T4 Test of Professional Competence Part B Case Study

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1 Name:... Address: Postcode:... Kaplan Financial Student Number:... If sending your script via post, please complete the name and address box above, and return to your Kaplan Financial centre. T4 Part B Case Study Examination Sep / Nov Mock 1 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 open the examination answer book and start writing or to begin using your computer to produce your answer or to use your calculator during the reading time. Answer the question on page 3. The Case Study Assessment Criteria are also included on page 4. This question paper should be used in conjunction with the pre-seen information and maths tables and formulae provided earlier on the course. T4 Test of Professional Competence Part B Case Study

2 T4 PART B CASE STUDY EXAM : MOCK 1 Kaplan Financial Limited, 2013 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing. Acknowledgements We are grateful to the Chartered Institute of Management Accounting for permission to reproduce this past examination question. 2 KAPLAN PUBLISHING

3 QUESTION CeeCee Retail Fashion Case unseen material provided on examination day Read this information before you answer the question Additional (unseen) information relating to the case is given on pages 5 to 8. Read all of the additional material before you answer the question. ANSWER THE FOLLOWING QUESTION You are the Management Accountant of CeeCee. Carla Celli, the CEO, has asked you to provide advice and recommendations on the issues facing CeeCee. Question 1 part (a) Prepare a report that prioritises, analyses and evaluates the issues facing CeeCee and makes appropriate recommendations. (Total marks for Question 1 part (a) = 90 marks) Question 1 part (b) As an Appendix to your report prepare a summary for use in a presentation to the CeeCee Board, in bullet point format, of your findings and the financial implications of the proposals to close the 300 small shops and open 150 medium-sized shops. This Appendix should contain no more than 10 bullet points. (Total marks for Question 1 part (b) = 10 marks) Note: Marks for calculations, relevant to Question 1 part (b), are awarded within the Assessment Criterion of Application included in Question 1 part (a). Your script will be marked against the Case Study Assessment Criteria shown overleaf KAPLAN PUBLISHING 3

4 T4 PART B CASE STUDY EXAM : MOCK 1 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 KAPLAN PUBLISHING

5 QUESTION CeeCee Retail fashion case - unseen material provided on examination day Read this information before you answer the question The final accounts for the year ended 31 December 2009 showed that CeeCee achieved the forecast operating profit, before finance costs and tax, of 634 million. The plan for 2010 was to achieve an operating profit of 690 million. However, the latest forecast operating profit for 2010 is only 614 million. This forecast is based on sales revenue of 2,835 million, which is 150 million lower than planned sales revenue of 2,985 million. Juliette Lespere, the Sales and Marketing Director, is confident that sales revenue figures for 2011 onwards are still achievable. Legal case against CeeCee CeeCee s designers have a policy of monitoring closely all of the latest fashion trends and designing similar clothes without replicating the entire design as the original designer owns the intellectual property rights (IPR s). A global clothes designer label, KK, has filed a legal challenge against CeeCee stating that one of its material designs and latest clothing range has been copied illegally. All of CeeCee s shops have now received this range of clothing in stock and the range is selling very well. In fact, the publicity generated from the legal case has generated even higher sales revenues and additional orders are currently being manufactured by CeeCee s suppliers. CeeCee s legal advisors consider that these particular new products are a close copy of the original KK designs. They have stated that CeeCee should seriously consider whether these products should be withdrawn from sale and destroyed. This would result in a one-off loss of 10 million, which represents a complete inventory write off for these products (including the recent additional orders) and an out of court settlement to KK. Juliette Lespere, considers that as sales are high for these products, CeeCee should continue to sell these products and fight KK s claim in court. However, the legal advisors consider that if the case were to go to court and CeeCee were to lose the case, the cost including damages, could exceed 40 million. The chances of losing the case are assessed to be 50%. Air freight transportation CeeCee has recently had some adverse publicity over the transportation of some of its manufactured clothes from suppliers based in Asia. Currently around 30% of production comes from Asia and around a third of this (10% overall) is transported by air, so that new clothing ranges reach the shops quickly. The press has criticised CeeCee for having a large carbon footprint. Jim Bold, the Head of Logistics, has stated that CeeCee cannot change its current pattern of transportation as the alternative of shipping these items would result in a 20 day delay in new designs reaching the market. He argues that this would affect the very basis of the fast fashion model and would adversely affect sales revenue. The only alternative method would be to terminate contracts with some suppliers and source the products from Eastern European suppliers. However, products manufactured by suppliers in Eastern Europe would still result in a large amount of road transportation. Jim Bold s proposal is that all air freight should be cancelled for 2 months and that all clothes manufactured in Asia should be transported by ship to Europe until the fuss dies down. Then he proposes that CeeCee should resume air freight transportation from suppliers in Asia. KAPLAN PUBLISHING 5

6 T4 PART B CASE STUDY EXAM : MOCK 1 Sales bonus scheme proposal At present all shop-based employees are only paid a salary irrespective of whether sales revenue targets for their shop are met or not. In the light of the latest forecast for 2010, which shows sales revenue 150 million below plan, Paulo Badeo, the Operations Director, proposes to introduce a sales bonus scheme. This would incentivise shop-based employees to increase CeeCee s sales revenue. Paulo Badeo wants to announce the scheme to shop-based employees under the banner Be part of CeeCee s success. The proposal is to launch this new sales bonus scheme effective from July It would allow all shop-based employees to earn more if sales revenue either increases or falls by up to 2% from the latest forecast sales level (see table below). The sales bonus would be payable to each shop-based employee based on the following: There will be monthly sales revenue targets for each shop for each calendar month. A sliding scale of sales bonus (see below) will be payable to employees in each shop, dependent on the actual level of sales revenue achieved compared with the target for their shop for each calendar month. The total value of all of the sales revenue targets for each month for all shops will equate to the latest forecast group sales revenue of 2,835 million. These sales revenue targets will be the Base case level of sales revenue. At this level of sales revenue, for each shop, a bonus of 5% based on current salary levels will be payable. The total salary cost for shop-based employees is forecast to be 410 million for 2010, before any changes arising from this sales bonus proposal. This salary cost is treated as a fixed overhead cost and is not charged in arriving at the gross margin. This proposal applies to shop-based employees only and excludes all Head Office staff and distribution centre staff. The relevant forecast data for the CeeCee group and the sliding scale of sales bonus payment levels are as follows: Base case sales revenue level of 2,835 million (which is the latest forecast for 2010) For each change from this Base case : CeeCee group sales revenue targets Bonus percentage paid to shopbased employees (expressed as a % of current total salary cost of 410 million) million % 2,835 5% + 2% extra sales revenue 2,892 7% + 4% extra sales revenue 2,948 9% + 6% extra sales revenue 3,005 11% + 8% or more extra sales revenue 3,062 14% maximum Or a reduction: - 2% reduction in sales revenue 2,778 2% - 4% or more reduction in sales revenue 2,722 0% The gross margin is forecast to be 60.2%. The gross margin is defined as sales revenue, net of sales tax, less the purchase cost of the product. 6 KAPLAN PUBLISHING

7 QUESTION Diane Innes, the Finance Director, has asked you to calculate for each of the sales revenue levels shown in the table on page 4, the following: The cost of the new sales bonus scheme The value of the total gross margin generated The change in the total gross margin compared to the latest forecast Base case The overall effect for a full year on operating profit Proposal to introduce matching accessories CeeCee currently sells a large range of fashion accessories. Juliette Lespere has a proposal to try to stimulate customers to make more purchases by having ranges of accessories that match, or co-ordinate, with ranges of clothes. For example, these accessories will be manufactured using the same material and design to match new ranges of clothing items, such as matching handbags and shoes to dresses and suits. In this way, Juliette Lespere considers that a customer deciding to purchase an item of clothing may decide to additionally purchase some of the matching accessories. In a limited market trial in 3 city centre shops, the average shopper spent 40% more in the same transaction when matching accessories were available. The gross margin, at 80%, for these matching accessories is higher than the clothing gross margin. The gross margin is defined as sales revenue, net of sales tax, less the purchase cost of the product. If this proposal were to be approved, production could start almost immediately and the ranges could be in CeeCee shops by the end of March However, there is a risk that these products will not sell in the volumes forecast and some inventory will have to be sold off at very low prices. This will result in a lower operating profit margin if the level of sales revenue achieved is at the Low level, as shown in the table below. The forecast operating profit margin, in value and percentage terms, for 2 different levels of sales revenue is shown in the table below for the 9 months remaining in 2010 and for the whole of The operating profit margin shown below includes the inventory write off cost if Low sales revenue is achieved. It excludes other costs, such as distribution costs, which are considered to be marginal to this proposal and should be ignored. 9 months in Probability Operating profit margin Operating profit margin Level of sales revenue: % million % million % High sales revenue achieved Low sales revenue achieved (includes inventory write down) 60% 40 80% 64 80% 40% 5 33% 4 20% KAPLAN PUBLISHING 7

8 T4 PART B CASE STUDY EXAM : MOCK 1 Proposal to close 300 small shops At the end of December 2009, CeeCee had 630 shops. Of these 630 shops, 300 are small shops that were opened in the early days of CeeCee. These older shops are all due for refurbishment soon and are fully depreciated. Paulo Badeo is considering whether to: (A) Close all of the 300 small shops and to replace these with 150 medium-sized shops. Or (B) Refurbish and retain the 300 small shops The relevant data for each alternative is as follows: (A) Closure of 300 small shops and opening of 150 medium-sized shops A medium-sized shop has double the selling space of a small shop (1200 square metres compared to 600 square metres of selling space for a small shop). Therefore 150 medium-sized shops provide exactly the same sales area but in fewer locations. Ruth Giddens, the Head of CeeCee s Property Management, is confident the 150 medium-sized shops can be located in desirable locations. The average operating profit margin (before finance costs and tax) in 2009 was 23.5% for medium-sized shops. This compares to the average company wide operating profit margin of 22.8% for all shops in An additional consideration is that the rent that CeeCee is currently paying on all 300 small shops is significantly higher than the rent that could currently be negotiated if CeeCee decided to take out new rental agreements on 150 medium-sized shops. The effect of the current economic environment has resulted in lower rents for new rental agreements. In some cities, this would result in CeeCee relocating its store to a different site on the same High Street or shopping centre with no loss of location appeal to customers. The total investment cost, which includes the shop fitting costs for 150 medium-sized shops and the closure costs of the 300 small shops, is forecast to be 580 million. The forecast posttax cash flows are 260 million each year, which are forecast to grow at 7% each year. The closure of the 300 small shops will result in some staff being made redundant although where possible, employees will be offered positions in other CeeCee shops. The closing of the 300 small shops and the opening of 150 medium-sized shops would be phased in over the next 2 years. (B) Retaining 300 small shops All of the 300 shops would be fully refurbished to maintain brand image and to stop these older shops becoming unappealing to customers. The average operating profit margin (before finance costs and tax) was 13.2% for small sized shops in 2009, due mainly to the minimum level of staffing required for each shop, irrespective of the size of the shop. The total cost of the refurbishment of the 300 small shops is forecast to be 360 million, which is currently included in the 5-year plan capital expenditure budget. The forecast post-tax cash flows are 160 million each year, which are conservatively forecast to grow at a slower rate than medium-sized shops, at only 5% each year. A suitable risk adjusted post-tax discount rate is 8%. As the market is changing rapidly it is considered that 5 years is a suitable period to assess the proposal. If the decision to close the 300 small shops and open 150 medium-sized shops is taken, Diane Innes is confident that the required finance would be available. This proposed change in the number of shops will have no impact at all on the planned number of new shop openings. End of Unseen Material 8 KAPLAN PUBLISHING