility to help meet the peak demands in working capital. The overdraft interest
rate is 14% per year.

Therefore, the overall structure of the book value of finance provided at 1 April 2010 was as
follows:

Management
€0.8 million

PIE private equity

€1.2 million

Bank loan financing

€1.4 million

The business plan

The business plan was to grow the existing vehicle fleet maintenance business and to expand
its geographical coverage of maintenance workshops to two neighbouring European countries.
Underpinning BVS‟s plan is for BVS to provide a seamless one-stop service to fleet managers
operating vehicle fleets across three countries. The Board planned to deliver this service
through the use of managed and outsourced workshops which would all deliver a high quality of
service, excellent customer care as well as the provision of management information on the fleet
vehicles through BVS‟s new IT systems.

March 2013 5 T4 - Part B Case Study

The principles behind BVS‟s business plan are shown in the following diagram:

Develop the strategy Monitor performance

 Vision  Profitability analysis

 Strategic analysis  Strategy reviews
 Business strategy  Operating reviews
 Customer responses

Operational planning

 Sales planning
 Resource planning
 Capacity limits
 Planned
improvements
 Adapt and change

The business plan includes a growth in revenues from €84 million to almost €140 million by 31
March 2015. Toby Baum, Managing Director, considered that this is challenging, but achievable.

Extracts from BVS‟s business plan are shown in Appendix 2 on page 13.

The core business that BVS offers to its customers is a fixed annual price, per type of vehicle,
for vehicle servicing. The price per vehicle varies depending on the type of vehicle and its
expected mileage. BVS‟s customers require that their vehicles are serviced on time, so as to
minimise the risk of breakdowns and failures, and the associated risk to its fleet safety.
Furthermore, they require that BVS‟s maintenance work should be of a high standard and that
quality replacement parts should be used, particularly for safety-critical elements such as brakes
and tyres. BVS‟s customers have differing requirements for the frequency of vehicle servicing,
depending on the mileage and type of vehicle. Other factors include the vehicle manufacturer‟s
recommended service frequency and the need for more frequent servicing in different
geographical regions and for harsher environmental conditions, such as during winter months.

Revenues are generated from four streams, which are:

1. Fixed price maintenance service (for which minor parts are not chargeable to customers)

2. Mechanical repairs, for which BVS charges its customers based on labour time as well as
the cost of bought in parts, with a small mark-up on parts. BVS does not provide vehicle
crash repairs at its own, or its outsourced, workshops.

3. Replacement tyres. BVS also makes a charge for the labour costs associated with replacing
tyres and balancing the vehicles wheels to ensure safe and accurate steering of all vehicles.

4. Additional fleet management services, as detailed on the next page.

T4 - Part B Case Study 6 March 2013

Additional fleet management services offered by BVS

BVS also offers a range of administrative services to help its customers manage their fleets.
These additional services are at an extra cost to customers, but many fleet managers want to
outsource them to a specialised company. BVS offers the following additional services:

 Fleet administration services and provision of vehicle management information.

 Management of vehicle road testing certificates.
 Accident management and arranging for vehicle repairs at specialist repair facilities.
 Management of vehicle insurance claims.
 Breakdown recovery service.
 Reporting of vehicle mileage and carbon emissions.

Toby Baum recognised that many company fleet managers wanted to outsource much of their
fleet operational work and BVS‟s customer were under pressure to control and reduce their fleet
operating costs. Furthermore, market research and contact with potential customers identified
that they were seeking a “one-stop” outsourcer which could not only service and maintain their
vehicles, but also provide key management information on each vehicle‟s operating efficiency.
This includes data on mileage, operating costs, tyre usage and carbon emissions. This
information can be gathered using new “telematic” technology.

A telematic device is defined as a piece of electronic equipment which is installed in each

vehicle which allows the vehicle‟s fleet management department, and its outsourced
maintenance supplier (such as BVS), to gather a range of data on each vehicle‟s operation. This
information is far more sophisticated than merely providing information on vehicle location, as it
can also provide data on how the vehicle has been driven. For example, it can report on
whether speed limits have been observed, how aggressively a vehicle has been driven round
corners and the usage of brakes. The flow of data to the fleet manager, and also to BVS,
generates information on all vehicles, the mileage driven and helps BVS to plan its customers‟
vehicles maintenance requirements. This enables BVS to ensure that its customers‟ fleet
vehicles are maintained to minimise breakdowns and to ensure that all vehicles meet all of the
legal and safety requirements. An added opportunity exists for the use of data from vehicles
fitted with telematic devices, as BVS is able to monitor and report to its customers‟ fleet
managers on carbon emissions for those customers who have selected to subscribe to this
additional fleet management service.

Current operations of BVS

The majority of BVS‟s work is generated from vehicle servicing, vehicle repair work and tyre
replacement. However, the additional fleet management services are a growing area of BVS‟s
revenues. Furthermore, these additional services have been instrumental in BVS winning
several large fleet maintenance contracts from competitors over the last few years.

Fleet managers are under increasing pressure to reduce their operating costs but also to meet
increasingly demanding vehicle safety compliance measures, especially in respect of the 3 key
areas of vehicle safety, concerning brakes, lights and tyres. BVS‟s Fleet Maintenance IT system,
FLIS, (see page 9) helps provide information to BVS‟s customers‟ fleet managers for them to
closely monitor their fleet vehicles. This IT system identifies the need for regular checks to be
undertaken and provides reports on vehicles that are due for any safety related maintenance
work.

Some of BVS‟s customers‟ fleets include vehicles which use alternative fuel sources. These
include vehicles which use a mix of fuels including bio-diesel, electric vehicles and hybrid
vehicles, which are capable of running on electric power or alternative fuel. Therefore, BVS has
had to adapt to the changing needs of its customers‟ fleet vehicles and offer a wider range of
maintenance services. This has enabled BVS to expand its skills and it has provided training for
some of its employees in the maintenance work required for these alternative vehicle types.
These services are currently offered at workshops located near major cities.

March 2013 7 T4 - Part B Case Study

Outsourced suppliers

Leo Willems was responsible for selecting and appointing a range of outsourced workshops to
undertake BVS‟s customers‟ vehicle maintenance in the geographical areas where BVS did not
retain its own managed workshop. Only 120 workshops were retained by BVS after the MBO
and with BVS‟s expansion into two neighbouring countries, it was necessary to appoint reliable
outsourced companies which have the vehicle capacity and experience to meet BVS‟s strict
criteria for maintenance and repair work.

BVS has appointed 5 outsourced suppliers for vehicle maintenance. By 31 December 2012
these 5 outsourced suppliers undertake maintenance work for BVS‟s customers‟ vehicles at
over 320 locations. These outsourced suppliers are independent chains of garages and
workshops which have spare capacity, or can provide increased capacity, to undertake
maintenance work which meets the strict criteria for quality of work and spare parts fitted as well
as excellent levels of customer service. These outsourced suppliers are presented to BVS‟s
customers as “BVS‟s partners”. These outsourced workshops have BVS‟s signage and BVS‟s
logo on all paperwork. This ensures that BVS‟s customers would not necessarily be able to
distinguish between any of BVS‟s own managed workshops and an outsourced workshop.

BVS‟s contracts with these outsourced suppliers are based on BVS paying an agreed fixed
hourly rate plus an agreed mark up on parts bought and used for customers‟ vehicles. These
outsourced costs are invoiced to BVS at the end of each calendar month, and are analysed by
vehicle and by outsourced workshop. As BVS is utilising a significant proportion of the 5
outsourced company‟s total workshop capacity, the contracted hourly rate with BVS is lower
than these outsourced companies charge their other customers. Additionally, all work
undertaken by all of the outsourced workshops is updated on BVS‟s Fleet Maintenance IT
system, FLIS, (see page 9). This IT system therefore reflects all of the work that has been
undertaken for all of BVS‟s customers‟ vehicles irrespective of whether the work occurs at an
outsourced workshop or in one of BVS‟s managed workshops.

Toby Baum chose to acquire only 120 workshops from JAR in April 2010 and to outsource the
remainder of the maintenance work to gain greater flexibility. The volume of work allocated to
outsourced workshops depends on a number of factors. These include:

 Geographical location.
 Customers‟ selection of the workshop, or workshops, in which they choose to have their
vehicles maintenance work undertaken.
 Availability and utilisation levels at BVS‟s 120 managed workshops.
 The overall number of vehicles BVS is responsible for maintaining.

BVS‟s customers want their vehicles off the road for the shortest possible time and they choose
where to book their vehicles for maintenance and repair work.

The business plan assumed that the 120 managed workshops would have utilisation levels of
90%, rising to 92% by Year 5. However, the business plan included a high growth in the number
of vehicles being maintained, and much of this increased volume of work was planned to be
undertaken by its outsourced workshops. The number of vehicle hours planned to be
outsourced was forecast to rise from fewer than 300,000 hours in the year ended 31 March
2011 to over 1,000,000 vehicle hours forecast in the year to 31 March 2015.

BVS’s new IT systems

Toby Baum recognised the lack of operational and management information provided by JAR
FM‟s IT systems, which had not been updated for many years. The first task that he undertook
when the MBO was approved was to appoint a global IT consultancy company to select and
implement new IT systems for BVS. However, until these new IT systems were operational, at
various dates during BVS‟s first year of trading, JAR allowed BVS to use its existing IT systems
for a small licence fee. By selecting the best available software solutions and integrating these
systems together, BVS was able to reduce the implementation time for these new systems. BVS

T4 - Part B Case Study 8 March 2013

now incurs annual software licencing fees of €0.24 million each year. This is included in
administrative expenses.

BVS‟s new IT systems include:

 a multi-currency nominal ledger including integrated sales and purchase ledgers and a
fixed assets register.
 a fleet maintenance IT system, called Fleet Information System (FLIS).
 a cash flow forecasting modelling system.

The Fleet Maintenance IT system, FLIS, provides management information tailored for the
needs of workshop managers, Head Office staff, the senior management team as well as for
BVS‟s customers. FLIS is installed at all workshops, both BVS‟s managed workshops and
outsourced workshops. It provides BVS‟s customers with improved reporting on fleet repair
costs, vehicle downtime, mileage data and more. FLIS incorporates detailed reporting with the
capability to track the maintenance needs for all of BVS‟s customers‟ vehicles. FLIS holds
statutory data, including vehicle taxes, mileage and maintenance and repair data as well as
carbon emission monitoring data. FLIS also provides a range of management information
reports, analysed by vehicle, by customer, by each engineer, and by managed workshop or
outsourced workshop.

FLIS can also be remotely accessed by BVS‟s customers for them to book their vehicles for
maintenance and repairs and to access information on vehicle status whilst in for servicing or
repair. This allows a seamless interface for customers, irrespective of whether the vehicle is
maintained by one of BVS‟s managed workshops or by an outsourced workshop.

The planned implementation cost for all of these new IT systems was €2.0 million, for both
hardware and software licencing costs. However, the final cost was €2.3 million, which was
charged in full (in Administrative expenses) against profits in the year ended 31 March 2011.
This cost was net of the agreed payment received from outsourced suppliers, for installing FLIS
at all of the outsourced workshops. Jonas Kral, PIE‟s representative on the BVS Board, was not
happy with this cost over-run, but was re-assured by Toby Baum that the IT systems were
robust and that they were all fully operational by the planned completion date.

During the year ended 31 March 2011, all employees and outsourced workshop personnel were
trained extensively in the use of these new IT systems. Additionally, they all receive regular
annual training in respect of FLIS system updates and any new features it offers.

Customers’ fleet profile

BVS maintains four categories of vehicles, which are:

 Vans.
 Cars.
 Articulated lorries.
 “Other” vehicles, for example street lighting trucks and earth-moving plant vehicles.

The majority of the vehicles maintained are vans and cars, with less than 10% of the total
vehicles that BVS maintains being articulated lorries and “other” vehicles.

Phillip Beck has been actively involved with meetings and presentations to many fleet
managers. He has been promoting the services that BVS offers to its customers, its quality of
service and maintenance standards as well as the range of management information that BVS
can provide to help each fleet manager run his or her fleet as cost effectively and efficiently as
possible.

Phillip Beck has had a real challenge to achieve the high growth in new sales, to meet the
agreed business plan vehicle and sales revenue targets. When BVS commenced operations on
1 April 2010, it was responsible for 47,500 vehicles. This comprised 34,100 vehicles in JAR‟s
fleet and 13,400 vehicles for other customers‟ fleets. At 1 April 2010, these 13,400 vehicles
comprised:

March 2013 9 T4 - Part B Case Study

 10 customers, each of which operates a fleet size of more than 300 vehicles, including 1
large fleet operator with 4,500 vehicles.
 84 different customers, each of which has a fleet size of 300 vehicles or fewer.

The forecast for 31 March 2013 is that other customers‟ fleets will have grown to comprise
33,200 vehicles (see Appendix 5 on page 16).

BVS does not offer any maintenance services to the general public.

JAR had signed a 5-year contract with BVS for maintaining its entire vehicle fleet, which
included 34,100 vehicles at 1 April 2010. This 5-year contract gave JAR assurances that its
vehicle fleet would continue to be maintained (as it had been previously by JAR FM) and it also
generated a large revenue stream for BVS. However, JAR‟s fleet size is forecast to reduce, as
part of JAR‟s planned cuts and efficiency improvements, to 26,000 vehicles by 31 March 2015,
as included in BVS‟s business plan.

Over the first 2 years of trading, Phillip Beck was pro-active in speaking to company fleet
managers to win new business. He considers that BVS offers a competitive service, clearly
priced with good levels of service and quality of work. BVS‟s geographical expansion to cover 2
neighbouring countries, as well as its home country, also enabled it to attract fleet managers
who were looking for a single outsourced fleet maintenance company across these 3 countries.

Phillip Beck has worked closely with regional and central government departments in BVS‟s
home country over the last year in order to try to win the fleet maintenance work for some of the
government‟s fleet of vehicles, including emergency vehicles such as police cars. A contract for
20,800 vehicles was signed with the central government department in June 2012, and
maintenance work commenced from 1 October 2012. The contract was for a rolling annual
contract with the possibility for a further 12,000 vehicles to be added in future.

Procurement

Leo Willems is responsible for all areas of procurement, including negotiations of prices with
outsourced suppliers as well as procurement contracts with a range of suppliers of vehicle parts
and tyres. The speed of delivery of spare parts for repairs is of great importance as the “down
time” of customers‟ vehicles whilst being repaired is crucial for its customers‟ businesses.
Therefore, BVS has in operation a large number of contracts with large, as well as small, vehicle
parts suppliers. These suppliers are normally able to meet the time-critical demands for getting
spare parts delivered to BVS‟s managed and outsourced workshops in the shortest possible
time, which is usually the same day as the order is placed.

BVS also has contracts in place with a range of specialist tyre manufacturers. BVS fitted over
500,000 tyres in the year to March 2012 for its customers. BVS considers that the cost, as well
as the quality of these tyres, is very important. Some customers specify which manufacturer‟s
tyres they require to be fitted, whereas other customers leave the choice of tyre to BVS‟s
expertise based on quality and value for money. BVS has a contract with a large European tyre
manufacturer which attracts a good volume discount. The reduced tyre cost is passed onto
BVS‟s customers, giving them a reduction in their fleet maintenance costs.

BVS employees

BVS took on responsibility for 860 employees at 1 April 2010. By 31 December 2012, employee
numbers had grown slightly to 890 employees, due to additional work carried out by Head Office
staff, in order to provide an efficient service to its customers.

The split of employees between BVS‟s 120 managed workshops and Head Office is as follows:

 Workshop based: 724 employees.

 Head Office: 166 employees.

T4 - Part B Case Study 10 March 2013

Toby Baum and the rest of the BVS Board recognise the important role all employees contribute
towards the company‟s success and the need to deliver high quality of service to customers.
Each of BVS‟s customers has an account manager as a point of contact, who has a small
support team. The account manager and the team provide support and management
information on their customers‟ vehicles and they try to ensure customer satisfaction. Some of
BVS‟s account managers provide support to many customers, especially those customers which
have small vehicle fleets. Regular customer surveys are carried out and the general feedback is
positive. BVS has not lost any of its customers to date.

In order to try to ensure goal congruence and to help BVS to succeed, Toby Baum established
performance related pay (PRP) for all employees from 1 April 2010. PRP is linked to the
achievement of different, specific objectives which are:

1. All employees – the achievement of the annual business plan operating profit.

2. Workshop based employees – the achievement of a “satisfactory”, or better, assessment of

the quality of work carried out within each of BVS‟s managed workshops based on
customers‟ assessment of their maintenance work at each workshop.

3. Sales employees and customer account managers – the achievement of high levels of
customer satisfaction as well as the number of new customers‟ vehicles for which BVS
acquires the maintenance work for each year.

Therefore, if BVS meets, or exceeds, the business plan annual operating profit, then a
proportion of the annual profits will be paid to all employees, assuming that the assessment of
their work has shown them to be satisfactory or better. Any employee with a poor assessment
will not receive any PRP.

PRP based on operating profit was not paid for BVS‟s first year, but it was paid in respect of the
year ended 31 March 2012. Most of BVS‟s managed workshops met the satisfactory
assessment requirement and the employees at these workshops received PRP. Additionally, all
of the sales and customer account managers received PRP for the higher than planned levels of
new customers‟ vehicles to be maintained by BVS, although there are some customer service
issues still to resolve. It is forecast that PRP will be paid in respect of the current year ending 31
March 2013.

PRP relates to BVS‟s employees at the 120 managed workshops only.

Financials

The planned level of operating profit was for €1.2 million in the year ended 31 March 2011 rising
to €10.0 million by the year ended 31 March 2015. In its first year of trading, BVS‟s operating
profit was lower than planned at €0.5 million. However, in its second year, operating profit was
higher than planned at €4.4 million, an increase from plan of €0.6 million.

An extract from BVS‟s accounts for the year ended 31 March 2012 is shown in Appendix 3 on
page 14.

BVS‟s Statement of cash flows for the year ended 31 March 2012 is shown in Appendix 4 on
page 15.

The latest forecast for the year ended 31 March 2013 has higher than planned operating profit
at €6.6 million due to an increase in the vehicle numbers compared to the business plan. This
also includes revenues and costs relating to the new government contract, which commenced
halfway through the current financial year.

The latest forecast for the year ended 31 March 2013 is shown in Appendix 5 on page 16,
compared to the business plan for this year.

March 2013 11 T4 - Part B Case Study

 Appendix 1
BVS’s key personnel

Toby Baum - Managing Director, BVS (since 1 April 2010)

Toby Baum, aged 48, was recruited as the new Chief Executive of JAR FM in August 2007 to try
to improve profitability. He had previously worked as the Fleet Maintenance Operations Director
of a smaller, but highly profitable, fleet maintenance company. Despite reducing the losses that
the subsidiary company made, the JAR Board decided to sell off JAR FM. He was instrumental
in preparing the business plan and for identifying an interested private equity investor, PIE, in
order to establish BVS on 1 April 2010. He borrowed funds to invest in 17.5% of the shares in
BVS.

Leo Willems - Operations Director

Leo Willems, aged 55, has spent his whole career in the vehicle industry. He has worked for
several companies in middle management positions involved in fleet management and also fleet
maintenance. He joined JAR in 2005, when the company recruited a number of senior
managers to improve operational efficiency and profitability. He borrowed funds to invest in
7.5% of the shares in BVS.

Phillip Beck - Sales and Customer Support Director

Phillip Beck, aged 40, was recruited in November 2007 by Toby Baum to identify new external
customers and to market and sell JAR FM‟s fleet maintenance services. He had previously
worked as a fleet manager for eight years, responsible for a large fleet of vehicles. In his
previous role he had been dissatisfied with the outsourced maintenance service and had
changed the outsourced service provider twice. As a fleet manager, he knew what service he
wanted to provide, and his previous experience of running a fleet helps him understand the
needs from a fleet manager‟s perspective. He has brought in, and retained, many large
customers with fleets of thousands of vehicles. This has helped generate large levels of
revenues with a relatively small impact on fixed costs. He borrowed funds to invest in 7.5% of
the shares in BVS.

Annika Larsen - Finance Director

Annika Larsen, aged 40, is a qualified accountant. She was recruited by Toby Baum initially as a
business consultant to help him arrange and establish the MBO. She had previously worked in
an international business consultancy firm, but had held senior finance roles in the retail and
distribution industries. She had no specialised knowledge of the vehicle maintenance industry
but Toby Baum considered that her financial skills were excellent. Whilst working directly for
Toby Baum as a consultant, she was offered, and accepted, the role of Finance Director in the
newly established company. She borrowed funds to invest in 7.5% of the shares in BVS.

Jonas Kral - Non-executive Director – PIE’s representative

Jonas Kral, aged 45, was selected to be PIE‟s representative on the BVS board. He is extremely
experienced in helping newly established businesses and MBO‟s to achieve their business
plans. He has undertaken a Board representative role many times before and brings
management experience to BVS. It is his role to ensure that BVS delivers the levels of cash flow
and profitability that are included in BVS‟s business plan. It is also his role to steer BVS towards
a flotation so that PIE can exit and realise its investment. PIE owns 60% of BVS‟s shares.

Jan Grein - IT Manager

Jan Grein, aged 32, was recruited by Jonas Kral in April 2010, immediately after BVS was
established, in order to help implement and manage the newly created IT systems. Jan Grein
previously worked as an IT manager in a competitor‟s fleet maintenance company and
understands the business well. He has also established good relations with many of the
workshop managers, who consider that he is approachable and helpful when they experience IT
problems or are confused about any aspects of the new IT systems.

Carmen Kemp - Human Resources Manager

Carmen Kemp, aged 55, was recruited to the newly established company in April 2010 and was
given a remit to ensure that all employees understood the importance of creating value in the
business and to deliver outstanding levels of customer service.

T4 - Part B Case Study 12 March 2013

 Appendix 2
BVS’s Business Plan

Year ended 31 March 31 March 31 March 31 March 31 March

2011 2012 2013 2014 2015
Business statistics:
No. of vehicles – End year:
JAR 32,100 30,100 28,100 27,000 26,000
Other customers 18,600 24,800 32,200 42,600 55,000
Total vehicles 50,700 54,900 60,300 69,600 81,000

No. of vehicles – average for year 49,100 52,800 57,600 64,950 75,300

Utilisation level at managed workshops 90.0% 90.0% 91.0% 91.0% 92.0%

Outsourced vehicle hours „000 hours 274 385 516 736 1,034

Financial plan: € million € million € million € million € million

Revenue 84.0 92.2 102.6 118.1 139.8

Cost of sales 64.9 71.6 79.7 91.9 109.5
Gross profit 19.1 20.6 22.9 26.2 30.3

Distribution costs 0.2 0.2 0.2 0.3 0.3

Administrative expenses 17.7 16.6 17.6 18.7 20.0
Operating profit 1.2 3.8 5.1 7.2 10.0

Finance costs 0.2 0.2 0.2 0.2 0.2

Profit before tax 1.0 3.6 4.9 7.0 9.8

Profit after tax 0.7 2.5 3.4 4.9 6.9

Business Plan - Number of vehicles - End year

Number of vehicles (end year)

90,000 81,000
80,000
69,600
70,000
54,900 60,300
60,000
47,500 50,700
50,000
40,000
30,000
20,000
10,000
0
Mar Mar Mar Mar Mar Mar
2010 2011 2012 2013 2014 2015

Business Plan - Operating profit

12.0
Operating profit (€ million)

10.0
10.0
7.2
8.0
5.1
6.0
3.8
4.0
1.2
2.0

0.0
Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015

March 2013 13 T4 - Part B Case Study

 Appendix 3
Extract from BVS’s Statement of Comprehensive Income,
Statement of Financial Position and Statement of Changes in Equity
Year ended Year ended
Statement of Comprehensive Income 31 March 2012 31 March 2011
€ million € million

Revenue 93.9 84.9

Cost of sales 72.8 66.2
Gross profit 21.1 18.7

Distribution costs 0.2 0.2

Administrative expenses 16.5 18.0
Operating profit 4.4 0.5

Finance income 0 0
Finance expense 0.2 0.2

Profit before tax 4.2 0.3

Tax expense (effective tax rate is 30%) 1.3 0.1
Profit for the period 2.9 0.2

As at As at
Statement of Financial Position 31 March 2012 31 March 2011
€ million € million € million € million

Non-current assets (net) 3.2 3.4

Current assets
Inventory 1.6 0.9
Trade receivables 17.8 13.1
Cash and cash equivalents 0.3 0.1
Total current assets 19.7 14.1
Total assets 22.9 17.5

Equity and liabilities

Equity
Issued share capital 0.2 0.2
Share premium 1.8 1.8
Retained earnings 3.1 0.2
Total Equity 5.1 2.2

Non-current liabilities
Long-term loan 1.4 1.4
Liability for acquisition (to JAR) – due over 1 year 0 0.5

Current liabilities
Liability for acquisition (to JAR) – due within 1 year 0.5 0.5
Bank overdraft 0 0
Trade payables and other liabilities 14.6 12.8
Tax payables 1.3 0.1
Total current liabilities 16.4 13.4
Total equity and liabilities 22.9 17.5

Note: Paid in share capital represents 400,000 shares of €0.50 each at 31 March 2012.

Statement of Changes in Equity Share Share Retained Total

For the year ended 31 March 2012 capital premium earnings
€ million € million € million € million

Balance at 31 March 2011 0.2 1.8 0.2 2.2

Profit 0 0 2.9 2.9
Dividends paid 0 0 0 0
Balance at 31 March 2012 0.2 1.8 3.1 5.1

T4 - Part B Case Study 14 March 2013

 Appendix 4

Statement of Cash Flows

Year ended
31 March 2012

€ million € million

Cash flows from operating activities:

Profit before taxation (after Finance costs (net)) 4.2

Adjustments:
Depreciation 0.4
Finance costs (net) 0.2
0.6

(Increase) / decrease in inventories (0.7)

(Increase) / decrease in trade receivables (4.7)
Increase / (decrease) in trade payables (excluding taxation) 1.8
(3.6)

Finance costs (net) paid (0.2)

Tax paid (0.1)
(0.3)

Cash generated from operating activities 0.9

Cash flows from investing activities:

Purchase of non-current assets (net) (0.2)

Cash used in investing activities (0.2)

Cash flows from financing activities:

Payment of instalment for acquisition (0.5)
Dividends paid 0

Cash flows from financing activities (0.5)

Net increase in cash and cash equivalents 0.2

Cash and cash equivalents at 31 March 2011 0.1

Cash and cash equivalents at 31 March 2012 0.3

March 2013 15 T4 - Part B Case Study

 Appendix 5

Latest forecast for year ended 31 March 2013 compared to Business Plan

Year ended Year ended

31 March 2013 31 March 2013

Forecast Plan
Business statistics:

No of vehicles - end year

JAR 28,100 28,100
Government contract (from October 2012) 20,800 -
Other customers 33,200 32,200

Total vehicles - end year 82,100 60,300

No of vehicles - average for year 69,000 57,600

Utilisation level at managed workshops 91.5% 91.0%

Outsourced vehicle hours („000 hours) 851 516

Financial plan: € million € million

Revenue 122.9 102.6

Cost of sales 98.5 79.7
Gross profit 24.4 22.9

Distribution costs 0.2 0.2

Administrative expenses 17.6 17.6
Operating profit 6.6 5.1

Finance costs 0.2 0.2

Profit before tax 6.4 4.9

Profit after tax 4.5 3.4

End of Pre-seen material

T4 - Part B Case Study 16 March 2013

 BVS – Fleet maintenance case – Unseen material provided on examination day

Additional (unseen) information relating to the case is given on pages 19 to 22.

Read all of the additional material before you answer the question.

ANSWER THE FOLLOWING QUESTION

You are the Management Accountant of BVS.

Toby Baum, the Managing Director, has asked you to provide advice and
recommendations on the issues facing BVS.
Question 1 part (a)
Prepare a report that prioritises, analyses and evaluates the issues facing BVS and
makes appropriate recommendations.
(Total marks for Question 1 part (a) = 90 Marks)

Question 1 part (b)

In addition to your analysis in your report for part (a), Toby Baum, the Managing
Director, has asked you to prepare a presentation to the Board on the effect on
operating profit and utilisation level for 2013/14 for the 10 under-performing workshops.
Your presentation should contain no more than 5 bullet points, including your
recommendation, and 1 graph (a column or a bar chart or a line chart).
This graph, as an attachment to your presentation, should show the actual utilisation
levels for each under-performing workshop in 2012/13 together with the forecast and
planned utilisation levels for 2013/14 and the annual effect on the utilisation level if
2,000 extra hours of work were to be undertaken at each of these workshops.
(Total marks for Question 1 part (b) = 10 Marks)

Your script will be marked against the T4 Part B Case Study Assessment Criteria shown below.
Assessment Criteria

Criterion Maximum
marks available
Analysis of issues (25 marks)
Technical 5
Application 15
Diversity 5
Strategic choices (35 marks)
Focus 5
Prioritisation 5
Judgement 20
Ethics 5
Recommendations (40 marks)
Logic 30
Integration 5
Ethics 5
Total 100

March 2013 17 T4 - Part B Case Study

 This page is blank

T4 - Part B Case Study 18 March 2013

 BVS – Fleet maintenance case – unseen material provided on examination day

Read this information before you answer the question

Apprentice scheme proposal

Leo Willems, Operations Director, is concerned that with the planned growth in vehicle numbers,
the 120 BVS managed workshops are under pressure to cope with the planned volume of
maintenance work. The age profile of workshop employees shows that 50 employees are within
1 to 5 years of the current retirement age of 65 in BVS‟s home country. This is shown below:

Age range Number of workshop

employees

Under 30 years old 260

30 to 49 years old 368
50 to 59 years old 46
Over 60 years old 50
Total workshop employees 724

Following discussions with Carmen Kemp, Human Resources Manager, a proposal has been
prepared to introduce an apprentice scheme. Details are:

 The apprentice scheme would cover 1 year. The total salary and associated employer costs
for each apprentice would be €22,000 each year.
 External training costs are forecast to be €5,000 for each apprentice for the 1 year course.
 Government subsidy available of €4,000 for each apprentice for the 1 year course.
 It is forecast that each apprentice employed would result in a reduction in the number of
hours chargeable to customers by 420 hours each year, as workshop employees spend
time training each apprentice. This loss of time would result in additional outsourced
maintenance work at a cost to BVS of €32.00 per hour.

Carmen Kemp believes that at least 10 apprentices should be trained each year, but the Board
has indicated that a budget of only €150,000 is available each year. Some Board members
consider that experienced qualified vehicle mechanics could be recruited when BVS requires
new employees and that the apprentice scheme is an unnecessary expense. There is a
shortage of skilled vehicle mechanics in BVS‟s home country. One Board member has
suggested that apprentices should not receive any salary during their training.

Vehicle repairs

The Fleet Manager of JP, one of BVS‟s customers, has queried the repair bill for some work
undertaken at one of BVS‟s managed workshops on 5 different vehicles in JP‟s fleet. JP‟s Fleet
Manager questioned why certain parts, brakes and some other parts, had been charged for in
February 2013 when they had only been replaced, and charged for, in January 2013. The
lifespan for these parts, even with the high mileage that these vehicles undertake, would only
require them to be replaced every 3 months at the earliest. BVS‟s account manager, who is
responsible for this customer, was concerned that it was a duplicate charge and that it would
only require the customer‟s account to be credited for these repair costs. You, as the
Management Accountant, have decided to investigate this query more fully.

On investigation you have identified that all of these parts for the 5 vehicles were replaced in
January 2013 as well as in February 2013, so it was not a duplicate charge. You have spoken to
the workshop manager and established that all of the mechanics at his workshop have been
instructed to replace parts as they consider necessary and even commented “well, this at least
generates extra billable work and more revenue for BVS”. You have reported this conversation
back to the account manager, who wants to keep the customer happy and has asked you to just
raise a credit on the customer‟s account for these repairs and not to take any further action.

March 2013 19 T4 - Part B Case Study

Electric vehicles

Currently, BVS offers electric vehicle servicing at only 60 of BVS‟s managed workshops. Many
of BVS‟s customers are increasing the number of electric vehicles in their fleets. The work
required to service electric vehicles is low as it relies on electrical diagnosis of faults and the
“removal and replacement” of faulty parts. Some customers have complained that BVS‟s current
fixed-price for electric vehicle servicing is too high at €500 per vehicle each year.

One of BVS‟s customers, FAST, with a fleet size of 4,500 vehicles, has recently announced its
plans to replace 1,000 vehicles with electric vans over the next year. Its Fleet Manager has
informed Leo Willems that it will terminate its contract with BVS in September 2013 unless BVS
is able to expand the geographical coverage of workshops equipped to service electric vehicles.
The current gross profit is €310 per year for each of FAST‟s normal vehicles (i.e. non-electric
vehicles). This compares with the current annual gross profit of €120 per electric vehicle.

Toby Baum, the Managing Director, has received a proposal from an electric vehicle
manufacturer, E-car. The proposal is for BVS to be one of E-car‟s appointed electric car
servicing providers as well as providing electric vehicle charging points at all of its workshops.
E-car‟s Sales Director considers that BVS‟s involvement could help promote higher fleet sales of
its electric vehicles. The proposal for electric re-charging points, which would have the new
universal fitting allowing re-charging for any make of electric car, would require installing re-
charging points at all of BVS‟s managed workshops and outsourced workshops. This would
necessitate dedicating an area in the workshop parking area for electric vehicles to re-charge at
any time. E-car will contribute 50% towards the cost of installing re-charging points. E-car has
asked for a decision within 2 weeks.

Preliminary discussions with BVS‟s outsourced workshop supply companies are that they are all
in favour of the proposal to service electric vehicles and provide re-charging points. However,
they have all stated that they will not contribute towards the capital investment, training or the
installation costs of re-charging points.

Further information on the proposal to expand BVS‟s services for electric vehicles is as follows:

 To equip and train staff at 380 workshops (60 BVS managed and 320 outsourced) at the
start of the proposal, at a cost of €4,000 per workshop. Currently only 60 BVS managed
workshops offer electric vehicle servicing. This will mean that all 120 of BVS‟s managed
workshops will offer electric vehicle serving.

 Average number of BVS‟s customers‟ electric vehicles in Year 1, which BVS is forecast to
service, is 1,800 vehicles, growing at 30% each year.

 BVS‟s share of the capital investment for the installation of electric charging points at the
start of the proposal is €2,500 for each workshop location for all 440 workshops.

 Operating profit from re-charging points is forecast to be €2,000 per workshop in Year 1,
growing at 30% each year. BVS will retain the profits at only its 120 managed workshops.

 Variable operating costs (manpower at BVS managed workshops and charges from
outsourced workshops) are forecast to average €260 for each electric vehicle each year.

 The proposal is to charge all customers (including FAST) a fixed price of €450 for each
electric vehicle each year, a reduction from the current price of €500.

 The capital expenditure and training costs would be funded from cash generated from
operations together with additional loan finance.

Annika Larsen, Finance Director, has asked for the proposal to be evaluated over a 4 year
period, using BVS‟s pre-tax cost of capital of 12%. You should assume that all cash flows,
except equipment, training and capital investment, occur at the end of the year to which they
relate. Jonas Kral, PIE‟s representative on the BVS Board, has stated that this proposal will only
be acceptable to PIE if it generates a positive NPV within 3 years.

T4 - Part B Case Study 20 March 2013

Under-performing workshops
BVS has significantly increased the number of vehicles that it maintains since the company was
formed in April 2010. The company has not increased the number of workshops that it manages
and this still remains at 120 workshops. The remainder of the maintenance work for its
customers‟ vehicles is undertaken by 5 outsourced companies operating across 3 European
countries. BVS‟s customers can choose to book any of their vehicles for maintenance at any of
BVS‟s workshops, whether they are BVS managed workshops or outsourced workshops.

It has been established that BVS has 10 managed workshops that are under-performing.
Customer feedback for these 10 BVS managed workshops is generally negative with reports of
delays in vehicle repairs and poor quality of work. One vehicle was involved in an accident soon
after it had been maintained by BVS. The accident was blamed on faulty workmanship. Leo
Willems, Operations Director, is concerned that previous actions have not resulted in improved
quality of work at these 10 workshops. Over the last 2 years the workshop managers and all
employees at these 10 workshops have attended a variety of training courses.

Leo Willems is now considering:

(A) Closing down some, or all, of these 10 managed workshops and moving the work to
outsourced workshops. All 10 workshops are leased at a cost of €48,000 per workshop
each year, with a 2 month notice period. The lease costs are included in the direct fixed
costs for each workshop. Employee termination costs are forecast at €30,000 per workshop.

(B) Replacing the managers and some of the employees at these 10 managed workshops.

(C) Promotional discounts for customers to try to persuade them to book their vehicles into
these 10 BVS managed workshops.

The actual data for 2012/13 is compared to the latest forecast and plan for 2013/14 as follows:

Figures are for EACH of the 10 workshops Actual Latest Plan

forecast
2012/13 2013 /14 2013 /14
Total hours available at each workshop 11,100 11,100 11,100

Average number of hours work charged to customers 7,104 6,882 10,101

for work performed at each workshop

Utilisation level 64.0% 62.0% 91.0%

Direct fixed costs for each workshop € 284,000 290,000 290,000

Cost of outsourced workshops € per hour 32.00 32.00 32.00

You are asked to calculate the effect on forecast operating profit for 2013/14 for 3 alternatives:

 Alternative 1. If all 10 workshops were to achieve the planned utilisation level of 91.0%.

 Alternative 2. If all 10 workshops were to be closed immediately.

 Alternative 3. If an additional 2,000 hours of work were to be carried out at each workshop,
in addition to the forecast level of 6,882 hours. You should also calculate the effect on
utilisation levels for these proposed additional 2,000 hours.

Jonas Kral, PIE‟s representative on the BVS Board, has insisted that 2 of these under-
performing workshops are closed immediately and the BVS management team have agreed to
this. Jonas Kral has asked you, the Management Accountant, to provide him with the location of
the 2 worst performing workshops, so that he can announce the closure of them immediately.
You, as Management Accountant, do not feel confident that your information is sufficiently
robust and adequate enough to justify this business decision.

March 2013 21 T4 - Part B Case Study

Inventory valuation

You are preparing for the financial year end inventory count at workshops and have emailed out
some forms for workshop managers to complete. You have now received several questions
from workshop managers about the information that you have asked for. The questions that
have been asked are:

1. Why does the inventory count have to take place on Sunday 31 March? Several
workshop managers have asked if the count could be taken at various times during the
week commencing Monday 25 March, as the workshops are fully booked with vehicle
maintenance work everyday including the weekend.

2. How should parts be valued? Workshop managers have asked whether parts should be
valued at the original purchase cost, as some parts were bought in bulk, or whether they
should be valued at the current cost. Some parts are currently substantially cheaper to
buy, whereas other parts are significantly more than the original purchase cost.

3. Slow moving items – why do these parts need to be counted and valued as they are
hardly ever used?

4. One workshop manager has asked how he should value some specialised tyres. A bulk
purchase of 200 of these specialised tyres was made last year at €150 per tyre.
However, 140 tyres are still in inventory and have not been used at all, as the customer
whose vehicles needed these specialised tyres, sold the vehicles 2 months ago.

End of unseen material

T4 - Part B Case Study 22 March 2013

 This page is blank

March 2013 23 T4 - Part B Case Study

APPLICABLE MATHS TABLES AND FORMULAE

Present value table

-n
Present value of 1.00 unit of currency, that is (1 + r) where r = interest rate; n = number of periods until
payment or receipt.

Periods Interest rates (r)

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

T4 - Part B Case Study 24 March 2013

Cumulative present value of 1.00 unit of currency per annum, Receivable or Payable at the end of
each year for n years  r
1(1 r )  n 
 

Periods Interest rates (r)

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

March 2013 25 T4 - Part B Case Study

FORMULAE

Valuation Models
(i) Irredeemable preference share, paying a constant annual dividend, d, in perpetuity,
where P0 is the ex-div value:
d
P0 =
k pref

(ii) Ordinary (Equity) share, paying a constant annual dividend, d, in perpetuity, where P0 is
the ex-div value:
d
P0 =
ke
(iii) Ordinary (Equity) share, paying an annual dividend, d, growing in perpetuity at a constant
rate, g, where P0 is the ex-div value:
d1 d 0 [1  g ]
P0 = or P0 =
ke - g ke  g

(iv) Irredeemable (Undated) debt, paying annual after tax interest, i (1-t), in perpetuity, where
P0 is the ex-interest value:
i [1  t ]
P0 =
k dnet
or, without tax:
i
P0 =
kd
(v) Future value of S, of a sum X, invested for n periods, compounded at r% interest:
n
S = X[1 + r]

(vi) Present value of £1 payable or receivable in n years, discounted at r% per annum:

1
PV =
n
[1  r ]

(vii) Present value of an annuity of £1 per annum, receivable or payable for n years,
commencing in one year, discounted at r% per annum:

1 1 
PV =

r 
1


n
[1  r ]

(viii) Present value of £1 per annum, payable or receivable in perpetuity, commencing in one
year, discounted at r% per annum:
1
PV =
r

T4 - Part B Case Study 26 March 2013

(ix) Present value of £1 per annum, receivable or payable, commencing in one year, growing
in perpetuity at a constant rate of g% per annum, discounted at r% per annum:
1
PV =
r g

Cost of Capital
(i) Cost of irredeemable preference capital, paying an annual dividend, d, in perpetuity, and
having a current ex-div price P0:
d
kpref =
P0
(ii) Cost of irredeemable debt capital, paying annual net interest, i (1 – t), and having a
current ex-interest price P0:

i [1  t ]
kdnet =
P0
(iii) Cost of ordinary (equity) share capital, paying an annual dividend, d, in perpetuity, and
having a current ex-div price P0:

d
ke =
P0
(iv) Cost of ordinary (equity) share capital, having a current ex-div price, P0, having just paid a
dividend, d0, with the dividend growing in perpetuity by a constant g% per annum:

d1 d 0[1  g ]
ke =  g or ke = g
P0 P0
(v) Cost of ordinary (equity) share capital, using the CAPM:
ke = Rf + [Rm – Rf]ß

(vi) Weighted average cost of capital, k0:

 VE   VD 
k0 = ke
V  V   kd
V  V 
 E D  E D

March 2013 27 T4 - Part B Case Study

 T4 – Test of Professional
Competence - Part B Case Study
Examination

March 2013

T4 - Part B Case Study 28 March 2013