Chartered Institute of

Management Accountants

HELPING YOU TO PASS YOUR EXAM

THE MANAGEMENT LEVEL CASE STUDY

A WALKTHROUGH OF A REAL ANSWER there are 25 marks available, which equates to one quarter of the exam or
45 minutes. In this case there are two requirements per task, equating to 4
TO THE MANAGEMENT CASE STUDY EXAM tasks in total. You can assume that all sub-requirements carry equal marks,
(VARIANT 1) FROM FEBRUARY 2016 thus you should apportion your time equally (This is confirmed in the
allocation of marks provided by the marking guidance document).
As part of an ongoing drive to improve support to CIMA students,
we have published a new exam resource. The following document As you will see from the commentary below, you must answer all parts of
takes you through a real student script from the February 2016 case all requirements to be sure of securing a pass.
study examination; the answer has been transcribed, anonymised and
annotated with observations on strong performance and some areas
where performance could be improved upon. ADDITIONAL SUPPORT RESOURCES
The following documents are referenced at various stages within this
PASSING STANDARD ILLUSTRATED feedback which will enhance your understanding:

The script was selected to demonstrate a comfortable passing standard, Feb 2016 Variant 1 Exam
having earned a score in the 90s. It shows one of many ways in which Feb 2016 Variant 1 Answers
a candidate would demonstrate sufficient competence to earn such a
pass. Please note it is not a perfect answer nor the only one which would Feb 2016 Variant 1 Marking guide
have achieved a passing standard. However, the walkthrough will provide Feb 2016 Examiner’s Report
an idea of what a strong answer looks like and some examples of where
answers might have fallen short and been improved upon. Grade Descriptors for MCS

HOW TO USE THE RESOURCE OVERALL COMMENTS

To get the full benefit of this resource, you should download: the At first glance, the overall answers have good paragraph layout to suggest
February case study pre-seen materials and the test variant (1) this comprehensive coverage of each area of the tasks and subsequent
candidate was answering so that you have the context for the script. You requirements. Overall grading may have been stronger if the script had
could also review the examiner’s report, the marking guide and grade more structure and persuasive language. In addition, at management
descriptors for the MCS which might give you a greater appreciation level, to achieve a 'strong' rating for the competencies, you need to
of the comments on the script. Links to all five of these documents are demonstrate an ability to weigh up the pros and cons of a situation and
provided below. You may also benefit from reading CIMA’s published make recommendations; there are opportunities to do that which have
answer to the variant. This gives you an alternative approach to achieving been missed in this script.
a pass from the same requirements. It is useful to understand how In terms of writing style, our candidate has kept their replies professional
different approaches can earn credit and that the markers are not looking with a good layout. They have used headings to clearly indicate which
for a ‘model’ answer. task they are addressing, which also provides structure to their response.
Each idea has a separate paragraph which makes it easy for the marker
to follow the train of thought and award marks. You will notice that the
EXAM APPROACH OVERVIEW candidate has not used bullet points in the sample script; it is better to
Before looking at the real answer script in depth, it’s worth reviewing the write in small paragraphs with sub-headings to give clarity.
key features required to produce a good answer of passing standard. A The candidate has made some errors in spelling and grammar. The
clear passing answer will demonstrate various features such as evidence examiners have made it clear that candidates will not be penalised for
of planning; a good layout and structure which make it easy to follow this. The key element the examiner looking for is the ability to address
the discussion; an answer which responds appropriately to the task in the the requirements of the tasks and communicate them effectively within
format required and from the perspective of the persona described for a time constrained environment. Therefore, you will not earn marks
the Management case study. unless the examiner can understand what you are trying to say. If
The length of your answer will vary, depending on various aspects but communication is not your natural strength, you need to start working
remember, the examiner is looking for quality rather than quantity. A on it as soon as possible. Ask friends or colleagues to read your answer for
long answer does not necessarily equate to a better answer. However, if you and see if they can understand what you are trying to say.
your answer is too brief, you may not be providing enough detail for the
examiner to give you marks. Use the time given for each task as a guide to
how much you might write. For example, in section 1 of our sample script,
TASK 1: Reading these requirements carefully shows there
are the initial requirements (as indicated by
Requirement 1:
'firstly' and 'secondly') but there are also sub
The Chief Executive has asked me to prepare a board paper on two issues. requirements within each of these. For example,
in the first requirement you are expected to
Firstly, what would a value chain analysis involve in the case of Pizzatime
comment on what a value chain analysis would
and how might we involve our staff more in creating value?
involve and how staff could be involved to create
more value. It is important to draw this
distinction and answer the whole question as
different skills can be tested within the
VALUE CHAIN ANALYSIS requirement, in this case technical skills and
people skills.
Primary Activities
A value chain analysis of primary activities should enable us to look at the activities that we are The answer has cleverly addressed the task set
performing and evaluate them in terms of the value that they offer our customers. The idea being by the Marketing Director by incorporating the
that if we can create added value whilst minimising costs we sustain the competitive advantage. involvement of staff in creating value into the
We can also remove non value activities that would essentially be a waste of resources. value chain analysis, generating credit for
integration,
Inbound Logistics in this case of technical skills and people skills.

Our inbound logistics will mainly focus on delivering our dough from our central plant to our Is it suitable for the audience? If I were on the
restaurants across the three countries. In the first instance, orders will need to be placed promptly board of Pizzatime, I would want brief, to the
and correctly in terms of volume to anticipate the next weeks demand. point and comprehensive discussion points. I
would not need a more lengthy analysis to
It’s important that deliveries are then delivered on time and with the correct ingredients equipment
understand the possible application of the value
to ensure that customer demand can be met. It is also important that the individual suppliers are
chain. At the same time, good assumptions have
delivering correctly and on time. Delivery drivers and factory staff will need to be made aware of
been made about the board directors' level of
the implications of untimely and incorrect deliveries cause.
understanding of the business.

Operations This opening paragraph sets the scene for the

rest of the answer. It demonstrates an
This is essentially the 'making' of our pizzas’. Ingredient control is important here. We need to ensure understanding of the question requirement (what
that there is standardisation across the board for amounts of ingredients used per pizza, as the Marketing Director is expecting from you). It
customers are familiar with our product, they have come to expect a standard product, no matter also shows an understanding of the higher-level
which restaurants they go to. Using excessive ingredients will cause difficulties in ordering, as well as usefulness of the value chain model. This creates
excess costs. Using too little will mean that customers’ expectations are not met and could mean a positive ‘first-impression’ in the mind of the
them deferring to a competitor. It is essential that our cooks/chefs and kitchen staff adhere to any Marketing Director (Marker) which makes them
procedures that are set, particularly when it comes to quantities and quality standards of our food. read the rest of the answer with a positive
mind-set.
Outbound Logistics
The answer could have been improved by sticking
This is essentially our restaurant floor staff. Once the pizza is cooked it will need to be 'delivered to to the format of a Board report, guidance of
the customer' we need to ensure that this is done in a timely and efficient manner. However, we are which can be found here.
also know for our quality of service and so standards need to be set on what is acceptable or not
when serving customers.
This analysis demonstrates strong understanding
of the pizza business and addresses some key
Sales and Marketing
issues in this part of the value chain for Pizzatime.
An important part of what we do, not only do we need to retain our current customer base but also There is a good level of commercial awareness for
attract potential new customers. It is vital that our marketing staff know who our customers are and an organisation that operates in a chain.
target our advertising towards them. The use of promotions loyalty schemes may encourage our
loyal customer base to use us more. Whilst this paragraph recognises that outbound
logistics is very important in a pizza business, it
Service does not demonstrate a good understanding of
Any complaints would generally be deal within our restaurants by our restaurant staff. It is vital that just how value is added at the point of delivery.
it if a customer does raise a complaint that it is dealt with promptly and efficiently. A complaint The discussion point could have been improved
could mean that we are likely to lose that customer, perhaps if incentive is made for them to return by making reference to the company's slogan of
(i.e. perhaps a voucher for their next visit) this could create a means of retaining them. Staff will 'Happy time, it's Pizzatime' and how that
need to ensure the customer that their feedback is valued and not just brushed aside like some customer promise must be delivered to retain
many other restaurants. customers and, perhaps, generate new customers
through word-of-mouth recommendation.

This paragraph demonstrates a good level of

commercial awareness and competence, as it
draws on relevant real life examples.
SUPPORT ACTIVITIES

HR Management
Essentially given the industry that we are in, we are only as food as our staff serving our pizzas. Steps
need to be taken to ensure that we are recruiting the candidate that we need. By ensuring this, value
is being added both here and in our primary activities of outbound logistics, operations and service.

Technological Development
In a rapidly changing world of technology our customers are becoming more and more attuned to
the fact that they demand quick, efficient service at a reasonable price. The use of technology in our
stores will add value in terms of card machines and point of sale equipment for order taking – all
being convenient for the customer and adding value in their eyes.

Procurement
Our procurement staff (and that of our individual restaurant managers who order ingredients from
local suppliers) will be adding value by sourcing quality ingredients at a reasonable price. We are
likely to be able to take advantage of economies of scale given our position in the market
(particularly in 1- Land). But it is essential that we balance cost with quality as if our ingredients are
bad quality it is unlikely that we will keep our loyal customer base if standards drop.

Infrastructure There appears to have been a slight problem with

time management in this section. Whilst the
Our infrastructure at present (decentralised) in itself adds value. Our regional offices provide a
analysis of the value chain is full and well-
means of quick communication to individual restaurants in the area. It is vital that if any restaurant
structured, points made in the pricing section
encounters an issue that it is able to resolve it quickly, or else it could impact on its’ sale for the
appear to me more rushed and, in some cases,
week/day etc. A decentralised structure enables us to add value by the fact that any problems are
incomplete. The answer demonstrates adequate
able to be overcome far quicker than if had a centralised structure.
familiarity with the scenario from the pre-seen
materials and the extra material delivered in the
exam. However, this section does not appear to
Requirement 1: be part of the same board paper as the piece on
Secondly, the Chief Executive is unsure whether we should focus our value chain analysis in a the value chain. If this section were to
low-cost strategy or a differentiation strategy. acknowledge that the value chain analysis would
contribute to any decision on the pricing
strategy, it would give a greater chance to earn
credit, not only for the business skills being
LOW COST/DIFFERENTIATION STRATEGY tested but also for integration.

Low cost strategy’s will generally mean an increase in market share and creates a high barrier to
entry for any competitors wishing to follow suit. It will mean that we are likely to become the Some really good points have been made,
dominant force in the market in the P Land like are in 1 Land. However, a low cost strategy is however, it would have looked better to explain
reasonably easy to copy and could result in price cuts from our main competitors such as Pizza 2 Go. 'why' or 'what'. For instance, why would a low
We may not be able to sustain this approach depending on our margins. It may also alienate our cost strategy prove a barrier to entry for other
customers. Given that we are known for quality, some of our customers, may perceive this cut in providers or, what are our actual margins? As it
price with suspicion thinking that we will had to change (potentially for the worse) our product. stands, this point does not illustrate an adequate
understanding of the business, even though it is
A differentiation strategy will enable us to concentrate on the activities that make us different. We addressing a key issue.
have recently launched our new healthy range. All be in a small way. However none of our
competitor are yet to do so this makes us unique in the market. A push on this initiative and proper
investment in the R & D may help us add value to our business. We could develop it further to Given the value chain analysis, although the
include allergy – friendly recipes such as gluten or diary free – again an initiative our competitors question does not explicitly request a
have not developed. The issue here though is that we essentially have a ceiling in terms of price recommendation, it would be expected at this
– that is the price of our competitors (both other pizza chains and other varieties of cuisine level and your role within the organisation, that
restaurants), if we are to push for a differentiation strategy the chances are that we will have to it would have been appropriate to give an
make considerable investment in both R & D and the price of specialised ingredients are likely to opinion of which strategy may be best suited to
increase – unless we are willing to sacrifice our margin. We will need to increase our price and given Pizzatime. A stronger score could have been
the nature of our product – in that it is fairly elastic there is only a certain price that customers will achieved by drawing relevant conclusions that
pay for eating out a at a pizza restaurant. follow logically from the analysis.
TASK 2
Requirement 1:
I need you to email me your thoughts on the following:
How can we organise our supply chain better to prevent a recurrence? Clearly, flour is only one of
the many ingredients that we purchase.

SUPPLY CHAIN ORGANISATION This is another good layout of the answer, with
Given our JIT system in the factory, this scandal will have caused major disruption. Clearly our flour each point being explained in a new paragraph.
supplier has acted unethically in supplying the flour that was out of date, but there is also an issue
here in terms of internal control and understanding of what is acceptable.
In future we will need to ensure that our suppliers are meeting our quality standards – given the
nature of food production and the end consumer. This is not a trivial matter and is now resuming in
us potentially having to pay out serious amounts of compensation. In a JIT system, close
collaboration is key to success in the system. Any new supplier of flour (or any ingredient) we will
need to meet with and discuss the standards that we are expecting. There may be potential for a
contract here, and potentially we could make penalty clauses as a part of this contract.
Relationships with our supplier will be key here, and we will need our procurement staff to identify
potential new suppliers for flour and meet with them to ensure that they have a good understanding
of our standards. A JIT System is of course susceptible to the supply chain, and so again, it may be
wise for procurement staff to liaise with current suppliers to strengthen their relationships and
re-clarify standards to strengthen our present relationships. It may have been helpful to reflect a little more
We will also need to have much tighter control of our inbound logistics. Any deliveries will need to on cost vs benefit in this paragraph and the
be checked and if necessary, rejected, should they not be in date or be of a high enough quality etc. consequences of rejecting orders.

This unfortunately is a bad reflection of our staff in the factory and even though it is not necessarily
The answer in general could have been improved
the stance that all staff take, the actions of one has tainted them all. It is vital that all staff
by focusing more detail on improvement ideas
understand the gravity of bad/out of date ingredients, and so training of our staff on what checks
and how this could be incorporated by the
need to be made.
business, given the various stakeholders in
question. By looking at the grade descriptors for
people skills, there are obvious areas of
Requirement 2: improvement.
I need you to email me your thoughts on the following:
How can we address the inevitable claims that we have acted unethically and against the public
interest?

The answer could have been enhanced by

ADDRESSING CLAIMS addressing possible other actions, that is
It is important that we appear as transparent as possible to the press and public. This is a major deny any wrongdoing or challenge the food
scandal and will potentially impact our sales on a large scale. technologist as covered in the examiner’s answer.

We will need to make it clear to the public that we find the situation absolutely unacceptable and
This seems a bit extreme in terms of identifying
are working as quickly as we can to identify new suppliers and remedy this.
new suppliers, particularly as the candidate
The public will need reassurance that this will not happen again so we will need to communicate mentions investigating the matter fully to
that we are to implement far tighter controls and a staff training scheme to ensure this isn’t ascertain responsibility later in the answer,
repeated. which seems a contradiction of this point.
We also need to ensure that it is known that we are considering this matter as extremely serious
and there will be serious investigations into exactly how and why it was allowed to happen and who
was directly responsible. There may even be a need to suspend the employee in question and / or
the factory manager to show that we are dealing with this in an ethical but serious way.
There is of course potential to take action against our flour supplier here although it may be wise
not to go as far as this until serious investigations have been concluded and a decision has been
made on how to proceed.
Requirement 3:
I need you to email me your thoughts on the following:
What are the accounting issues associated with determining the need for a provision in the
financial statements?

ACCOUNTING ISSUES Given the examiner’s answer and report, this

candidate has provided a good response to the
You are right in that we will need to make some kind of accounting disclosure here regarding the
question.
potential claims that we are likely to have to handle.
IAS 37, Provisions Contingent Liabilities and Assets states that for an accounting provision to be This shows a good understanding of the
made there is a present obligation arising from past events which will result in a probable outflow of accounting standard.
economic benefit required to settle. The criteria also states that the amount required to be settled
can be measured reliably and the timings are known. Essentially for a provision to be made the
details will need to be almost certain.
Although we know that we are almost certain to receive claims from customers regarding this issue This paragraph and the remainder of the answer
our lawyers have given no indication of whether these are likely to be successful or not. Therefore has been approached well in applying the
we are unable to say with certainty that the outflow of economic benefit is probable at this stage. standard to the actual details that have been
Furthermore we do not have any indication of when these claims are likely to be made or even an supplied in the exam.
estimate of how much we are likely to pay out.
Given the circumstances of the situation as now we would need to disclose in the form of a note in
the Financial Statements details of the estimated timings amount nature and circumstances of these
claims. However as time goes on we are likely to gain more detail and understanding of the amount
and timings of these claims.
If between now and the yearend we were to receive an indication of timing and amount of
successful claims against us then we should either provide for this in the financial statement if we
are able to measure with certainty or if successful claims are probable but we are unable to estimate
how much we are likely to pay out or when, then a contingent liability would be appropriate.
TASK 3
Requirement 1:
We need to decide on the following:
Should we relax profit targets for restaurant managers’ bonuses for this quarter on the grounds
that costs and revenues are effectively beyond the restaurant managers’ control?

RELAXING TARGETS This answer could have been improved by having

Since the documentary has been released several of our restaurants have seen a down turn in profits. a little more structure. Identifying pros and cons
The fact remains that the flour scandal was not the fault of the restaurant managers themselves and (advantages and disadvantages) is always a good
so this adverse publicity and loss of public confidence they were not responsible for. way to approach such a question, then giving an
explanation as to why and how it is pertinent to
If we were to consider changing restaurant targets it would be important to be able to gauge what the company in question. Suggestions could have
the trend for each of our restaurants is in this difficult time. I appreciate you have had several emails been better justified and supported by fully
from restaurant managers but given that this down turn is likely to affect their salaries. It is driven developed arguments.
by self-motivation. To get a fairer picture we would need to consider the reduction across all similar
restaurants to try and gauge an appropriate target if we were to maintain that their target were
based on financial measures only. To do away with targets completely would be bad move even in
this period of difficulty. At this level, some kind of recommendation
would have been appropriate, either against or
We need to appreciate that some costs are out of control particularly as mentioned they are not
for relaxing targets – or a combination of both.
allowed to make staff cuts, even though it would appear on the face of it the sensible thing to do.
The candidate has explained some of the points
Again shutting restaurants down was not controllable by managers and it would appear that to
but not really advised on what to do.
assess their performance on revenue for that period would be unfair. It may also and damaging to
the restaurant managers morale id we were not to relax/change the targets. The Jaytown manager is
clearly very good at her job having always hit the target in the past and so we must be able to retain There is a missed opportunity here to
staff such as her. By not changing target she and other may be motivated to leave Pizzatime and go demonstrate leadership skills. If we look to the
to our competitors. grade descriptors for a strong answer here, the
following point would apply, “Where appropriate,
tasks are addressed in a way that demonstrates a
Requirement 2: sound understanding of human nature”.

We need to decide on the following:

Assuming that we decide to do so, how would we go about setting realistic targets?

REALISTIC TARGETS
There are several ways that we could go about setting a realistic and motivating target for our
Overall, this seems to be quite a poor response
restaurant managers. As I already mentioned we need to assess the trend across the board with
and doesn’t really answer the question. It would
some accuracy if we are to continue to assess managers in terms of profitability. This would see a
have been strengthened by focusing on setting
reduction in profit margin as the target.
realistic targets, particularly from a financial
However, there may be many other ways to set these to make them more relevant. The biggest perspective. The examiner’s report has some
problem that we have right now is loss of sales and customers. Our main focus should be gaining the good suggestions.
trust of these customers since the flour scandal. It may be wise for us to set a target for our
restaurant managers in terms of the amount customers through the door and further breaking this
down through whether they are new or returning customers. This could be ascertained through a
simple question from staff to our customers when they are here. However this method may be
susceptible to some creativity from staff. We could remedy this by monitoring growth in revenue.
Again focusing on customers their satisfaction and peace of mind is going to be key in retaining/
retracting those that we have lost. Word of mouth is a powerful force and so if customers who have
come back to us have had a pleasant experience then they are likely to pass this on. At the same
time a bad experience will also be passed on. We could certainly assess our managers in terms of
customer satisfaction. A simple survey to be completed on line or instore (perhaps with the added
incentive of being entered into a prize draw on competition) about their experience would enable us
to see whether managers are performing well in terms of both themselves and their staff
maintaining high customer service levels.
Requirement 3:
We need to decide on the following:
Looking forward, beyond the present concerns about the documentary, should we consider linking
the restaurant managers’ bonuses to a balanced scorecard approach? What would the
implications of that be?

BALANCED SCORECARD
Given the current circumstance that Pizzatime is in, it is unlikely that maintaining profitability Given the examiner’s answer, the candidate has
targets will be motivating for restaurant managers. The introduction of a balanced score card system approached this well. They have not recited the
could provide many benefits. We are already using a similar system in our PCCS programme and so theory of the BSC and have applied it to the
we could build on this to implement a full balanced scorecard system. scenario and business, instead picking up on
some important aspects like short termism and
As I already stated, profitability it is potentially on the back burner for the time being, given the loss
dysfunctional behaviour.
of sales that we have experienced. By using a range of non-financial and financial measures to assess
the performance of our managers we are encouraging a long term view of pizzatime. Right now, our
strategy needs to focus on getting our lost customers back from competitors and restoring their
faith in us. By using a balanced scorecard system (and PCCS) we can assess our customers’
perception of us and alter our appearance to attract more.
This system is also likely to be very motivating for managers. Looking beyond what is a difficult time
for us, profitability may be an unfair ways assess in the long term. Given our geographical spread,
margins are likely to vary from area to area and so what might be considered poor in one area or
outlet may be considered strong in another. Using a BSC will provide consistency across the board as
well as enforcing our expected standards, measures such as cleanliness and customer satisfaction are
all things that managers are in control of and so assessing them on this basis makes sense.
When using financial measures alone, the focus on gaining maximum sales may come at the
detriment of other important aspects of Pizzatime. It is likely that if managers are pushing to It is always worthwhile trying to leave a little
decrease table turnover time during a sitting, it will impact on the customer experience. This view time to sense-check the answer. Whilst this
would encourage short termism in the managers but in the long term we may have potentially just paragraph is a pertinent point, there is a
lost a loyal customer because they feel uncomfortable and rushed. By measuring performance from contradiction in that they probably meant
four perspectives, the aspects are balanced increasing turnover as opposed to decreasing it.
The risk of introducing a BSC system however is that managers may view these measures as
subjective and possibly not take them seriously. It still leaves room for some dysfunctional behavior
for example under the learning perspective – if a manager was being assessed on training days of
staff alone there may be potential for them to go too far with these and training becomes excessive.
There is also the danger of the content of these days being poor or inadequate so really we have not
gained better staff but the manager has got the “tick in the box” that they want. It’s therefore
important that we ensure that these measures can be controlled and the risk of dysfunctional
behaviour minimised.
TASK 4
Requirement 1:
Please email me your thoughts on the following:
What impact will the disposal of the subsidiary have on Pizzatime’s consolidated financial
systems?

DISPOSAL OF SUBSIDIARY Whilst the answer displays technical merit, there

are other points which have not been taken into
The main change here is if we are to reduce our holding from 100% to’ 10% then we will need to
account. It is worth looking at the examiner’s
change our accounting for the subsidiary via the acquisition method.
answers and report for their comments.
Depending on when the transaction is made, we will need to value our holding to its’ fair value,
including any good will arising from acquiring the :subsidiary_ The accounting treatment will then be
simply the consideration received for our 90% holding, less the fair value and any goodwiII at that
date. This wiII form a net gain /loss on disposal which wiII be shown in the SPLOCI. Since we are no
longer the controlling parent, any goodwiII that arose on the original purchase will need to be
re-leased from the CSOFP. Given that it has a large retained earnings balance, the figure in the
CSOFP is likely to drop considerably.
Once the disposal has been made, assuming that we do not have significant influence (we will need
more detaiI to establish whether this is the case in which case a different method is needed).The
10% minding wiI I be classed as an Avai!able for Sale Asset. Initially it will need to be measured at
fair value and any transaction costs arising wiII need to be added. At each reporting date, the asset
wiII need to be restated to it’s fair value and any adjustment being taken to a reserve account within
equity section of the balance sheet.

Requirement 2:
Please email me your thoughts on the following:
How will this arrangement affect our management of the supply chain?

MANAGEMENT OF THE SUPPLY CHAIN

Our management of the supply chain is going to have to be controlled tightly in order to prevent There are some valid points, however there are
another scandal happening. We will be solely relying on another company to provide this dough for several points which could have been raised.
us and unlike with our subsidiary we wiII have no say in the way that this is done. We wiII be able to Again, the examiner’s answer provides some
mitigate these risks by an in-depth Service Level Agreement, this will need to include penalties of valuable insight into the breadth of issues that
not meeting our standards. could have been discussed.
Our relationship with this supplier is going to be imperative we are to stick with our JIT system as
we are extremely susceptible to disruption Constant communication will be vital.
There is also potential for a gain sharing scheme there we could specify to our supplier regarding the
target we require and offer them a parentage should these targets be met it’s imperative that both
parties are rewarded for their efforts.
We will be in a vulnerable position once a contract is signed as we will have divested in our
subsidiary and so attaining a new supplier could be difficult . We need to ensure that once we.are
tied in with this new supplier, there is a limit on what price changes (rises) are acceptable. Our new
supplier will know that it wiII be difficult[t for us to change back so we do not want to be put in the
positions of them increasing prices and knowing we cannot get out.
Requirement 3:
Please email me your thoughts on the following:
How can we tell whether the net effect of divesting this subsidiary and buying in dough will be to
enhance future cash flows? There are some valid points that have been
made, but a more detailed discussion would have
enhanced the potential to gain marks.

Remember that planning your answer is vital.

FUTURE CASHFLOWS Spending a bit of time listing the points you wish
to discuss and building arguments around these
We will need to work out the implications of this transaction. Given that we we’re buying the dough
points is a good way not to repeat what you have
from our subsidiary at market-t price means that we are unlikely to see our price of buying increase.
already covered and to ensure you address the
We may in fact see a fall in the purchase price of dough given that the provision has now been
majority of issues.
competitive-indeed.
There is now potential that we could be paying a lower price for dough from another supplier, and
our subsidiary manages to gain another major contract else where . In which case we will still be
entitled to 10% of the profits from it. This would suggest that our cash flows wiII certainly increase. Analyses and evaluates the results obtained from
We will need to perhaps create a projected. analysis listing all of the cash inflows and outflows for techniques and decision models in a way that
each year. These cash flows will need to be discounted possibly using our Weighted Average Cost of implies good understanding (Strong Technical
Capital (WACC) to take the risk of the new arrangement into account We will also need to state any Skills)
working capital or capital investment used to fund this venture. By using this we will be able to
ascertain a Net Present Value the venture We can compare this to a similar analysis our current The candidate has shown a good understanding
operations under this supplier to see which gives the greatest NPV. of the issues raised and linked it to a pertinent
model that can be used for evaluation. In some
questions, the examiner will provide a model to
be used, but in other cases, as this, you may have
to identify relevant models and explain their
pertinence and application.