Strategic Business Management November 2022 Mark Plan

Strategic Business Management November 2022 – Advanced Level
MARK PLAN AND EXAMINER’S COMMENTARY
This report includes:

• a summary of the scenario and requirements for each question
• the technical and skills marks available for each part of the requirement
• a description of how skills should be demonstrated
• detailed points for a full answer
• examiner’s commentary on candidates’ performance
The information set out below was that used to mark the questions. Markers were
encouraged to use discretion and to award partial marks where a point was either not
explained fully or made by implication.
Question 1 – Zoomer Electric Cycles Ltd (ZEC)
Scenario
ZEC manufactures electrically powered bicycles (e-bikes) at its factory in south-east England.
Sales are made to consumers in the UK and mainland Europe.
The board is concerned about the capacity and reliability of ZEC’s inward supply chain and, in
particular, about the supply of e-bike frames, a major component bought from two suppliers.
Prepopulated spreadsheet data is provided with information about the reliability of timing and
quality of the supply of ebike frames.
The board is considering selecting one of the two existing suppliers of ebike frames as the
preferred supplier or selecting a third supplier.
The board wishes to expand production capacity by opening an additional factory either in
Hastings or the Netherlands.
Two alternative methods of private equity financing for the additional factory have been
identified.
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Requirements MARKS Skills assessed

(Max)
(Headroom)
1. Regarding the supply chain for e-bike • Assimilate and analyse the data in the
frames (Exhibit 2): prepopulated spreadsheet.
• Demonstrate an understanding of the
(a) Assimilate and analyse the data in information and data provided.
the pre-populated spreadsheet • Analyse the summary data in a
in relation to the number of: 27 structured manner (eg, a table).
• late deliveries • Carry out data analysis to identify key
• defective items. (29)
differences in the relative performance
of the two suppliers.
(b) Evaluate and explain the relative • Use judgement to distinguish the causal
performance of the two suppliers factors for differences in performance of
relating to delivery dates and each supplier.
defective items. In so doing, use • Address and articulate the key issues
your results in (a) and the succinctly.
information in Exhibit 2. • Demonstrate a clear understanding of
key risk issues.
(c) Using the information in Exhibit 2 • Assimilate other information to provide a
and the other information reasoned and revised conclusion.
available, explain and evaluate • Use judgement and data to select a
the benefits and risks of the two preferred supplier.
choices for increasing the supply • Use judgement to provide a reasoned
of e-bike frames. Provide a conclusion.
reasoned recommendation. • Demonstrate skills of professional
presentation and appropriate language.
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2. Regarding the decision to open an

additional factory (Exhibit 3): • Use judgement to identify and select
key issues for each location.
(a) Explain and evaluate whether the 17 • Demonstrate a clear understanding of
new factory should be located in the characteristics of the two locations.
Hastings or the Netherlands and (19) • Demonstrate a clear understanding of
provide a reasoned key risk issues.
recommendation. Include a • Set out structured calculations.
calculation of the NPV for each • Use judgement to critically appraise
factory at 1 October 2023, using each location.
the working assumptions.
• Understand and assimilate the non-
financial information provided to assess
(b) Assuming that the ZEC board
the implications for each contract.
decides to locate the new factory
• Set out structured calculations to
in the Netherlands:
demonstrate the impact of exchange
• Calculate and explain the rate appreciation on NPV.
impact on the NPV if the €
• Assimilate and select relevant
appreciates against the £ by
information to set out and explain the
3% per annum, as suggested
financial reporting treatment of the
by the finance director.
lease.
• Set out the financial reporting
• Select and structure relevant
treatment of the Netherlands
information to set out and explain the
factory lease in ZEC’s
financial reporting treatment to
financial statements in each of
determine profit before tax.
the four years to 30
September 2027.
3. Explain and evaluate the factors that • Assimilate and structure available data.
the ZEC board should consider in • Demonstrate an understanding of the
choosing between the two methods of information and data provided.
financing from the private equity funds 11 • Analyse and assimilate the data in a
(Exhibit 4). structured manner for each method of
Provide supporting calculations and a (12) finance.
reasoned recommendation. • Demonstrate a clear understanding of
key risk issues.
• Demonstrate a clear understanding of
financial costs and provide supporting
calculations.
• Use judgement to provide a reasoned
conclusion.
Maximum marks 55
Headroom 60
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Requirement 1.1
(a)
Delivery times
Horace Basten Total

Late 1 6 7
Ontime 26 12 38
Total 27 18 45
% late 3.7% 33.3% 15.6%
Defects
Horace Basten Total

Defective 67 9 76
Not
defective 2,195 1,499 3,694
Total items 2,262 1,508 3,770
% defective 3.0% 0.6% 2.0%
(b)
Late deliveries
Horace has performed well with only 1 of its 27 deliveries (3.7%) being late, which was
only late by one day. Indeed, two of its deliveries (7.4%) were made earlier than the 7-
day agreed period.
Conversely, Basten has performed poorly in terms of delivery time with one third
(33.3%) of its 18 deliveries being late. Four of the 18 deliveries (22.2%) were late by two
days or more (up to four days late). None of its deliveries were made earlier than the 7-
day agreed period.
However, the sample period of only two months is short and may be atypical of longer-
term performance on delivery times, perhaps reflecting short-term logistical problems
being experienced by Basten.
Causal factors
Route cause analysis may help explain the issues to identify solutions. Basten is clearly
more geographically remote from the ZEC factory than Horace and is in a different
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jurisdiction, where import/export regulatory compliance or transport issues may have

caused delays. Reviewing the available documentary compliance and transport issues
may reduce delays.
The agreed delivery period of seven days is the same for both companies.
Consideration could be given for a longer lead time for Basten. This may create greater
delays, but also more certainty in the lead times. This could be facilitated by ZEC having
improved procurement planning and ordering earlier or maintaining more inventories to
reduce uncertainties.
Other causes may include:

• Suppliers’ policies – does Basten have a policy of delaying deliveries to obtain a
full load or shared load to the UK?
• Practices – why have delays arisen in the two-month period? Is it due to
inefficient practices or inappropriate procedures (eg, for production, storage or
delivery)?
• Capacity – does Basten lack staff or a sufficient number of vehicles to meet
demand? Do they accept orders from ZEC when they are already at peak
production capacity?
• Capability – is there appropriate resource for staff (training and recruitment with
necessary skills); IT (meets industry standards and appropriate for purpose);
vehicles (right size and type; reliable)?
• Allocations – are orders allocated to both suppliers on equivalent terms eg, times
of the day.
• Events – have there been random unavoidable or unforeseeable events which
have caused delays (eg, traffic delays, staff illness, access to documentation,
vehicle break down)?
Defective items
Basten has performed well with only 9 frames with defects of the 1,508 delivered to
ZEC (0.6%). This is within the agreed tolerance level of 1% for defects.
Conversely, Horace has performed poorly in terms of defects with 67 frames having
defects of the 2,262 delivered to ZEC (3%). This is three times the agreed tolerance
level of 1% for defects.
The overall number of defects hides considerable variance between deliveries, in the
two-month sample period. There were as many as five defect items in one delivery,
while other deliveries had zero defects.
The sample period of only two months is short and may be atypical of longer-term
performance on the amount of defects, perhaps reflecting short-term production
problems being experienced.
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Given that the e-bike frames are the same for both suppliers, then the defects in
production are comparing like with like.
Factors to consider
Improved quality assurance by Horace could help to prevent and detect and reduce the
amount of frames with defects being delivered to ZEC.
Similarly, improved quality assurance by ZEC over goods inwards may help detect and
reduce the amount of frames with defects being accepted by ZEC.
Penalty clauses in contracts with suppliers of frames, if defects exceed 1 in 100, may
also incentivise suppliers of e-bike frames to improve their quality assurance
procedures.
Benchmarking the proportion of defects against the performance of Basten may help
Horace improve its quality assurance procedures by showing improvement of quality is
achievable on the same product.
Further information
Before conclusions can be drawn, further information and explanations are required
from each supplier to identify the underlying causes of the differences in relative
performance in the sample period.
Whilst Horace has superior performance in reliability of delivery times, Basten clearly
has better performance in the proportion of defective items delivered. Basten also has a
lower price per frame than Horace by £21 in 2022. The lower price may offset any costs
arising to ZEC for late delivery.
More information is also needed on the consequences for ZEC of the opening of the
new production facility by Basten next year.
(c)
The current arrangement has ZEC with just two suppliers of a key component, the e-
bike frame. This can be described as one of strategic procurement. This is the
development of a partnership between a company a limited number of key suppliers of
strategic value. The arrangement is usually long-term in nature and addresses not only
the buying of components, but part of product design and supplier capacity.
The following are some of the advantages of this type of relationship:

• Consistency (shape, size, quality, design) from only two suppliers.
• Easier to monitor quality.
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• Suppliers may be dependent on ZEC and are therefore more responsive to its
needs, if a large amount of its income is being earned from it.
• More scale economies can be earned by suppliers to reduce costs if a large
proportion of ZEC’s e-bike frame supply is sourced with just two companies. This
can then be passed on to ZEC in reduced prices.
• Communication, integration and synchronisation of the two companies' systems are
easier (eg, integrated IT systems).
• Collaboration is easier and more mutually beneficial in developing new products
because the benefits come to just two suppliers.
However, if the two months’ data is typical, there are issues of delays in delivery with
Basten and a high proportion of defects with Horace.
If ZEC uses a third supplier, then a number of benefits can arise:
• ZEC can drive down prices charged to it by encouraging competition between

suppliers who know that ZEC has a choice of three alternative suppliers.
• Switching sources of supply may be possible by dropping a supplier altogether if it
is delivering a poor quality product or has late deliveries, or at least reducing the
number of purchases.
• ZEC can benefit from innovation in future product development from many
companies rather than just one.
However, if the new supplier is to charge the equivalent of £500 per e-bike frame, this is
more expensive than both existing suppliers, even with a 5% increase in price for the
year ending 30 September 2023.
Moreover, if the new supplier is to invoice in euro, then this could extend the currency
risk as ZEC’s revenue are generated in £s.
There may also be uncertainties in working with a new supplier.
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Requirement 1.2 (a)
Input variables
Growth rate 0.2

Initial XR 1.15
Discount rate 0.06
Company-wide
2023 2024 2025 2026 2027
Volume 22,600 27,120 32,544 39,053 46,863

Existing capacity 22,600 22,600 22,600 22,600 22,600
demand - 4,520 9,944 16,453 24,263
Hastings
Variable cost pu £ 1,700
Sales volume 4,520 9,944 16,000 16,000

Price 3,168 3,168 3,168 3,168
Revenue 14,319,360 31,502,592 50,688,000 50,688,000
Variable cost 7,684,000 16,904,800 27,200,000 27,200,000

Fixed cost 10,000,000 10,000,000 10,000,000 10,000,000
Operating profit/(loss) (3,364,640) 4,597,792 13,488,000 13,488,000
PV inflows 22,926,374
Outlay 20,000,000
NPV @ 6% 2,926,374
The Netherlands
Variable cost pu € 1,800

£/€ appreciation 0.98
Outlay € 23,000,000
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Sales volume 4,520 9,944 16,453 24,263

Price 3,168 3,168 3,168 3,168
Revenue £ 14,319,360 31,502,592 52,122,470 76,866,324
Variable cost € 8,136,000 17,899,200 29,615,040 43,674,048

Fixed cost € 15,000,000 15,000,000 15,000,000 15,000,000
Total cost € 23,136,000 32,899,200 44,615,040 58,674,048

Exchange rate
(using 0.98) 1.150 1.127 1.10446 1.0823
Total cost £ 20,118,261 29,191,837 40,395,343 54,208,824
Operating profit/(loss)
£ (5,798,901) 2,310,755 11,727,128 22,657,501
PV inflows £ 24,379,088
Outlay £ 20,000,000
NPV £ (@ 6%) 4,379,088
Note:
An alternative acceptable approach is (for example in 2025) 1.15/1.02 = 1.1274 to

determine the exchange rate.
Evaluation
The Netherlands location has an NPV of £4,379,088 which is almost 50% higher than
the NPV for the Hastings location at £2,926,374.
On this financial basis alone both projects are acceptable, but as they are mutually
exclusive, The Netherlands is clearly preferable.
However, such a conclusion would be premature as the NPVs are only as valid as the
working assumptions and there are non-financial factors to consider. Relative risks also
need to be considered.
Note: that both choices have a higher variable production cost than the current factory
which is only £1,287 per bike assuming cost of sales are all variable costs (ie,
£29,098,000/22,600). This is likely to be due to economies of scale at the current
factory.
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Risks
Both projects are discounted at the same interest rate, but may not be of equivalent risk.
Whilst output and markets seem equivalent there are different currency risks for ZEC in
the two locations as, despite selling across Europe, all sales are invoiced in £s. For the
Netherlands factory, there is a mismatch between costs being incurred in euro with
revenues in £s compared with Hastings where all costs are in £s.
Some actions could be taken to mitigate risks such as starting to make some sales in €
to create a natural hedge against € costs.
In Dover, it appears most costs are in £ and some in €. A new factory may impact this
mix and therefore have a knock-on effect.
There may be additional risks, other than currency. These may include dealing with
production in an overseas jurisdiction in the Netherlands with different regulations and
laws for example for operations, labour and transport.
Conversely, however, proximity to European markets may reduce downstream supply
chain risks for the Netherlands factory.
Operating gearing is higher for the Netherlands factory as annual fixed costs are higher
than the Hastings factory whilst variable cost per e-bike frame are lower. As a result,
there is likely to be greater sensitivity of operating profit to variations in sales volumes
for the Netherlands factory.
There is a loss for both factories in the first year, but it is much larger for the
Netherlands factory at £5.8m compared with £3.36m for the Hastings factory. Financing
this initial loss creates greater liquidity risk for the Netherlands factory.
Sensitivity to assumptions
One expression of risk could be sensitivity of NPV to changes over time in assumptions
as a result of various scenarios changing their validity. Alternatively, there is a risk that
inappropriate assumptions have been made from the beginning.
One possible issue, suggested by the FD, of changing the assumption of a 2% €
appreciation to a 3% appreciation is considered below. However, the sensitivity of the
NPV to changing other assumptions could also be considered.
Whilst revenues seem equivalent, as both factories would be selling into the same
market, variations in costs could cause changes in NPV. If the rentals of both factories
are fixed by the lease contracts from the beginning, then this seems unlikely to change
over the four years. Similarly, the initial outlay is known from the beginning. However
other fixed and variable costs may change.
Non-financial factors
Non-financial factors could include:
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• Brand image as a UK company is diluted.

• Being closer to Europe markets for the Netherlands factory may improve the
efficiency of leads times to European customers and enhance reputation.
• Impact on the environment may be better for the Netherlands factory as there is
less transport being closer to markets.
• Impact on the environment may be better for the Netherlands factory as it may
be closer to some European suppliers.
• Reputation may be enhanced in the Netherlands, which is a key market for ZEC
as production would be local.
(b)
Impact of a 3% appreciation of euro
Netherlands
2024 2025 2026 2027
Variable cost pu
€ 1,800
£/€ appreciation 0.97
outlay € 23,000,000
Demand 4,520 9,944 16,453 24,263

Price 3,168 3,168 3,168 3,168
revenue £ 14,319,360 31,502,592 52,122,470 76,866,324
Variable cost € 8,136,000 17,899,200 29,615,040* 43,674,048

Fixed cost € 15,000,000 15,000,000 15,000,000 15,000,000
Total cost € 23,136,000 32,899,200 44,615,040 58,674,048

Exchange rate
(using 0.97) 1.150 1.1155 1.082 1.0495
Total cost £ 20,118,261 29,492,784 41,232,529 55,902,729
Operating profit/(loss) £ (5,798,901) 2,009,808 10,889,941 20,963,596
PV inflows £ 22,066,597
Outlay £ 20,000,000
NPV £ 2,066,597
Red in italics figures b/f from (a)
* £29,615,400 is acceptable as a rounded figure
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Note
As above, an alternative acceptable approach is (for example in 2025) 1.15/1.03 =

1.1165 to determine the exchange rate.
Changing the assumption from a 2% pa appreciation of the euro to a 3% appreciation

makes a significant difference to the NPV reducing it from £4,379,088 to £2,066,597 for
the Netherlands factory. This NPV is now lower than the Hastings NPV of £2,926,374,
which, on pure financial grounds, now becomes the preferred choice under the FD’s
assumption.
Financial reporting treatment of the factory lease
Year ended 30/9 €

2024 1,200,000
2025 1,200,000
2026 1,200,000
2027 1,200,000
PVFLP @10% €3,803,839
All in euro
Year ended Balance interest @ Rental Balance
30/9 b/f 10% paid c/f
€ € € €
2024 3,803,839 380,384 1,200,000 2,984,222
2025 2,984,222 298,422 1,200,000 2,082,645
2026 2,082,645 208,264 1,200,000 1,090,909
2027 1,090,909 109,091 1,200,000 0
Converting to the £ as the functional currency
Interest
Year ended 30/9
Interest XR Interest
€ (3% appreciation) £
2024 380,384 1.15 330,769
2025 298,422 1.11550 267,523
2026 208,264 1.08204 192,475
2027 109,091 1.04957 103,938
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Liability
Year ended 30/9
XR
Liability (3% Liability
€ appreciation) £
2024 2,984,222 1.15 2,594,976
2025 2,082,645 1.11550 1,867,005
2026 1,090,909 1.08204 1,008,201
2027 0 1.04957 -
Depreciation (in £) £826,921 ((€3,803,839/4)/1.15)
Requirement 1.3
Offers of finance
Provider Type of finance Price per share Equity holding

(status)
GFI £400 33.3%

(private equity) Equity (£20m) (£20m/50,000) (50,000/150,000)
Lintern • 7% loan (£6m) £424.24 24.8%

(private equity) • Equity (£14m) (£14m/33,000) (33,000/133,000)
• Options
Both finance providers are offering the £20m needed to finance the expansion project.
General issues – both providers
There are two key (and related) issues:
• Financial costs and risks
• Impact on corporate governance and control
The full amount of finance of £20m is provided by either finance provider which enables
the additional factory to be established. Either factory has a positive NPV, so the new
finance is expected to enhance the value of ZEC’s shares and increase the wealth of its
existing shareholder. However, the private equity firms may also capture some of this
positive NPV depending on the price paid for the new shares issued to them.
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Both private equity firms require a suspension of dividends, which may not suit the
existing shareholders. However, as they both require the suspension, it is not a
differentiating factor between them.
Similarly, they both require an AIM listing, which again may not suit the existing
shareholders, but is not a differentiating factor between them.
GFI
Financial costs and risks
At £400, this is the lower initial price per share of the two offers, as 50,000 new ordinary
shares are required. This is a substantial increase in share capital, adding 50% to the
100,000 ordinary shares already in issue.
As a benchmark, GFI existing shareholders have been offered £42m by Cyclonex to
acquire the entire ordinary share capital of ZEC. This is £420 per share. However, to
compare this with the £400 GFI offer this is not comparing like with like. The Cyclonex
offer is to acquire the entire ordinary share capital and therefore includes the premium
for control. In effect, it gives existing shareholders an exit route. In contrast, with the GFI
offer, the shareholders have continuing participation and control. The director-
shareholders will also retain their positions as directors and continue to benefit from
directors’ remuneration.
A more direct comparison is with the Lintern offer of £424.24 which is higher than the
GFI offer and thus Lintern’s offer could be more favourable to existing ZEC
shareholders taking these amounts at face value. The Lintern offer is considered further
below.
Governance and control
GFI would be a private equity investor in the corporate governance structure, which may
have same similar objectives to the venture capital firm, Vattex. So, there may be
common interests and common voting between the two entities. Together they would
have a combined shareholding of 70,000 ordinary shares, which is 46.67% of
shareholder votes. This is not an absolute majority but, de facto, could achieve a
majority vote if they gain support from some private investors, or indeed if some private
investors fail to vote.
The interests of GFI and Vattex (eg, in an early exit route) may not be consistent with
the interests of the other shareholder groups. A shareholder agreement may control
their ability to take certain decisions (eg, removal of directors) but could be susceptible
to change by a majority shareholder vote.
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In asking for two directors, GFI would not control the board alone, but it could outvote
the four executive directors at a board meeting vote, if working in collaboration with the
two existing non-executive directors.
However, the new directors may bring some new expertise in environmental and
sustainability matters which could enhance the reputation of ZEC.
Lintern
Financial costs and risks
Lintern is asking for less shares than GFI, but it is providing the same amount of overall
finance of £20m as the shares are only part of a package.
Lintern is offering a higher price per share than GFI at £424.24 and is requiring a lower
shareholding of 33,000 ordinary shares. However, the value of this deal needs to be
considered holistically, rather than assessing its separate elements. Much depends on
whether the options will be exercised. Consideration also needs to be given to the high
interest rate on the loan element of the deal.
ZEC is not listed but, if the Cyclonex offer is reasonable, the options could be
considered to be currently out-of-the-money. However, with the long vesting period up
to 2027 it means that, if ZEC becomes listed on AIM, the options are likely to become
in-the-money and exercised. There would then be further dilution of equity.
On exercise, Lintern’s shareholding would increase by 1,000 shares, to 134,000 million,
although an additional £440,000 (1,000 x £440) would be raised.
Valuing the options at their fair value (eg using Black Scholes Merton model) would be
difficult as the ZEC shares are not listed. However, if £400 per share can be considered
as a current price (based on the GFI offer) then the intrinsic value is £40 (£440 – £400).
It is difficult to estimate the time value, but the fair value will exceed the intrinsic value.
In effect, part of the £20m from Lintern can be considered as buying the call option as it
has value on the grant date. In this respect, the value per share noted above of £424.24
is overstated as it attributes the full £14m to the purchase of shares, rather than
attributing part of this amount to the purchase of the options at fair value at the grant
date.
The cost of debt is fairly high at 7%, costing £420,000 per annum. The debt would
increase financial risk by doubling ZEC’s total debt and significantly increasing its
gearing. There is also additional liquidity risk as both the new factories generate
negative cash flows in the first year and the additional interest payment would increase
the negative cash amount, whereas the GFI offer has no interest.
Overall, this offer protects Lintern from downside risk by using debt, whilst enabling it to
benefit from upside potential with the options. Conversely, it creates corresponding
costs and risks for ZEC.
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Governance and control

Initially, Lintern would only have a 24.8% shareholding based on its 33,000 shares. This
gives it less scope to collaborate with existing shareholder groups (eg, Vattex) to
outvote the executive directors at shareholder meetings. Lintern also requires the
appointment of only one non-executive director, so it cannot outvote the executive
directors at board meetings, even in collaboration with the existing non-executives.
Also, Lintern’s initial shareholding is less than 25%, so it cannot prevent votes on a
special resolution requiring a 75% majority of the votes cast, if all other shareholders
agree. This could include votes on altering ZEC’s articles of association, reduction of
capital and winding up the company.
However, if the call option is exercised, then Lintern will have a 25.4% (34k/134k)
shareholding, which would then exceed the 25% threshold.
The new non-executive director may bring some new business expertise into the board
and experience of the industry. This may be useful in a time of change management.
Recommendation
The GFI proposition seems favourable despite the lower price per share as it has fewer
direct costs and risks. However, it is more threatening to corporate governance and
control with the larger shareholding, so appropriate measures could include a
shareholder agreement to protect existing shareholder groups’ rights and develop a
clear understanding and communication at board level.
Examiner’s comments
Requirement 1 – Prepopulated spreadsheet and supply chain
1.1a Late deliveries and defective frames data
The analysis of the pre-populated spreadsheet data was well attempted by most
candidates, with many providing the correct numbers and percentages to earn full
marks or nearly full marks.
One common approach was not identifying the number of late deliveries but looking at
average days late or similar variants.
Some answers provided the absolute numbers only and not percentages.
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Weak answers focused on only one aspect of performance, either the late deliveries
or defective items. A minority of candidates calculated the wrong numbers for the
suppliers, which was due to their manipulation of the spreadsheet data.
1.1b Relative performance of the two suppliers
Most answers were structured according to the two suppliers, rather than the two
performance measures.
Weaker candidates just described, relatively briefly, the differences in the numbers
from part a) without really trying to apply from the scenario the likely drivers or
underlying causal factors behind differences in the numbers.
Better candidates were able to use their data from part (a) and the other information
provided in the scenario, such as factory location for delays or capacity for the
defected items, to support their analysis in a reasoned manner.
Some weaker candidates were very brief with their evaluation and explanation.
1.1c Benefits and risks of two choices for increasing supply of frames
Good answers were provided by most candidates who clearly identified the benefits
and risks of both choices and provided well-structured answers.
A minority of candidates were confused with the two choices and instead assessed
Horace v Basten and did not mention a possible new third supplier.
Many candidates did not provide a recommendation, despite being specifically asked
to do so in the requirement. Others asserted a brief recommendation, but the
requirement was for a more considered and justified ‘reasoned recommendation’.
Requirement 2 – Location of new factory
(a) The NPV calculations variable. However, a relatively small number of candidates
came to the correct figure for the two locations.
The output volumes often tended to be the key error, with many seeming to get
confused with how many bikes would be produced per year, missing the fact that they
would be producing only the surplus. Some did not factor in the existing capacity and
others not recognising the maximum capacity for the Hastings site.
Other common errors were cash flows in the wrong periods, variable costs being
treated as fixed costs and incorrect discounting.
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For the Netherlands proposal, the exchange rate was largely correctly calculated, but
a number of candidates went in the wrong direction (euro depreciating) or used a flat
rate of 1.15 throughout.
The discussion part of this requirement was typically strong, demonstrating a range
reasonable suggestions.
(b)
Most candidates made a good attempt at this requirement to show the impact of the
euro appreciation. Even though the original NPV calculations were often incorrect,
marks were awarded on the ‘own-answer’ principle.
Most candidates correctly identified that the direction of the NPV was lower than
previously and made some comment on this. Some candidates, however, stated that
the euro appreciation would improve the NPV.
Weaker candidates often provided no NPV figures at all and simply made a comment
on what would generally happen with an appreciation against of the euro against the £
- not always correctly.
There was a varied set of answers to the financial reporting element this requirement.
Many candidates correctly calculated the PVFLP, interest and liability, but fewer
provided a depreciation figure.
Weaker candidates struggled with these basic calculations. A few still talked about
operating leases.
Requirement 3 – Methods of financing
Most candidates were able to construct good answers to this requirement. Most used
the information available to support their evaluation and recommendation. Although
some answers were more comprehensive than others.
Most candidates structured their answer by GFI and then Lintern, although some,
focused on the factors to consider (eg. debt/equity, governance).
The more obvious points around the price and the ownership impacts were well
covered by the majority, but the more embedded elements regarding control, voting
rights and the impact of the options were only addressed well only by good
candidates.
Page 18 of 34
Question 2 – Premier Hearing Aids plc (PH)

Scenario
PH manufactures high-quality, technologically-advanced hearing aids.
The PH board is reviewing its digital assets and whether they represent good value for money
given the cost of creating them. The board also wants to determine a value for its digital
assets.
A post-implementation internal assurance review is taking place to evaluate the SIA project to
date.
Three proposed new pricing strategies for one of PH’s hearing aids is being considered.
Two ethical issues have been raised relating to the length of subscription contracts and
relationships with audiologists.
Requirements MARKS Skills assessed

(Max)
(Headroom)
1.
(a) Evaluate:
• the performance of SIA for the • Assimilate and structure available data.
year ended 31 December 2022 • Demonstrate an understanding of the
14 financial and non-financial information
compared with the other two
devices for the three years to 31 (16) provided.
December 2022; and • Analyse and assimilate the data in a
• whether the SIA project is likely to structured manner (eg, a table).
be ultimately beneficial to PH. • Carry out data analysis to identify key
Consider financial and non-financial differences in the relative performance.
benefits, costs and risks. • Use judgement to distinguish the causal
factors for differences in performance.
(b) Explain and critically evaluate any • Address and articulate the key issues
methods that PH could use to succinctly.
determine an appropriate commercial • Exercise judgement to determine
whether the project is likely to be
value for the following digital assets:
ultimately beneficial.
• The software supporting SIA
• Assimilate information to provide a
devices.
reasoned and revised conclusion.
• The data captured from each
• Assimilate and select relevant
user’s SIA device. information to set out and explain an
appropriate value for digital assets.
Page 19 of 34
2. For the post-implementation internal • Set out structured assurance

assurance review for the SIA project procedures evidencing historical data.
(Exhibit 2), set out the assurance and 9 • Set out structured assurance
review procedures to be carried out in (10) procedures evidencing forecast data.
respect of the relevant historical data • Assimilate and select relevant
and forecast data, including any information considering relevant
underlying assumptions. assumptions.
• Demonstrate an understanding of the
different levels of assurance for historic
and forecast data.
3. Regarding the new pricing strategies • Assimilate and structure available data.
for SIA (Exhibit 3): • Demonstrate an understanding of the
information and data provided.
(a) Calculate the annual implicit interest 13 • Analyse and assimilate the data in a
rate earned by the bank under Choice structured manner to determine implicit
3. (14) interest rate for the bank financing
(b) Evaluate each of the three choices arrangement.
and provide a reasoned • Evaluate each of the three choices and
recommendation. Consider financial, provide a reasoned recommendation
operating and strategic issues. Show • Assimilate data and set out and explain
supporting calculations for the sale of the financial reporting treatment for each
one device using the treasury’s of the three choices.
figures.
(c) For each of the three choices, set out
and explain the financial reporting
treatment of the sale of one SIA on 1
January 2023 in PH’s financial
statements for year ending 31
December 2023.
4. Set out any ethical issues for the PH • Use ethical language and principles.
board arising from the two matters • Use judgement to identify key ethical
raised by the finance director, Emera 9 issues presenting a balanced approach
Evans (Exhibit 4). Recommend any (10) to interpreting the facts and incentives.
actions that the PH board should take • Identify self-interest, independence and
in respect of these matters. honesty as key issues.
• Use judgement to distinguish business
issues and ethical issues.
• Set out the actions to be taken by the
PH board.
Maximum marks 45
Headroom 50
Page 20 of 34
Requirement 1.1 (a) SIA project evaluation

Performance review
Revenue (£)
Price 2020 2021 2022
SIA 3,000 - - 14,400,000
DeepBlue 1,800 11,520,000 10,368,000 8,294,000
Audex 800 16,000,000 15,200,000 14,440,000
Gross profit (£)

Margin 2020 2021 2022
SIA 0.40 - - 5,760,000
DeepBlue 0.30 3,456,000 3,110,400 2,488,200
Audex 0.15 2,400,000 2,280,000 2,160,000
Volume
(devices)
2020 2021 2022
SIA - - 4,800
DeepBlue 6,400 5,760 4,608
Audex 20,000 19,000 18,000
Red in italics is taken from the question directly – so no credit given
NPV at 31 December 2021: SIA – no growth (£)
31 Dec 2021 2022 2023 2024 2025
Gross profit 5,760,000 5,760,000 5,760,000 5,760,000
PV @10% 18,258,425
Outlay 20,000,000
NPV (1,741,575)
Based on the assumption of zero volume growth and constant price over the entire four-
year product life cycle, then SIA is expected to generate a negative NPV of £1,741,575.
This figure is a combination of historic figures and forecasts for which supporting
evidence is required.
Page 21 of 34
Sunk costs are not ignored as it is a post-implementation evaluation over the entire
product life cycle, not a prospective decision.
Strategic and non-financial factors
The impact of SIA as part of a portfolio of products needs to be considered (eg, BCG
matrix) rather than considering SIA in isolation.
The sales of both other products are declining.
DeepBlue sales declined by 10% in 2021 and by 20% in 2022. This might be due to the
fact it is reaching the end of its product life cycle (estimated to be the end of 2023) and
new competitors’ products are outperforming it. The larger decline in 2022 than 2021 is
consistent with the picture of cross substitution by consumers switching their purchases
to SIA from other PH devices by brand loyal customers.
Audex sales declined by 5% in both 2021 and 2022. This might again be due to the fact
it is reaching the end of its product life cycle (estimated to be the end of 2024).
Without replacement with new devices PH may lose scale and reputation as a major
manufacturer, then its position in the industry may be unsustainable.
Risks
Whilst there is risk in undertaking R&D projects there is also risk in doing nothing. The
SIA project appears to be technologically successful, although the economic benefits
have perhaps not been leveraged to best effect. This might include mis-pricing or
inadequate marketing. However, it could also be that the SIA takes time to establish
itself in the market in the first year and once established greater sales may be achieved.
Alternatively, as for DeepBlue and Audex, the first year may be the best year and sales
may decline thereafter.
The negative NPV £1,741,575 is a point estimate of zero growth expected volumes and
cash inflows. However, both revenues and costs are subject to error in either direction
and there may be a wide dispersion of expected outcomes. This could be due for
example to revenues being higher or lower within the expected remaining period of the
lifecycle. Alternatively, it could be that the life cycle itself is longer or shorter than
currently expected.
The 10% discount rate includes a risk element, but this rate may not be appropriate or
may change over time.
Monitoring and continued review
This post-implementation internal assurance and review engagement may establish
evidence at the current point in the SIA product life cycle. However, given the
significance of the project, feedback to the board should be a continuous process rather
than a one-off exercise.
Page 22 of 34
Identification of leading indicators that can help predict future difficulties is particularly
important. For example, falling customer satisfaction can result in future falls in revenue
and a decline of the company’s brand reputation. However, in order to monitor this
threat to future performance, the board needs regular reviews on customer satisfaction.
Is the SIA project likely to be ultimately beneficial to PH?
In financial terms, the negative NPV, based the first-year sales being repeated over the
product cycle, indicates that the SIA project will not be beneficial. However, the key
assumption underlying whether it will be ultimately beneficial is the finance director’s
assumption of constant sales volumes. The data indicate that SIA will not prove
ultimately successful, but this assumption is subject to uncertainty as the FD admits.
Moreover, the existing two products are unlikely to represent a sustainable product
portfolio on their own. Without replacement, with new devices such as SIA, PH’s
position in the market is questionable in attaining critical mass. If PH loses scale and
reputation as a major manufacturer, then its position in the industry may be
unsustainable.
So, in the absence of other products being developed, SIA may be the best opportunity
to sustain the business and may therefore prove ultimately beneficial to PH.
Requirement 1.1 (b) Digital asset valuation

Valuing internally generated intangible assets such as digital assets relating to SIA is
subject to a high degree of estimation uncertainty. This arises for a number of reasons:
• There is unlikely to be an active external market for assets identical to PH’s digital
assets where traded prices can be observed. Such assets tend to be unique.
• Cash flows are not generated independently, but only in combination with SIA digital
devices and other tangible and intangible assets owned by PH. Cash flows are
therefore difficult to attribute to individual digital assets.
• External markets for PH’s devices are changing, competitive and uncertain.
Forecasting end-product cash flows is therefore difficult, even before trying to
allocate these flows to source digital assets.
Despite these difficulties, the exercise of estimating a value for digital assets may be
useful in establishing their worth to the business and informing future decisions in R&D
investment.
The software supporting SIA devices
Whilst there is not an active market for assets identical to SIA software, there may be
some market trades for similar assets where prices can be adjusted. An example might
be where a company is withdrawing from a market related to hearing aids and is selling
off its assets. Alternatively, where a company is being dissolved and the liquidator is
Page 23 of 34
selling off assets, software for broadly similar digital assets may be available in a related
market to hearing aids.
Where there are no observable sales transactions for similar digital assets, then
establishing capitalised current value of the incremental cash flows that will occur as a
result of having the SIA software rights, compared with not having the rights, would
provide an estimated value. In this case, the R&D costs and 2022 SIA historic cash
flows should be ignored and it is only the remaining incremental future cash flows that
are relevant to determine the current value of the digital assets.
The post-implementation internal assurance review for SIA may help identify these cash
flows. However, this would be a valuation for PH’s use, it is not an indication of a value
to a third party who may wish the acquire the digital asset. In this respect, it is essential
to determine the purpose of the valuation for the valuation to be meaningful.
The data captured from each user’s SIA device
The data captured by PH from SIA is a much more difficult digital asset to value than
the SIA software, as a current use has not been established.
Nevertheless, similar principles apply in determining the value. Ascertaining whether the
data can be sold (after anonymizing) by observing any publicly available information on
data sale in the industry.
If there are no such sales, then establishing how the data is likely to be analysed and
used by PH may provide a means to obtain a rough estimate of incremental cash flow
streams (eg, to generate more sales by understanding customer usage or by improving
future products and software).
However, in the absence of identifying a specific future use for the data, then any
valuation becomes almost meaningless.
Requirement 2 – Internal assurance review procedures
Historic data
Procedures to gather evidence are:
• The PV estimate of R&D costs asserted by the FD as £20m needs to be
substantiated. Obtain an analysis of the individual amounts comprising the total
figure and ensure they are incremental cash flows that would not have occurred if
the SIA project had not taken place (eg, exclude depreciation on buildings, fixed
salary costs and other fixed costs and allocated overheads).
• Assess whether 10% is an appropriate annual risk adjusted rate using market
risk adjusted factor models of share price return.
Page 24 of 34
• Obtain evidence for the sales of SIA made during the year 2022 to date from
sales and marketing records.
• Obtain evidence of operating costs incurred in 2022 to evidence the 40% GPM.
Ensure only incremental cash costs are included.
• Attempt to estimate the sales of the other two products (DeepBlue and Audex)
that were lost through customers buying SIA instead of these (substitution effect).
Evidence could include, from customer records, purchases of SIA made by
existing customers who had purchased other PH products in the past, but now
switched to SIA. This might be low because of the large price differences, or high
due to brand loyalty.
Forecast data
Evidence is required on future growth rates based on a range of prices to test the FD’s
assumption of constant growth. Procedures may include:
• Examine any original forecasts of SIA sales at the time of launch and any revised
forecasts based on the fact that 2022 sales volumes were ‘disappointing’
according to the marketing director. Seek explanations from marketing for
variances.
• Evaluate the consistency and reasonableness of assumptions underlying
forecast sales and incremental costs in accordance with ISAE 3400 The
Examination of Prospective Information.
• Market research could evidence customer attitudes and whether 2022 is likely to
be typical of future years (eg, it may be a year of establishing SIA and it
becoming known).
• Discuss trends with participants in distribution channels about the popularity of
SIA compared with rivals’ products.
• Evidence of new rival products to enter the market within life cycle. eg evidence
of new patents, industry intelligence of new and potential products from rivals.
• Baseline assumption of what would have happened in the absence of SIA
introduction (eg, to other to products, but also reputational effects) eg, examine
original budgets before SIA introduced.
• Evidence supporting the assertion of a four-year life cycle needs to be
considered. Is the cycle estimated to end suddenly or decline over time? If sales
are expected to decline over the cycle, then a zero-growth assumption may be
optimistic.
• Evaluate potential for new products by PH’s R&D department. This could be
positive if replacement products for SIA (eg second generation) are being
developed that leverage the initial R&D research on SIA to extend product life
cycle or create a new, second generation, life cycle.
• PH’s new R&D could have a negative impact on the benefits of SIA if a new
product is coming online from separate research which will displace SIA sales.
Page 25 of 34
• In addition to the sale of SIA devices, additional income streams may be

achievable. This includes revenues generated from using the data collected by
SIA or by selling the data (see digital asset valuation below).
Requirement 3 - Proposed new pricing strategies (Exhibit 3)
3(a) Annual return earned by the bank
For each device sold, the bank pays £2,539
The bank receives quarterly subscriptions in arrears of £319.66 for 12 periods.
AF12 periods = £2,539/£319.66 = 7.943

Quarterly return from body of annuity tables = 7%
Annual return generated = (1.074 - 1) = 31%
3(b) Evaluation of the three pricing choices
Choice 1 – sale with immediate cash receipt from consumer
Cash generated on 1 January 2023 is £1,200 (£3,000 x 40%)
Choice 2 – subscription model collecting quarterly fees from consumer

PV of cash generated on 1 January 2023 using 10% risk adjusted discount rate is:
Quarterly rate is (1.1)1/4 -1 = 2.411%
NPV = £3,296.74 – (£3,000x 0.6) = £1,496.74 (per workings below)

Alternative approach - IRR
AF12 periods = £3,000/£319.66 = 9.385
Annual return generated = (1.044 - 1) = 17%
Workings
Page 26 of 34
PV
Period Cash flow @ 2.411%
0
1 319.66 312.13
2 319.66 304.79
3 319.66 297.61
4 319.66 290.60
5 319.66 283.76
6 319.66 277.08
7 319.66 270.56
8 319.66 264.19
9 319.66 257.97
10 319.66 251.90
11 319.66 245.97
12 319.66 240.18
PV £3,296.74
Alternative method using annuity formula
AF = 1/0.02411 x (1- 1/(1.02411)12)
Alternatively, can use the PV function in the spreadsheet
=PV(0.02411,12,319.66,,0) gives £3,296.74
Choice 3 – subscription model selling rights to subscription fees to bank

Cash generated on 1 January 2023 is
= £2,539 – (£3,000x 0.6) = £739
Summary
NPV
£
Choice 1 1,200.00
Choice 2 1,496.74
Choice 3 739.00
(b) Evaluation discussion

Based on the NPVs amounts alone, choice 2 is preferred as it gives the highest NPV
based on the data provided.
Page 27 of 34
However, the analysis should not just consider the sale of a single device. If the
marketing director Andy is correct, then choices 2 and 3 will generate a higher sales
volume than choice 1. Although the extent of the increase in sales volume is uncertain,
it is likely to be the same as for choices 2 and 3 as the consumer will be unaware that
PH has sold the debt.
A factor to consider is liquidity. In 2022, PH was receiving all the cash immediately on
making the sale (per choice 1). Converting to the subscription model in choice 2 may
create liquidity issues as cash received would initially be much lower as only quarterly
payments from current year sales would be received. The full operating cost of £1,800
would also still need to be paid. This is a temporary problem as, in steady state,
quarterly cash payments will be received from current and previous years’ sales.
Choice 3 will also receive an upfront cash payment. It is lower per unit but may be
higher overall depending on the impact on sales volumes. However, operating costs are
variable and will also increase with sales volumes.
Irrecoverable debts relating to quarterly subscription payments is an issue with choice 2.
For choice 1, where cash is received immediately, there is no issue with irrecoverable
debts. Similarly, for choice 3, the debts are sold without recourse, so irrecoverable
debts are not an issue as cash is received up front.
Reasoned recommendation
Overall, if the cash shortfall can be financed, choice 2 seems the preferred option. It
generates finance income, it has the highest NPV per device and sales volumes, based
on market research, are expected to increase due to deferred payment (although the
interest is an incremental amount paid by the consumer in addition to the basic price of
£3,000 for the device).
Choice 1 is simplest but is restricting sales volumes and does not generate the finance
income of choice 2.
Choice 3 sacrifices a significant proportion of the sales value to the bank, which is
reflected in the bank’s high annual return of 31% on the arrangement.
3(c) Financial reporting
Choice 1
Revenue of £3,000 will be recognised along with £1,800 as cost of sales as risk and
rewards have passed to the consumer and all the performance obligations have been
satisfied.
Choice 2
The sale has a significant financing component in accordance with IFRS 15, as cash
receipts are over a long period and there is an issue of the time value of money.
Page 28 of 34
Revenue recognised should reflect the price the consumer would have paid for the
device if they had paid cash (IFRS 15, para 61). This is £3,000.
Revenue of £3,000 will therefore be recognised for each sale of a hearing aid as the
performance obligation of delivering the device has been completed, even though the
cash has not been received. If there are related services with the sale (eg, software
updates, checking the device and hearing tests) then these are separate performance
obligations and would need to be allocated out of the £3,000 and recognised separately
over the period of the contract.
Interest income is to be recognised. Most appropriately PH would use the implicit
interest rate to discount the quarterly subscription fees to the £3,000 value of the
hearing aid device that would be paid in a cash transaction (IFRS 15, para 64).
The implicit interest rate can be determined as:
AF for 12 periods = £3,000/£319.66 = 9.385
The workings table below shows interest income recognised in the year ending 31
December 2023 for a purchase of one device on 1 January 2023 as £430.79.
Interest income workings
interest
b/f (4%) Paid c/f
3000.00 120.00 319.66 2800.34
2800.34 112.01 319.66 2592.69
2592.69 103.71 319.66 2376.74
2376.74 95.07 319.66 2152.15
£430.79
The receivable recognised at 31 December 2023 would be £2,152.15. Consideration

would need to be given to recognising an impairment loss allowance if there were any
indication the consumer would not be able to pay.
£1,800 would be recognised as cost of sales as for choice 1.
Choice 3
Initially, revenue of £3,000 will be recognised along with £1,800 in cost of sales.
The initial receivable of £3,000 is then recognised as an asset sale to the bank, which is
acting as a debt factor. The sale is without recourse, so no rights or obligations are
retained by PH.
Page 29 of 34
PH receives a cash asset of £2,539, replacing the value of the accounts receivable
£3,000 in the statement of financial position.
Dr Cash 2,539
Dr Loss on sale 461
Cr Receivables 3,000
As previously, £1,800 would be recognised as cost of sales.
Requirement 4 - Ethics
Length of subscription contracts
Establish the facts. The estimated product life cycle is to 31 December 2025. For
subscription sales made in 2023, most of the useful life of the SIA device falls before
this date and therefore the device is likely to be useable and provide the latest
technology available from PH for most of the subscription period.
Also, even for sales that may take place after 2023 using the subscription model, this
does not mean that the SIA device is not useable after 31 December 2025 in
accordance with the agreed terms of the contract. It may just be that superior
technology becomes available from PH (and its competitors).
The same issues would arise under the cash purchase model used by PH for 2022
sales. A cash purchase within the product life cycle, would likely have a period of use
which extends beyond the product life cycle, in a similar way to the subscription model.
Ethical issues may arise however if there is not transparency for the consumer. This
may include where a sale is made to an older, vulnerable consumer where it is known
that the device may become inappropriate over the subscription period (eg. through
expected increasing deterioration in hearing). The honesty and integrity of the PH board
would then be questioned if it knowingly approved or tolerated such a policy in order to
promote its own self-interest in making more sales.
Actions
• Put a policy in place with audiologists to establish whether consumers are able to
make independent and informed judgements. This would establish a duty of care to
consumers by PH, audiologists and their employers This might include relying on
professional assessments of audiologists. Provide written clear written information to
consumers where they cannot hear oral indications, speaking to consumers’ doctors
Page 30 of 34
where there are concerns and seeking to have older patients accompanied by
friends/family for assessment and purchase.
• Provide a cooling off period after signing the subscription contract for consumers to
take advice and reconsider the commitment (this may delay the sale of the debt
under choice 2 so the duty of care would dominate self interest).
• Consider an exit clause in the subscription contract, without significant financial
penalty, where consumers could update to new and more advanced devices within
the contract period where the original device becomes unsuitable or less suitable.
Relationships with audiologists
The ethical risk is that audiologists are being provided with a personal inducement by
PH which will incentivise them to act in their own self interest, rather than making an
independent assessment of the most suitable hearing aid for the consumer.
There is therefore a potential conflict of interest between the interests of the audiologists
and the consumers, as PH seeks to align the self interests of audiologists with its own
self interests.
The possible inducement also creates a potential conflict of interest between the
audiologists and their employers. This is the case as audiologists may damage the
reputation of their employer’s business relating to its duty of care. Audiologists may also
recommend PH products, rather than competitors’ products, where they are equivalent
to the consumer, but less favourable to their employer.
Whilst the conference may be an inducement, it needs to be established whether this is

necessarily the case in impacting the behaviour of audiologists in a material way. For
example,
• are rival companies offering similar seminars?
• are there clear and legitimate business objectives being achieved at the seminars?
(eg, building relationships, imparting knowledge of recent technology advances,
ensuring knowledge of the suitability of PH devices for different types of hearing
impairment conditions).
• are the costs of the seminars reasonable and proportionate to legitimate business
objectives?
• is there evidence of inappropriate recommendations by audiologists following
attendance at seminars?
Overall, the key test is whether a reasonable and informed third party would consider
the attendance at the seminar to influence the professional conduct and behaviours of
audiologists.
Page 31 of 34
Actions
• The board should consider the nature, purposes and costs of the seminar. Then
publish clear aims for the seminar to reinforce legitimate business purposes.
• Remove the threshold requirement for attendance, so the seminar is not perceived
to be a reward for historically recommending PH devices.
• Change to a ‘delegate only’ conference (no partners) so it has a clear business
focus.
• Consider relocating to the UK, unless there is clear and legitimate purpose for
locating it in Switzerland.
Examiner’s comments
Requirement 1 – Performance of SIA and evaluation of digital assets
2.1a Performance of SIA compared with other products and whether it is likely to be beneficial
There were varied calculations for this answer. Only a minority of candidates provided an NPV,
although most had some form of comparison with the other products. Calculations included:
margins, volumes of units, mixes by volume and gross profit.
The discussion was generally good and appropriate, with many identifying the significance of
the technology having follow-on potential and the fit within the portfolio overall as well as the
high risk of doing nothing.
Some candidates answered the performance and beneficial elements separately, but most
merged their answer regarding these two aspects. Either approach was acceptable.
2.1b Commercial value of digital assets
The digital asset valuation produced a wide range of answers with different approaches.
Some candidates explained the valuing methods according to IFRS 13, but not always
applied to the specific circumstances in the scenario and often taking a financial reporting
approach.
Weaker candidates just stated that it was hard to place a value on the digital assets and
made little attempt to do so.
The higher marks were rewarded to candidates who split the software and data captured
valuations. They then attempted to explain a range of reasonable valuation methods (mainly
discounted cash flow approaches and observed value of similar assets in the market) which
could be used to approximate how each asset could be valued.
Better candidates discussed the uniqueness of the digital assets and therefore the lack of
comparability to other businesses or markets.
Page 32 of 34
Requirement 2 – Post implantation review
This requirement was poorly answered by many candidates.
However, stronger answers demonstrated a clear approach and separated out the
procedures for historic and prospective data and produced good practical procedures.
Weaker answers produced very general procedures. Others did not really identify procedures
at all, instead suggesting general areas which might be investigated to gain assurance, but
not saying how.
Requirement 3 – Pricing strategies
2.3a Annual interest rate
This was almost universally poorly attempted. Most candidates tried – but there was a variety
of inappropriate answers. Some got close by calculating the quarterly implicit interest rate, but
not going on to calculate the annual rate.
2.3b Evaluation of three pricing strategies
Candidates that followed a structured approach to evaluating the three pricing strategies were
often able to construct good answers. Weaker students, however, provided only brief points for
each strategy and received lower marks.
Calculations varied, but most had the right approach with issue 1 which was very
straightforward. The second issue was generally quite well discussed so marks were
achieved for the practical considerations.
The calculations were generally weak and sometimes partly omitted.
Issue 3 was more mixed with a variety of approaches.
2.3c Financial reporting treatment of an SIA sale
Often there were brief answers that did not fully demonstrate the FR treatment for one SIA
device. Some answers also just provided generic commentary on the accounting treatment and
did not provide specific numbers for each choice and how they would be shown in PH’s financial
statements.
Requirement 4 – Ethical issues
This was surprisingly poorly answered by many candidates. Weaker candidates were too quick
to jump to extreme judgements of exploiting the elderly and applying the bribery act, without
pausing and thinking more realistically about the situation.
Page 33 of 34
The majority answers were quite narrow and lacked a balanced and developed discussion
relating to the audiologists and as a result suggested actions typically were often not
particularly suitable or realistic.
In terms of the subscription issue, stronger candidates looked at the product itself and a
normal business transaction, deciding that although the subscription might outlast the
availability of the product (the product cycle), the product was still in working order and
supported by the company (the useful life). Stronger candidates looked at the transparency
issues and were able to make suggestions as to what the board should do. Weaker
candidates just looked at the vulnerability of the customer and asserted it was unethical.
Page 34 of 34

Strategic Business Management November 2022 Mark Plan

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Strategic Business Management November 2022 – Advanced Level

MARK PLAN AND EXAMINER’S COMMENTARY

This report includes:

Question 1 – Zoomer Electric Cycles Ltd (ZEC)

Requirements MARKS Skills assessed

2. Regarding the decision to open an

Horace Basten Total

% late 3.7% 33.3% 15.6%

Horace Basten Total

% defective 3.0% 0.6% 2.0%

jurisdiction, where import/export regulatory compliance or transport issues may have

Other causes may include:

The following are some of the advantages of this type of relationship:

• ZEC can drive down prices charged to it by encouraging competition between

There may also be uncertainties in working with a new supplier.

Requirement 1.2 (a)

Growth rate 0.2

Volume 22,600 27,120 32,544 39,053 46,863

demand - 4,520 9,944 16,453 24,263

Variable cost pu £ 1,700

Sales volume 4,520 9,944 16,000 16,000

Variable cost 7,684,000 16,904,800 27,200,000 27,200,000

Operating profit/(loss) (3,364,640) 4,597,792 13,488,000 13,488,000

Variable cost pu € 1,800

Sales volume 4,520 9,944 16,453 24,263

Variable cost € 8,136,000 17,899,200 29,615,040 43,674,048

Total cost € 23,136,000 32,899,200 44,615,040 58,674,048

NPV £ (@ 6%) 4,379,088

An alternative acceptable approach is (for example in 2025) 1.15/1.02 = 1.1274 to

• Brand image as a UK company is diluted.

Demand 4,520 9,944 16,453 24,263

Variable cost € 8,136,000 17,899,200 29,615,040* 43,674,048

Total cost € 23,136,000 32,899,200 44,615,040 58,674,048

Operating profit/(loss) £ (5,798,901) 2,009,808 10,889,941 20,963,596

Red in italics figures b/f from (a)

* £29,615,400 is acceptable as a rounded figure

As above, an alternative acceptable approach is (for example in 2025) 1.15/1.03 =

Changing the assumption from a 2% pa appreciation of the euro to a 3% appreciation

Financial reporting treatment of the factory lease

Year ended 30/9 €

PVFLP @10% €3,803,839

Converting to the £ as the functional currency

Depreciation (in £) £826,921 ((€3,803,839/4)/1.15)

Provider Type of finance Price per share Equity holding

GFI £400 33.3%

Lintern • 7% loan (£6m) £424.24 24.8%

Governance and control

Requirement 1 – Prepopulated spreadsheet and supply chain

1.1a Late deliveries and defective frames data

1.1b Relative performance of the two suppliers

Requirement 2 – Location of new factory

Requirement 3 – Methods of financing

Question 2 – Premier Hearing Aids plc (PH)

PH manufactures high-quality, technologically-advanced hearing aids.

Requirements MARKS Skills assessed

2. For the post-implementation internal • Set out structured assurance

Requirement 1.1 (a) SIA project evaluation

Gross profit (£)

Red in italics is taken from the question directly – so no credit given

NPV at 31 December 2021: SIA – no growth (£)

31 Dec 2021 2022 2023 2024 2025

Gross profit 5,760,000 5,760,000 5,760,000 5,760,000

Is the SIA project likely to be ultimately beneficial to PH?