Piccolo Limited - SAMPLE Mock Pack

Piccolo Limited –
July 2017 ACA Case Study Mock Exam Pack
Important notice
Although ACA Simplified is proud to be a fully-accredited ICAEW Partner in Learning, please note that
this mock exam pack is entirely the work of ACA Simplified and has not been reviewed or in any way
approved nor endorsed by ICAEW.
1
© ACA Simplified 2017. No copying or reproduction permitted. Breaches of copyright may be reported to ICAEW.
Disclaimers
We have made every effort to use our professional experience and skill to write mock exams that focus
on scenarios which will be relevant to the actual requirements of your real examination. However, we
do not know what the examiner will ultimately decide to do – you must be able to react to whatever
comes up on the day and the primary aim of these papers is to help you improve your time management
and technique, whilst also building up good knowledge of your Case Study company: these exams are
not intended to be ready-made pro forma answers to be copied out in the examination and you
should not treat them as such. Please particularly bear in mind this point if the real examination
question appears to be close to something you have practised in this mock pack – your answer
must be specifically tailored to what the ICAEW examiners have asked you to do, rather than
what our mocks ask you to do.
We have tried our very best to create a document which is free from errors but, as we are sure you will
appreciate, it is a huge challenge to produce a 50,000 word document in the 7-8 working days that we
have available, given that we need to ensure that the pack is released sufficiently in advance of the
examination to be of use to you. We have to strike a balance between perfection and ensuring that
students actually have enough time to sit 5 mock exams before exam day by releasing the mocks 7-8
working days after we have first started to learn about the Case Study business. We have tried our very
best to eliminate any typos and of course to ensure that the calculations and technical content are
correct. If you believe you have identified a problem please contact us so we can try to assist. If we
identify any serious issues we will issue an errata sheet to all taught course students and
purchasers as necessary. We keep a log of all students and purchasers so this will be sent
automatically if it is required – please keep an eye on your “junk mail” folder through to exam day in
case any communications from us have been incorrectly treated as spam as we will have to send
communications as a large group email (rather than as individual, personal emails) due to time
constraints.
As our Appendix workings have been prepared using Microsoft Excel, there may be some minor
rounding differences: we have attempted to use the Excel “ROUND” function to avoid these problems
but there may be some instances where rounding differences remain but in the real examination the
examiners are likely to pick numbers where rounding differences are not possible. All calculations are
clearly explained in square brackets so you should be able to identify the reasons for any rounding
differences.
References in our markscheme grids to page numbers (e.g. “p25”) are references to the Advance
Information to help you check the reference and understand the context: these points may potentially
be useable in the real examination but always check the specific question asked. References to
information which we have created purely for the purposes of these mock examinations is shown
by an Exhibit reference (e.g. “Exh 16”), with the possible Exhibits given within the Exam Paper for the
July 2017 examination being Exhibit 14 to 19 inclusive: do not use any points in the markscheme
marked as “Exh …” in your real examination as it is not included in the Advance Information.
Please ensure that you do not confuse information in the Advance Information (which should be used
in your real exam) with information invented for these mocks (which is purely for practice purposes).
Whilst we believe that these mock exams are very useful preparation, ACA Simplified does not
accept any liability whatsoever for your ultimate examination performance as a result of using
these mock examinations.
2
Introduction
Instructions – please read in full before starting Mock 1!

Thank you for purchasing this pack of Case Study mock exams. We hope that you will find them more
useful than past papers in allowing you to practise your technique 5 times, whilst at the same time
learning the only set of Advance Information which really matters in your preparation – the real Advance
Information on Piccolo Limited (“PL”).
This PDF file contains both question papers and full answers, as described in the Table of Contents on
page 6. To extract maximum value from your papers, we strongly recommend that you do NOT look at
the answers until you have completed each paper under strict timed conditions. We include a Table
of Contents on page 6 so that you can print off the relevant answers without having to scroll through
this file – this allows you to avoid potentially seeing answers/hints for papers you have not yet
completed.
We provide full ICAEW-style marking “grids” for all 5 mock exams. When you have completed a paper,
we recommend that you carefully work through the relevant marking grid, marking your own work in an
honest manner. Please try to observe all patterns in the markschemes – working out these patterns
is at least as important as developing your knowledge of the Advance Information.
Our ICAEW-style marking grids and Appendix workings provide page references to the Advance
Information (e.g. “p7”) and references to mock exam paper “Exhibits” (e.g. “Exhibit 16” or “Exh 16”)
purely for your reference – you would not be expected to include these references in your report
answer and you should not do so.
References to a page (“p7”) mean references to the Advance Information whereas when we refer to an
Exhibit (“Exh 16”) this will be a reference to this set of mock examinations. We have deliberately kept
the referencing style different between the 2 sources because anything with a “p” reference is
information that could be used in your exam, whereas anything with an “Exh” reference is something
that we have invented for the purposes of these mocks and therefore something that you should not
rely on when writing your answers in the real exam. After completing 5 mocks you may be slightly
confused as to what information is in the Advance Information and which information is purely from our
mocks so please use this different referencing style to help you here.
In our numerical answers for Requirements 2 & 3 (Appendix 2 & 3) we provide some workings or
comments in square brackets to show you how the answer is derived. We recommend that you include
some kind of similar explanation to the marker in your own scripts as this will ensure that you pick up
the marks available for correct identification of inputs to the model, even if your ultimate answers are
incorrect.
We also provide you with fully written out answers for all 5 mock exams to give you an idea of how to
structure your writing. Please note that our fully written out answers are slightly longer than you
can achieve in the time available as our answers aim to cover all points on the marking grid to give
you the maximum number of examples of the correct writing style: you would not need to make all
the points in the example answers to pass the exam … unless you would like to add another Case
Study prize to our collection! It takes us a significant amount of time to create these fully written out
answers so please do use them!
If you have bought our book Cracking Case™ we recommend that you first read the book in full, then
do 2 of our mock exams and mark these, then have another read through our book, and then do further
mocks, trying to implement the lessons from Cracking Case™. If you have not bought the book, we
recommend that you do so before attempting any of these mock exams, in order to extract maximum
value from this mock pack.
Please see www.acasimplifiedcase.com for further Case Study resources (both paid and free).
3
Introduction
You will obtain maximum benefit from these mock exams if you try to sit them under strict exam
conditions using the same notes and planning sheets which you expect to use on the day. Please try
to make everything as realistic as possible – you should download the sample ICAEW Case Answer
pad paper which is available at www.acasimplifiedcase.com to get used to the reduced writing space
available on the answer pad (which will be printed on one side only in the real exam so print off your
sheets as single-sided). You should also aim to work on a restricted desk space, just like in the exam
hall.
The more you can make your mock practice like the real thing, the more comfortable you will
feel on exam day.
Good luck with your preparations and, of course, the real examination!
All the best,
PS
Please note that for the purposes of creating these mock exams, we have invented certain characters,
companies/brand names and other events to allow us to draft mocks which will test a range of Case
Study skills. It is your responsibility to check the Advance Information thoroughly so that you know what
is contained in the real Advance Information and what we have invented for tutorial purposes in these
mocks. Our referencing of items in our marking grids is designed to help here – see above.
PPS
As there can be subtle variances in the composition of the markscheme “Boxes” between July and
November sittings, we have tried to reflect the different styles of markscheme in this mock exam pack.
This is entirely intentional and does not represent an error in our markschemes: we think that it is better
to provide a range of different kinds of markscheme rather than assuming every examination will be
identical in nature.
Exam Room Pack (ERP)
Based on popular demand from students, we will be producing an Exam Room Pack for the PL Advance
Information.
The ERP will provide approximately 20 pages of very quick reference notes designed to be taken into
the exam room with you. Using our experience of tuition and writing mock exams, we will draw out all
the key points from the Advance Information and we will transform this into a more useable format for
exam purposes.
The 2 aims of the ERP are:
1. To condense the Advance Information material by removing irrelevant elements and using a shorter
writing style – this will help you locate information quickly.
2. To collect and collate information on a particular issue which is scattered around different pages of
the Advance Information (e.g. ethics, the PL revenue streams, the press articles, strategic development
possibilities, and so on) and to place all information on a particular topic into a single page for ease of
reference – this will help you spot the relevant connections.
4
Introduction
The material will be clearly set out on the page using abbreviations and other easy reference tools
rather than the longhand narrative used by the Advance Information. Everything will be designed to
make it easy to find the information that you need as quickly and as simply as possible.
The ERP should be available on 23 June 2017 at a price of £60 plus VAT. The ERP is provided as a
watermarked (copy-protected) PDF file for ease of delivery and to allow you to print the material in a
way that works for you. Please see www.acasimplifiedcase.com for further information or to make a
purchase (please note that the ERP can be purchase in advance of its release date).
5
Table of Contents
Piccolo Limited – Case Study Mock Exams
Table of Contents
Please use this table of contents to ensure that you do not accidentally print or look at any
answers before attempting the relevant mock.
Question starts Answer starts

Exam on page on page
Mock 1 7 19
Mock 2 45 57
Mock 3 84 96
Mock 4 124 136
Mock 5 163 176
Note: To ensure maximum realism compared to a real ICAEW exam paper, print your mock exams
double-sided.
We also recommend that you prepare your planning sheets and notes in exactly the same way as if
you were sitting a real exam, including any additional reminder notes etc which you are going to rely on
in the exam hall. This may include the suggested planning sheets from our book Cracking Case™ or
use of our Exam Room Pack as mentioned on page 4 above.
In short, try to make everything as realistic as possible so that the real exam day feels familiar.
We provide fully written out model answers to all 5 mocks and these start on the following pages:
Mock 1 Model Answer 32

6
Mock Exam 1
Piccolo Limited –
Mock Exam 1
7
Mock Exam 1
List of Exhibits
[Exhibits 1 to 13, per Advance Information]
The following items are newly provided:
14 E-mail from Olivia Harrington explaining tasks required
15 Request for analysis of management accounts
16 Management accounts for the year ended 31 May 2017
17 Request regarding financial modelling
18 Request regarding strategic opportunities
8
Mock Exam 1
EXHIBIT 14
From: Olivia Harrington

To: Charlie Sims
Subject: Piccolo Limited – recent performance and future opportunities
Date: 19 July 2017
Charlie,
Piccolo Limited (“PL”) has just completed another year of trading. I need your assistance in assessing
performance in the past year.
Please draft for my review a report addressed to the PL Board. The report should comprise:
1. A review of the results of PL for the year ended 31 May 2017.
You should analyse and comment on the revenue, gross profit and operating profit
performance of PL and its revenue streams (Exhibit 16) relative to performance for the prior
year and also relative to PL’s budgetary information for the year ended 31 May 2017. Please
take into account the information provided by the PL Board (Exhibit 15).
2. A financial assessment of the Board’s proposals in relation to Piccolo’s logistics arrangement

with RDN (Exhibit 17).
Using the information provided, you should calculate the potential impact on PL’s distribution
expenses of the contract information provided by RDN, as well as the related revenue that PL
should expect to earn. Please then provide the requested evaluation of the draft contract
terms proposed by RDN. Finally, please comment on any strategic issues raised by the
proposal as a whole. As part of your analysis, you should discuss the adequacy of any
assumptions provided in Exhibit 17.
3. A strategic evaluation of the opportunity to develop our relationships with either Ringford or
Quincy Restaurants (Exhibit 18).
You should respond to the request for advice on the potential strategic benefits and risks of
developing a deeper relationship with either (1) Ringford or (2) Quincy Restaurants. Please
also explain any ethical issues which appear to be raised by the information provided. Where
appropriate, you should provide brief calculations to support your analysis.
9
Mock Exam 1
EXHIBIT 15
Email received from Sabrina Kroos on behalf of the Board of Piccolo Limited
Olivia,
We hope you and your team are well. The Board would like some help analysing performance over
the past year. Please ask a suitably able member of your team to analyse Piccolo’s performance in
revenue, gross profit and operating profit terms. We also need some analysis of performance against
the budgeted figures previously set: please refer to the information pack already provided for
information here.
The Board has provided some hopefully helpful notes that you may wish to take into account in your
evaluation.
We look forward to receiving your analysis.
Sabrina
Summary of events affecting Piccolo’s profitability (supplied by Piccolo Board)
Against a background of considerable uncertainty, we are generally pleased with performance. Some
delayed cost increases were passed onto Piccolo as a result of the decline in the value of sterling: it
became clear in the year that this would not be a temporary matter so unfortunately some suppliers
passed on their increases this year.
We were pleased that the project previously delayed by Dougal Hotels took place in the year ended
31 May 2017, as expected. Quincy Restaurants also came through with a large order.
We were pleased with our performance in Retail, considering that we are particularly dependent on
imports in this revenue stream. Our relationship with Kaster was very similar to prior years.
We finalised the amount of the variable element of our fee to Thor at £250,000 for the year to 31 May
2017.
10
Mock Exam 1
EXHIBIT 16
Piccolo: Management accounts for the year ended 31 May 2017
Statement of profit or loss

for the year ended 31 May Note 2017
£000
Revenue 1 46,771
Changes in inventories 1,174
Purchases of goods for resale (30,124)
Gross Profit 1 17,821
Other costs 2 (16,246)
Operating profit 1,575
Net finance income/(expense) 33
Profit before taxation 1,608
Taxation (322)
Profit for the year 1,286
Statement of financial position

as at 31 May Note 2017
£000
Non-current assets: Property, plant and equipment 3 128
Current assets
Inventories (finished goods) 9,110
Trade and other receivables 4 9,706
Cash at bank and in hand 651
Total current assets 19,467
Total assets 19,595
Shareholders' equity
Called up share capital 500
Retained earnings 13,268
13,768
Current liabilities
Trade and other payables 5 5,827
Total equity and liabilities 19,595
11
Mock Exam 1
Statement of cash flows

for the year ended 31 May 2017
£000

Adjust for:
Depreciation 113
Loss/(profit) on sale of property, plant and equipment 4
Net finance (income)/expense (33)
Operating cash flow before changes in working capital 1,692
Change in inventories (1,174)
Change in trade and other receivables (1,911)
Change in trade and other payables (154)
Cash generated from underlying operations (1,547)
Income tax paid (639)
Net cash from operating activities (2,186)
Investing activities
Net interest received/(paid) 33
Purchase of property, plant and equipment (32)
Proceeds on disposal of property, plant and equipment 10
Net cash generated from investing activities 11
Change in cash and cash equivalents (2,175)

Cash and cash equivalents at beginning of the year 2,826
Cash and cash equivalents at the end of the year 651
Notes to the management accounts
Note 1: Segmental analysis

2017
£000
Revenue
Hospitality 11,726
Retail 35,045
46,771
Gross profit
Hospitality 5,711
Retail 12,110
17,821
Note 2: Other costs

2017
£000
Sales and distribution 3,786

Product innovation and design 2,061
Advertising and marketing 7,225
Administration and support 3,174
16,246
12
Mock Exam 1
Note 3: Property, plant and equipment
Leasehold Fixtures, Motor TOTAL

improvements fittings and vehicles
equipment
£000 £000 £000 £000
Cost
At 1 June 2014 139 1,208 237 1,584
Additions - 15 - 15
Disposals - (140) (59) (199)
At 1 June 2015 139 1,083 178 1,400
Additions 29 45 11 85
Disposals - - (54) (54)
At 1 June 2016 168 1,128 135 1,431
Additions - 23 9 32
Disposals - (12) (24) (36)
At 31 May 2017 168 1,139 120 1,427
Depreciation
At 1 June 2014 114 907 145 1,166
Disposals - (128) (46) (174)
Charge for the year 24 90 18 132
At 1 June 2015 138 869 117 1,124
Disposals - - (31) (31)
At 1 June 2016 142 961 105 1,208
Disposals - (5) (17) (22)
At 31 May 2017 152 1,044 103 1,299
Carrying amount
At 31 May 2014 25 301 92 418
At 31 May 2015 1 214 61 276
At 31 May 2016 26 167 30 223
At 31 May 2017 16 95 17 128
Note 4: Trade and other receivables

2017
£000
Trade receivables 8,614

Prepayments and other receivables 1,092
9,706
Note 5: Trade and other payables

2017
£000
Trade payables 4,135

Accruals and other payables 1,370
Income tax payable 322
5,827
13
Mock Exam 1
Hospitality customers
Year ended 31 May 2017

£000
Dougal Hotels 1,368
Ringford 1,665
Quincy Restaurants 991
4,024
Other 7,702
11,726
Retail customers

£000
Longfield 5,397
Kaster 4,803
Gullen 3,185
13,385
Other 21,660
35,045
14
Mock Exam 1
EXHIBIT 17
RDN Contract copy of email sent by Piccolo Board to Ingleby Grant
The Piccolo Board requires your assistance to evaluate a proposed contract with RDN, our logistics
partner. Please calculate the likely cost of the contract over a 5 year time horizon, based on the
figures provided below, as well as the revenue associated with the work served by RDN.
The Board has provided some estimated delivery figures and margins as an attachment to this email
so please incorporate this information into your model.
We would expect actual delivery rates to be approximately in line with the target in our existing RDN
contract throughout the period under analysis as we do not see any reason for these rates to change.
We also require some evaluation of the proposed contract (included here for your reference) as well
as any strategic matters to consider. Obviously the details will be finalised at a later date: please just
work with what we know at this time.
We understand that the terms have been drafted by RDN’s legal advisers, Sit & Bill LLP.
Clive
PS Tamsin wanted to pass on an invitation to her “baby shower” as she has informed us that her
second child is due in November. We hope you will join us in celebrating with Tamsin before she
starts her maternity leave in October! Tamsin has already informed us that she intends to take her full
year away from the business but we look forward to welcoming her back after that – another excuse
for a few drinks so we will invite you to that too, don’t worry!
To the Board of Piccolo Limited – RDN Contract Renewal
RDN is pleased to present our proposed draft terms to cover a renewed contract for the provision of
logistics services to Piccolo through to 2028. We hope that Piccolo will value RDN’s commitment to a
long-term arrangement.
We look forward to hearing from you soon.
Trevor Truck
Managing Director, RDN
15
Mock Exam 1
RDN Contract (2018 to 2028) prepared by Sit and Bill LLP, legal advisers to RDN
Draft contract terms
1. Services provided
Full spectrum provision of logistics services from factory gate to final customer, including storage and
warehousing.
2. Territory covered
In order to ensure the provision of outstanding service, the contract shall be limited to deliveries to the
United Kingdom (including the Channel Islands). RDN shall not be obliged to provide services outside
this territory.
3. Duration
The contract shall last for 10 years. However, each party shall have the opportunity to terminate the
agreement after 5 years if a valid reason can be provided.
4. Performance Target
The Annual Delivery Rate target shall be set at 95% based on the overall number of deliveries. RDN
shall pay Piccolo a penalty of £35,000 for each 0.1 percentage point by which RDN’s actual delivery
rate falls below the Annual Delivery Rate target of 95%.
5. Payment terms
Payment terms shall be agreed at a later date.
6. Liability exclusion
RDN shall not bear any responsibility for loss of profits (including goodwill) as a result of a failure to
provide the agreed services, regardless of the cause.
Forecast Delivery Rates and Costs attachment to email sent to Ingleby Grant
The table shows the expected deliveries and average revenue from delivered items for the first 5
years of the proposed contract with RDN:
Year 1 Year 2 Year 3 Year 4 Year 5

Deliveries (thousands) 600 650 700 750 800
Average revenue per delivery (£) 70 75 80 85 90
Our gross margin on both Hospitality and Retail items is expected to be in line with the long term trend
for Ringford. We would expect to pay 15% of our gross profit in logistics costs to RDN each year.
16
Mock Exam 1
EXHIBIT 18
Hospitality expansion (Ringford and Quincy Restaurants) email to Charlie Sims
The PL Board is keen to deepen its relationships with its existing Hospitality customers and has
decided to prioritise either Ringford or Quincy Restaurants. Due to time constraints, the Board
believes that it can only select one of these clients for enhanced marketing activities. I have included
some further notes on what could be involved below but please also use what we already know about
Ringford and Quincy Restaurants to inform the analysis.
For forecasting purposes, I am informed by the PL Board that gross profit margins continue to be
stable and in line with recent trends for both clients.
The PL Board has asked for a report which discusses the strategic benefits and risks of each
alternative so please draft some sections for our firm’s report. Please also identify any ethical issues
so that I can consider these before we speak to the client next week.
The intention is for the chosen project to start at the end of May 2018 but the Board wants to make a
decision soon so that planning can begin.
Olivia
Ringford update e-mail sent by Fred Fork, Managing Director, Ringford
On behalf of Ringford, we would like to say a big “thank you” for all your support to the business over
the last year. We feel that our relationship has continued to blossom and we cannot wait to share with
you full details of our currently confidential (but ambitious) 10 year development plan. We believe that
fears in relation to Brexit are misplaced – instead, the next 10 years will be a golden opportunity for
the UK and we expect to see huge growth in demand for use of our hotels. We will be targeting the
business sector in particular as we believe that a certain level of “shakeout” caused by Brexit will give
us an opportunity to access new clients. Our new LuxoRooms loyalty scheme will apply to business
travellers in the UK: we expect Eric Franks to be the face of our LuxoRooms marketing as all rooms
will now include a deluxe 3 course breakfast known as a “Franks’ Feast”.
We have continued our impressive growth record and have added a further fully operational 30 hotels
to our portfolio since August 2016. These hotels were in addition to our existing plans in relation to the
conference market where all previously planned acquisitions are now operational.
We certainly feel we are in tune with Piccolo and working in concert we can achieve great things!
Fred
Ringford proposal notes provided by Piccolo Board
We think that sales of top of the range tableware could be a real opportunity at Ringford’s restaurants.
We will explain to Ringford that all the available research indicates that the vast majority of diners at
high quality restaurants have experienced problems with tableware over the last 12 months,
damaging their enjoyment of the meal and leading to a loss of goodwill.
We have estimated that our proposal would generate an additional £2,000 revenue per hotel in the
first year of the project and an additional £2,500 revenue per hotel in the second year. We have
assumed that it would take a one-off investment of 800 hours of management time, with an
opportunity cost of £75 per hour, to effectively deepen our relationship with Ringford.
17
Mock Exam 1
Quincy Restaurants email from Chuck Steak, CEO, Quincy Restaurants
Howdy partners,
It sure was swell to visit your quaint little country of England once again for the annual Utensils Utopia
event at the National Exhibition Centre in Birmingham – what a beautiful city! Following our brief
discussion at the Utensils Utopia event, we at Quincy are sending on some further thoughts about our
relationship with Piccolo.
We are proud to have 290 operational restaurants in the UK, having continued our previous
expansion trajectory. We are happy with our branding arrangement with Piccolo so we expect this
would continue in any future work together and we even hope to use your cookware back in the US.
Now that our good old USA dollar is doing so well against your English pound, our company feels it is
time to invest into the UK: some of our otherwise marginal projects are now just about worth
undertaking, given the depreciation of your so-called “quid”.
We have been very impressed with all Piccolo products to date so we are keen to offer Piccolo good
terms for the sale of utensils, based on the same supply chain location for the secondary
manufacturer that you use in relation to cookware.
Quincy Restaurants proposal notes provided by Piccolo Board
We are going to offer to improve the quality of our innovative PE7 non-stick pans by adding a PFOA-
based coating. We know that Quincy is highly reliant on the PE7 (spending over £500,000 with us
each year) so to prevent any unnecessary disruption to our supply we will add the new PFOA-coated
variant of the PE7 without making too much of this in our product literature.
If our proposal is successful then we think that we can boost revenue by £3,000 per Quincy restaurant
in each of the first 2 years of our efforts. Our investment into the Quincy relationship would require a
one-off investment of 500 hours of management time, with an opportunity cost of £50 per hour.
Trump Threatens Canadian Export Industry Strange Times, July 2017
First it was the Germans with their “very, very bad” trade surplus – now we understand that US
President, Donald J Trump, has threatened to impose a 35% tariff on exports of Canadian
manufactured goods.
“We Americans are proud to be the most hard-working and productive people in the world. It is
therefore essential that we create a barrier to protect our industries from competition. We are so
naturally awesome that we do not need to let the market interfere in resource allocation. If we
Americans succeed, it is due to our innate genius – if any other nation achieves anything, they must
be cheating,” stated the President in his July Trade briefing.
“This low-quality Canadian trash sucks big time!”, tweeted the President in a 4.03am post on Twitter.
“Canadian frying pan looks like Hillary’s face and had a bug in it – NOT GOOD”, said another Tweet.
“White House? This Canadian cooking dish was RED! Commies everywhere, Canadian Utensils
industry – you’re fired!!!” promised a final tirade from the President.
18
Mock Exam 1 Answers
Piccolo Limited –
Mock Exam 1 Answers and markscheme
19
Mock Exam 1 Answers
Appendix 1
2017 2016 Change Change %

Revenue £000 £000
Hospitality 11,726 8,837 2,889 32.7%
Retail 35,045 32,876 2,169 6.6%
Total 46,771 41,713 5,058 12.1%
2017 2016
Revenue mix % %
Hospitality 25.1% 21.2%
Retail 74.9% 78.8%

Gross profit £000 £000
Hospitality 5,711 4,345 1,366 31.4%
Retail 12,110 11,974 136 1.1%
Total 17,821 16,319 1,502 9.2%
2017 2016 Change

Gross profit margin % %
Hospitality 48.7% 49.2% -0.5
Retail 34.6% 36.4% -1.8
Total 38.1% 39.1% -1.0

£000 £000
Operating profit 1,575 3,163 (1,588) -50.2%
2017 2016 Change

% %
Operating profit margin 3.4% 7.6% -4.2

Other costs £000 £000
Sales and distribution 3,786 4,034 (248) -6.1%
Product innovation and design 2,061 2,153 (92) -4.3%
Advertising and marketing 7,225 4,038 3,187 78.9%
Administration and support 3,174 2,931 243 8.3%
Total 16,246 13,156 3,090 23.5%
Return on advertising KPI 2017

£000
Thor fee 1,150
Lucy Tyler fee 1,000
Total 2,150
Increase in total revenue 5,058

KPI calculation 235%
KPI target 120%
Calculation notes
The Thor fee is calculated as the £900k fixed element per p23 of the Advance Information plus the £250k mentioned
in Exhibit 15. The Lucy Tyler fee for 2017 is £800k plus £200k if revenue reaches £44.0m (which is achieved): this
is explained on p12 of the Advance Information.
The Advertising KPI is calculated as the increase in total revenue divided by (Thor fee + Lucy Tyler fee) per p24 of
the Advance Information.
We recommend that a condensed version of this note is included in your Appendix 1.
Exam Tip
It would be perfectly acceptable, and would not lose you any marks, if you were to use abbreviations such as H or
Hosp for the Hospitality stream and R or Ret for Retail stream throughout your Appendix 1 (and in the main narrative
of your report) providing that these are defined at the first mention i.e. in your Executive Summary.
20
Mock Exam 1 Answers
Appendix 1 continued
Performance vs budget
2017 Budget Variance Variance %
£000 £000
Revenue
High 46,771 45,000 1,771 3.9%
Gross profit
High 17,821 18,000 (179) -1.0%
Operating profit
High 1,575 4,000 (2,425) -60.6%
Revenue - Hospitality
High 11,726 10,000 1,726 17.3%
Revenue - Retail
High 35,045 35,000 45 0.1%
Gross profit - Hospitality

High 5,711 5,000 711 14.2%
Gross profit - Retail

High 12,110 13,000 (890) -6.8%
21
Mock Exam 1 Answers
Appendix 2
Sales, margin and costs
Year 1 Year 2 Year 3 Year 4 Year 5 Total
Deliveries (thousands) (Exh 17) 600 650 700 750 800

Average revenue per delivery (£) (Exh 17) 70 75 80 85 90
Total revenue (£000) 42,000 48,750 56,000 63,750 72,000 282,500
x 40% GPM (per Ringford (p27)) 16,800 19,500 22,400 25,500 28,800
x 15% allocation to distribution costs (Exh 17) 2,520 2,925 3,360 3,825 4,320 16,950
Performance target penalty
Target rate per new contract (Exh 17) 95

Expected delivery rate (equal to old contract target) (p35 and Exh 17) (90)
Failure in number of full percentage points 5

Failure in number of 0.1 percentage points 50
Penalty per 0.1 percentage points (£000) (Exh 17) 35
Penalty payable to PL per year (£000) 1,750 [50 x £35k]

x 5 years (£000) 8,750
Total 5 year RDN costs, net of penalty (£000) 8,200 [16,950 - 8,750]
Tutorial note - not for inclusion in your answer
References to page numbers and Exhibits are purely for your own reference - you do not need to include these in your answer.
We have set out the workings fully to explain the method used. It would be acceptable to use shortcuts to save time by not
presenting every separate stage. However, always ensure that any shortcuts are made clear to the marker in case you make
an error.
Some students include a list of assumptions/inputs at the bottom of their Requirement 2 Appendix. This can be helpful in
showing the marker which inputs you have chosen (helpful in obtaining the marks in Box 2.1 if this is allocated to inputs)
and can also help you plan your criticism of assumptions/inputs in Requirement 2. However, provided that your inputs are
made sufficiently clear in your workings, you may wish to save time and exclude such a list as there is no requirement for
a list and you will not be penalised if you do not include it in your Appendix 2.
22
Mock Exam 1 Answers
Appendix 3
Ringford Year 1 Year 2 Total
Hotels 340 340 [270 + 30 + 40 - see markscheme Box 3.1 for basis]
x additional revenue per hotel (Exh 18) 2,000 2,500
Total revenue (£000) 680 850
GPM % 40% 40% [Exh 18 indicates unchanged from p27]
Gross profit (£000) 272 340 612
less Opportunity cost

Management time (hours) (Exh 18) 800
Management cost (per hour) (Exh 18) 75
Total Opportunity cost (£000) (60)
Additional net profit (£000) 552
Quincy
Restaurants (Exh 18) 290 290

x additional revenue per restaurant (Exh 18) 3,000 3,000
Total revenue (£000) 870 870
GPM % 50% 50% [Exh 18 indicates unchanged from p27]
Gross profit (£000) 435 435 870 [Or calculate year 1 and multiply by 2 as terms
are the same in both year 1 and year 2]
less Opportunity cost
Management time (hours) (Exh 18) 500
Management cost (per hour) (Exh 18) 50
Total Opportunity cost (£000) (25)
Additional net profit (£000) 845
an error.
Note – the examiners have confirmed that candidates are not required to produce an Appendix 3 and
can instead write the relevant explanation in brackets within their report answer – unlike with
Appendix 1 and 2 which must be set up in your report answer (and presented at the end of the
report), there are no marks on the markscheme for an Appendix 3 specifically. This is because the
calculation in Requirement 3 will normally be very simple. However, we would ourselves recommend
the creation of an Appendix 3 in case the calculations are relatively complicated as attempting to
squeeze calculations into your main report narrative can harm the presentation of your report and
could force you to make unnecessary shortcuts given space constraints: such shortcuts could
introduce errors.
23
Mock Exam 1 Answers
Executive Summary markscheme
Financial analysis (Req 1) Financial modelling (Req 2)

E.1 Description E.3 Description
♦ Revenue comment with £, % and comparative figure ♦ Calculates total cost with figure
♦ GP comment with £, % and comparative figure ♦ Calculates penalty with figure
♦ OP comment with £, % and comparative figure ♦ Professional scepticism on assumptions
♦ Budget comparison with figure ♦ Significant costs involved
E.2 Evaluation/Conclusions/Recommendations E.4 Evaluation/Conclusions/Recommendations
♦ Explains change in revenue for PL ♦ Concludes on way forward
♦ Explains change in gross profit for PL ♦ Comments on contract terms
♦ Cash position concerning – Kaster issue? ♦ RDN relationship critical to PL
♦ Other commercial recommendations ♦ Other commercial recommendations
Evaluation of Strategy (Req 3)

E.5 Description
♦ Concludes on financial impact with figure
♦ Comments on Ringford risks & benefits
♦ Comments on Quincy risks & benefits
♦ Comments on impact on reputation of ethical issues
E.6 Evaluation/Conclusions/Recommendations
♦ Concludes on way forward
♦ Concludes on operational / strategic issues
♦ Makes recommendations on ethical issues
♦ Makes other recommendations
24
Mock Exam 1 Answers
Requirement 1 markscheme – performance review
Assimilating & Using Information

1.1 Calculates key figures
♦ Total revenue: up £5,058k AND up 12.1%
♦ Total GP: up £1,502k AND up 9.2%
♦ Overall GPM: down from 39.1% to 38.1% AND down 1.0 percentage point
♦ OP: down £1,588k AND down 50.2%
♦ Advertising effectiveness KPI 235%
1.2 Identifies business issues and wider context

♦ Press expectations of 10% market growth at best (p39)
♦ PL internal expectations 7.5% market growth at best (p38)
♦ Some customers resist price increases (p9)/pressure on margins (Exh 15)
♦ Advertising and marketing spend has tended to be around 10% of PL revenue (p23)
♦ PL Advertising and marketing effectiveness KPI set at 120% (p24)
♦ Own research with source (free response)
Structuring Problems and Solutions

1.3 Movements and basic narrative on issue 1 (revenue)
♦ Hospitality: up impressively £2,889k AND up 32.7%
♦ Retail: up significantly £2,169k AND up 6.6%
♦ Hospitality revenue mix: from 21.2% to 25.1%
♦ Retail revenue mix: from 78.8% to 74.9%
♦ Impact of Dougal Hotels versus prior year (p19)
1.4 Movements and basic narrative on issues 2 and 3 (GP and OP)
♦ Hospitality: up impressively £1,366k AND up 31.4%
♦ Retail: up marginally £136k AND up 1.1%
♦ Hospitality GPM: down marginally from 49.2% to 48.7%
♦ Retail GPM: down significantly from 36.4% to 34.6%
♦ OPM: down from 7.6% to 3.4%
1.5 Comparison to budget – figures

♦ Total Revenue: significantly exceeds High estimate by £1,771k AND 3.9%
♦ Total GP: just below High estimate by £179k AND 1.0%
♦ OP: well below High estimate by £2,425k AND 60.6% (or versus Low estimate)
♦ Revenue by stream: both exceed High estimate but Retail only just with figures
♦ GP by stream: Hospitality exceeds High estimate but Retail well below with figures
♦ Notes that Hospitality appears to be doing better than Retail
Note – we have invented the information in relation to the actions of Dougal Hotels, Quincy
Restaurants and Kaster during the year for the purposes of this Mock. Do not use these actions in
your answer to the real examination on 19 July 2017.
25
Mock Exam 1 Answers
Applying Judgement
1.6 Evaluation of stream revenue
♦ PL has outperformed even best expectations for growth in press (10%) (p39)
♦ Hospitality revenue above prior year decline of 5% (p19)
♦ Retail growth below prior year 9% growth (p19)
♦ Dougal Hotels and Quincy Restaurants benefit Hospitality stream
♦ Revenue from all key Hospitality AND all key Retail clients increased – impressive
1.7 Evaluation of stream GP and overall OP

♦ Shift in revenue mix to higher margin Hospitality does not prevent overall GPM decline
♦ Passing on of Brexit-related costs has affected GP
♦ OP hit by high increase in Advertising (78.9% increase, 15.4% of revenue)*
♦ Advertising effective on KPI but profit performance not impressive
♦ Revenue growth not translating into cash (decline of £2,175k per SCF*)
1.8 Comparison to budget – discussion

♦ Revenue performance better than profit performance
♦ Hospitality has performed well on all metrics
♦ Expected cost increases not too significant as well above Low forecasts
♦ Retail revenue strong but profit performance weak
♦ Operating profit well below High so Advertising spending out of control
♦ Advertising spend not caused by Thor or Lucy Tyler (minor increase)
Conclusions and recommendations

1.9 Draws conclusions (under a heading)
♦ Results for the year: impressive revenue growth but margins suffering
♦ Revenue: comment AND comparative figure
♦ GP and OP: comment AND comparative figures
♦ Comparison to budget: comment AND figure
1.10 Makes recommendations

♦ Review reasonableness of budgets/budget methodology/update budgets
♦ Investigate relationship with Kaster – affecting cash?
♦ Continue work with Thor and Lucy Tyler
♦ Review performance in Retail stream
♦ Consider revising Advertising KPI to include profitability/margin metric
♦ Other recommendations (free response)
Note – we have invented the information in relation to the actions of Dougal Hotels, Quincy
Restaurants and Kaster during the year for the purposes of this Mock. Do not use these actions in
* (£7,225k/£46,771)
** SCF = Statement of cash flows
26
Mock Exam 1 Answers
Requirement 2 markscheme – financial evaluation (RDN contract)

2.1 Uses AI / Exam Paper Information (report/Appendix)
♦ Items delivered and revenue per Exhibit 17 table
♦ GP margin of 40% per Ringford (p27)
♦ New RDN Performance Target 95% and penalty £35,000 per 0.1 pp* (Exh 17)
♦ Expected delivery rate of 90% (existing Performance Target (p35))
2.2 Describes business issues and wider context

♦ All PL’s logistics undertaken by RDN (p35) OR comparison to relevant R1 figures
♦ 5 year contract due for renewal on 31 May 2018 (p35)
♦ New contract terms: delivery rate/10 year period with 5 year break (Exh 17)
♦ Customers could leave if logistics is poor quality/loss of goodwill feared (p35)
♦ Tamsin Wright heads up co-ordination with RDN but will take maternity leave (Exh 17)

2.3 Calculation results
♦ Revenue £282,500k
♦ Allocated distribution costs £16,950k
♦ Penalty for poor performance £8,750k
♦ Net cost £8,200k
2.4 Evaluation of draft contract

♦ “Full spectrum” offering (Exh 17) consistent with current relationship with RDN (p35)
♦ Territory covered is restrictive (Exh 17)
♦ Duration of 10 years (Exh 17) longer than current deal but 5 year break matches (p35)
♦ Performance target attractive (Exh 17) – higher target and better penalty for PL (p35)
♦ Payment terms are not provided so needs clarification (Exh 17)
♦ Liability exclusion heavily in RDN’s favour – excludes all causes (even RDN?) (Exh 17)
2.5 Query and evaluate assumptions

♦ Actual delivery rate: could differ from recent trends/5 year forecasting period uncertain
♦ Sales units: no support for increase/crude stepped increase
♦ Revenue per unit: no support/crude stepped increase
♦ Assumed margins: Ringford is a Hospitality customer only
♦ Prop. of GP on distribution: could differ from recent trends/not substantiated
♦ Timescale: 5 year forecasting uncertain
Note – the names Trevor Truck and Sit & Bill LLP, as well as the event relating to Tamsin Wright,
have been invented for the purposes of this Mock and are not contained in the Advance Information.
Do not use this information in your answer to the real examination on 19 July 2017.
* percentage points e.g. a movement from 95.2% to 95.0% is a movement of 0.2 pp
27
Mock Exam 1 Answers
Requirement 2 markscheme – financial evaluation (RDN contract)
Applying Judgement
2.6 Evaluation of calculation
♦ PL distribution costs are substantial over a 5 year period
♦ Change in performance target provides significant refund to PL
♦ Contract would continue beyond 5 years forecasted in model
♦ Model implies huge increase in PL revenue over 5 years – plausible?
♦ Compares annual costs to “Sales and distribution” per Exh 16 – significant
2.7 Strategic issues

♦ PL could lose goodwill from customers (p35) – unfair term?
♦ 10 year period – provides certainty but hard to exit (5 year break) (Exh 17)
♦ Use Tamsin Wright’s expertise now before leave of absence (Exh 17)
♦ PL requires international distribution to Italy and Canada (p35)
♦ PL has heavy dependence on RDN (p35) – needs good outcome
♦ Draft contract from RDN’s advisers – independence OR just a draft
2.8 More complex points on assumptions/practical impact

♦ Actual delivery rate: RDN has tended to meet target of 90% (p35)
♦ Sales units: appears optimistic/Brexit uncertainty/forecasts of decline (p39)
♦ Revenue per unit: use of averaging (Exh 17) could introduce distortions
♦ Assumed margins: logistics operations in Retail very different (p21-22)
♦ Prop. of GP on distribution: different delivery mix (no international) (Exh 17)
♦ Could be other costs and revenues to consider with example of each

♦ Concludes on calculation with figure
♦ RDN currently essential/sole PL logistics supplier so relationship crucial
♦ Concludes on assumptions/strategic issues
2.10 Commercial recommendations

♦ Negotiate T&Cs further with RDN
♦ Research alternative logistics suppliers especially international
♦ Obtain high quality maternity cover for Tamsin Wright
♦ Obtain legal advice on terms/use own legal team
♦ Review all model assumptions OR develop more complex model
Note – the names Trevor Truck and Sit & Bill LLP, as well as the event relating to Tamsin Wright,
have been invented for the purposes of this Mock and are not contained in the Advance Information.
Do not use this information in your answer to the real examination on 19 July 2017.
28
Mock Exam 1 Answers
Requirement 3 markscheme – strategic evaluation (Ringford or Quincy Restaurants)

3.1 Mini-calculation
♦ Ringford hotels 270 (p26) + 30 (Exh 18) + 40 from Reeve (p27)
♦ Quincy restaurants 290 (Exh 18)
♦ Applies gross profit margins per p27 (40% and 50%)
♦ Deducts PL time-costs per Exh 18
♦ Queries basis of management time estimates
♦ Compares GP results to Hospitality stream per R1 with figures

♦ Brexit: delayed hotel openings OR could be more visitors to UK (p37)
♦ PL has a plan to expand into overseas markets via hotel chain (p37)
♦ Valid comparison to relevant R1 figures
♦ Trump Presidency threatens Canadian industry (Exh 18)
♦ Project start date (May 2018): time to plan OR market could change
♦ Information provided by MD/CEO (Exh 18)/only 290 hotels? (p27)

3.3 Issue 1 – Benefits & Risks (Ringford)
♦ Largest PL Hospitality customer – key client (p22, Exh 16)
♦ PL enjoys status as exclusive supplier of Cookware and Tableware (p26)
♦ Ringford entering the conference market – growth opportunity (p27)
♦ LuxoRooms initiative similar to effective Dougal Hotels method (p26)
♦ Gross profit margin of 40% not very high/lower than Quincy (p27, Exh 18)
♦ Not consistent with usual PL Hospitality profile/“value” branding (p26)
3.4 Issue 2 – Benefits & Risks (Quincy Restaurants)

♦ Major US restaurant chain (p22) – overseas expansion opportunity
♦ Gross profit margin of 50% good/higher than Ringford (p27, Exh 18)
♦ PL does not need to include Quincy logo – marketing advantage (p27)
♦ PL has not offered utensils to Hospitality – hassle relative to margin (p21)
♦ Uncertainty from Trump policy (Exh 18) – impact on Canada supplier (p31)
♦ Trump – supplier of PE7 technology is Canadian company Rolson (p33)
3.5 Ethics – identification of issues

♦ PFOA subject to health concerns and restrictions under US law (p39)
♦ PL does not propose to inform Quincy explicitly regarding PFOA (Exh 18)
♦ PL proposing to use PFOA in sales to Quincy, a US chain (Exh 18)
♦ PL will claim that “all available research” indicates problems (Exh 18)
♦ Zoto research indicates only around 20% of diners complained (p40)
♦ PL proposing to market “top of the range” Tableware to Ringford (Exh 18)
Note – the names LuxoRooms, Utensils Utopia, Fred Fork and Chuck Steak have been invented for
the purposes of this Mock and are not contained in the Advance Information. Do not use these names
in your answer to the real examination on 19 July 2017.
The Tweets from President Trump in relation to Canadian manufacturing have been invented for the
purposes of this Mock.
29
Mock Exam 1 Answers
Requirement 3 markscheme – strategic evaluation (Ringford or Quincy Restaurants)
Applying Judgement
3.6 Issue 1 – Further Benefits & Risks (Ringford)
♦ Ringford only customer to maintain revenue growth recently (p22)
♦ Ambitious 10 year development plan BUT terms unknown (Exh 18)
♦ Emphasis on business sector (Exh 18) in line with Dougal growth (p26)
♦ Eric Franks – unproven in market/poor outcome of last venture (p39)
♦ Eric Franks – impact on key existing PL marketing tool Lucy Tyler? (p12)
♦ Impact on Dougal relationship from similar loyalty scheme? (Exh 18, p26)
3.7 Issue 2 – Further Benefits & Risks (Quincy Restaurants)

♦ Quincy offering opportunity to boost utensils line (Exh 18) – diversify
♦ PE7 has performed very well – leading product (p19)
♦ Investment may be dependent on sterling value – uncertainty (Exh 18)
♦ Gross profit margin lower than Dougal Hotels (p26, Exh 18)
♦ Utensils stream has low margins (p13) OR 15% revenue target (p37)
♦ Providing utensils would require PL to obtain a secondary manufacturer (p31)
3.8 Ethics – impact and mitigation

♦ PL should take expert advice on use of PFOA
♦ PL reputational damage in US – impact on future relationship/opportunities
♦ PL should always act with transparency so not hide anything from Quincy
♦ PL may be overstating findings in data on tableware – lack of honesty
♦ PL Board may not be aware of Zoto findings but duty to research properly
♦ PL overselling items to a “value” chain – lack of integrity – sell suitable items

♦ Concludes on benefits and risks of BOTH opportunities
♦ Concludes on ethical issues

♦ Market research on outlook for Hospitality market
♦ Negotiate T&Cs further
♦ Also aim to enhance relationship with Dougal Hotels OR new customers
♦ Reconsider whether PL could try to deepen relationships with both customers
♦ Consider alternative projects
Note – the names LuxoRooms, Utensils Utopia, Fred Fork and Chuck Steak have been invented for
the purposes of this Mock and are not contained in the Advance Information. Do not use these names
in your answer to the real examination on 19 July 2017.
The Tweets from President Trump in relation to Canadian manufacturing have been invented for the
purposes of this Mock.
30
Mock Exam 1 Answers
Appendices and Main Report markscheme
Appendices Main Report
Appendices R1: Content and style Report: Structure
♦ Tabulated and mix of £ and % ♦ Sufficient appropriate headings
♦ Figures are as required by question – revenue ♦ Appropriate use of paragraphs/sentences
♦ Figures are as required by question – GP and OP ♦ Legible
♦ Figures are as required by question – Budget ♦ Correctly numbered pages
Appendices R2: Content and style Report: Style and language
♦ Numbers clearly derived ♦ Relevant disclaimer AND report from Ingleby Grant
♦ Well-presented and labelled ♦ Formal language for the board
♦ Uses given figures for calculation ♦ Tactful/ethical comments
♦ Calculates all elements requested ♦ Reasonable spelling/grammar
31
Mock Exam 1 Model Answer
Please note that this model answer is slightly longer than is possible in the time available in the exam:
this is so that we can provide an illustrative writeup of all points on our marking grid – you would not
need this many points to pass the exam.
As well as the specific points made, please look carefully at the section headings, sentence length and
general writing style: try to aim for as simple and “punchy” a style as possible so that you can make the
maximum number of points possible. This is important because it is impossible to be certain what points
will be rewarded on the markscheme so the more points you make, the better your chances of passing
the examination.
Cover Page [You do not need to write the term “Cover Page” on your report – we have included it for
illustrative purposes only]
Report to the Board of Piccolo Limited (“PL”)
Ingleby Grant
19 July 2017
This report is based on unverified management data and is for the use of the Board of PL only.
32
Executive Summary
Section 1 Financial Performance
Performance this year has been impressive in revenue terms but margins have suffered.
Revenue increased significantly by £5,058k (12.1%) from £41,713k to £46,771k due to demand from
all key Hospitality and all key Retail clients increasing, representing impressive performance and
exceeding the prior year Hospitality decline of 5%.
The Hospitality stream grew revenue significantly by £2,889k (32.7%) from £8,837k to £11,726k,
reflecting the fact that Dougal Hotels made purchases postponed from the prior year. Demand from
Quincy Restaurants would also have helped.
GPM was down significantly from 39.1% to 38.1%, a decline of one percentage point, despite the fact
that the revenue mix shifted significantly towards higher margin Hospitality work. PL’s customers are
known to resist price increases, putting pressure on margins.
OP was down disastrously £1,588k (50.2%) from £3,163k to £1,575k meaning that revenue growth
did not translate into cash, which declined precipitously by £2,175k, leaving PL with potentially
insufficient reserves of only £651k.
This could be due to problems with Kaster which has frequently not paid invoices on time: PL has
noted similar behaviour this year.
Revenue significantly exceeded the High estimate by £1,771k (3.9%) and GP was just below the High
estimate by £179k (1.0%). The company has performed better in revenue terms than profit terms.
Commercial Recommendations
PL should:
• review the reasonableness of budgets and create updated budgets

• review performance of the Retail stream
Section 2 RDN
Based on the assumptions provided, the project will yield total revenue of £282,500k and will incur
total distribution costs of £16,950k. The total costs are therefore significant to PL.
However, as a result of a substantial payment of £8,750k under the performance penalty, the net cost
will only be £8,200k. The change in performance target terms provides a significant refund to PL –
without this, the contract would be significantly more expensive.
As all of PL’s current logistics work is undertaken by RDN, PL does need to obtain a good outcome
from the negotiations as its existing 5 year contract comes to an end on 31 May 2018.
There is no supporting evidence for the increase in sales units each year, which appears to be a
crude stepped increase.
The model uses the margin relating to Ringford but this client is a Hospitality customer whereas
logistics operations in Retail are very different in nature.
The promise of “full spectrum” provision suggests that the contract is consistent with the current
successful relationship with RDN.
33
The territory covered is restrictive as the contract only includes the UK whereas RDN currently assists
PL in Italy and Canada.
PL should not proceed with the current contract as it requires international logistics services and the
terms are drafted heavily in RDN’s favour1.
PL should:
• obtain high-quality maternity cover for Tamsin Wright

• negotiate T&Cs further with RDN
Section 3 Ringford and Quincy
Working with Quincy will yield an additional net profit of £845k over the 2 years analysed, which is
substantially more than the £552k possible on work with Ringford.
Ringford is PL’s largest Hospitality customer and so PL could develop its relationship with this key
client through the proposed project.
Eric Franks is unproven in the market as he has not yet released any products and he has not been
successful recently, which could impact negatively on PL.
Selling utensils to Quincy could help PL diversify its income. Although Quincy is not a Retail client, if
PL starts to sell utensils to Hospitality clients it would help towards the goal of earning higher utensils
income (as reflected in the current target of 15% of Retail revenue from utensils by 31 May 2018).
Investment by Quincy appears to be dependent on the value of sterling, making future demand
uncertain as sterling is currently volatile due to Brexit.
PL could lose its reputation and opportunity to work in the US so should discuss use of PFOA
transparently with Quincy.
PL must not overstate research findings simply to sell products and must confirm its statements are
accurate.
PL must not oversell products to a company which does not need them as this would lack integrity.
PL should proceed to work with Quincy, provided that the PFOA issue is resolved2.
PL should:
• negotiate T&Cs further

• also enhance the relationship with Dougal Hotels or new customers
1
You would be awarded a mark for advising PL what to do irrespective of the option you pick: our choice here is merely for
illustrative purposes.
2
34
748 words or 30 minutes of writing time at 25 words per minute
As noted, this example answer is longer than is required to pass the exam as we wanted to illustrate all
available markscheme points.
35
Section 1 Financial performance for the year to 31 May 2017
1.A Market background
PL’s impressive revenue growth surpassed the best expectations of the market for 10% growth. The
increase also outpaced PL’s internal forecast of 7.5% growth at best.
PL has tended to spend around 10% of revenue on advertising and marketing so the substantial
increases this year are concerning, although the company did beat its Advertising KPI of 120% this
year.
[Add own research with a brief source in brackets e.g. (BBC).]
1.B Revenue
exceeding the prior year decline of 5% in Hospitality revenue.
The Hospitality stream increased its revenue mix share from 21.2% to 25.1%.
The Retail stream grew revenue significantly by £2,169k (6.6%) from £32,876k to £35,045k but this
increase was below the prior year growth of 9%. The Retail stream saw its revenue mix share decline
from 78.8% to 74.9%.
1.C Gross profit and operating profit
GP increased significantly by £1,502k (9.2%) from £16,319k to £17,821k due to growth in revenue.
GPM was down significantly from 39.1% to 38.1%, a decline of one percentage point despite the fact
The Hospitality stream increased its GP impressively by £1,366k (31.4%) from £4,345k to £5,711k but
GPM declined from 49.2% to 48.7%, possibly due to the passing on of Brexit-related costs.
The Retail stream increased its GP marginally by £136k (1.1%) from £11,974k to £12,110k but GPM
declined from 36.4% to 34.6%.
did not translate into cash, which declined precipitously by £2,175k.
OPM declined significantly from 7.6% to 3.4% as a result of a very high increase in Advertising
expenditure of £3,187k (78.9%) from £4,038k to £7,225k, reaching 15.4% of revenue, well above PL’s
normal allocation of around 10% of revenue to this activity.
The advertising effectiveness KPI was 235%, well above the 120% target, due to a good level of
revenue growth relative to the cost of incentives but performance in terms of profit/margins was not so
impressive.
36
1.D Comparison to budget
estimate by £179k (1.0%). The company has performed better in revenue terms than profit terms. The
impact of the expected cost increases does not appear significant as the company is well above the
Low forecasts for profitability.
OP was well below the High estimate by £2,425k (60.6%) as Advertising expenditure does not appear
to have been controlled well: the significant increase in advertising spend (above) does not appear to
have been caused by Thor or Lucy Tyler as there has been only a minor increase in their expenses.
Both streams exceed the High estimate for revenue but Retail only just beats the estimate by £45k
(0.1%): Hospitality performs better and beats the estimate by £1,726k (17.3%).
Hospitality exceeds the High estimate for GP by £711k (14.2%) but Retail is well below the High
estimate by £890k (6.8%), representing a weak performance in profit terms. Even so, Retail still beats
the Low estimate.
Therefore, overall, Hospitality appears to be doing better than Retail with Hospitality performing well on
all metrics.
1.E Conclusions
Performance this year has been impressive in revenue terms but margins have suffered.
exceeding the prior year decline of 5% in Hospitality revenue.
GPM was down significantly from 39.1% to 38.1%, a decline of one percentage point despite the fact
did not translate into cash, which declined precipitously by £2,175k.
estimate by £179k (1.0%). The company has performed better in revenue terms than profit terms.
1.F Commercial Recommendations
PL should:
• review the reasonableness of budgets and create updated budgets

• investigate the relationship with Kaster to determine impact on cash
• continue to work with Thor and Lucy Tyler as they have been effective
• review performance of the Retail stream
• consider revising the advertising KPI to include a profitability or margin metric
• [further idea]
37
Note that this answer is shorter than some of our Requirement 1 model answers because the EPIA
(Budget comparison) is very straightforward and does not require much narrative discussion.
38
Section 2 RDN
2.A Project background
from the negotiations as its existing 5 year contract comes to an end on 31 May 2018: otherwise PL
will have to entrust significant amounts of work to a new and unknown supplier.
Customers could leave PL if logistics service is of a poor quality and therefore customer goodwill
could be lost.
As Tamsin Wright is in charge of coordinating complex activities with RDN, it is vital that PL obtains a
suitable replacement during her leave of absence.
2.B Results of financial model
Based on the assumptions provided, the contract will yield total revenue of £282,500k and will incur
total distribution costs of £16,950k.
However, as a result of a substantial payment under the performance penalty, the net cost will only be
£8,200k. The change in performance target terms provides a significant refund to PL – without this,
the contract would be significantly more expensive.
Whichever way, PL will incur substantial distribution costs as the model examines a 5 year period.
The contract could last as long as 10 years but the model only forecasts 5 years, which is only half of
the full period, understating the full cost.
The yearly cost of around £3m would not be far below PL’s current level of Sales and distribution
costs, again indicating that the contract is material to PL.
2.C Evaluation of assumptions
The actual delivery rate could differ from recent trends and the suggestion that it will remain the same
over a 5 year period does not seem plausible. However, RDN has tended to meet a 90% rate in
recent years so it may be possible to continue to do so.
The increase in PL revenue implied by the increase in sales appears to be very high and is
implausible, particularly given concerns regarding Brexit and some press forecasts of a decline in the
market in the coming years.
There is no supporting evidence for the revenue per unit, which appears to be a crude stepped
increase. Use of an averaging method could introduce distortions.
logistics operations for PL in Retail are very different in nature.
The proportion of GP spent on distribution has not been substantiated and could differ from recent
trends, particularly if RDN is now going to cease international delivery.
Forecasting is inherently uncertain and a five-year period, which is relatively long, exacerbates this
problem.
39
The contract is a draft contract so the final terms could change.
The contract has been drafted by RDN’s advisers so could understandably be drafted to benefit their
client.
There could be additional costs such as legal fees and/or additional revenues from enhanced cross-
selling as sales levels increase.
2.D Strategic issues and evaluation of draft contract
The target delivery rate specified in the contract is attractive as it is both a higher target rate and an
enhanced penalty payment per 0.1 percentage point of failure by RDN. This would protect PL well.
The payment terms are currently not included so this will need clarification.
The liability exclusion appears to be very heavily in RDN’s favour as it excludes all causes, even if
RDN is itself negligent.
The clause specifically excludes claims for lost goodwill even though PL is aware that this is a
possibility if logistics is of poor quality.
The contract will last for 10 years which is a longer period than the current 5 year deal (providing
certainty to PL) but PL could exercise a break clause after 5 years, similar to its current contract.
It will be important that Tamsin Wright has a full opportunity to provide her expertise on the renewal
before her leave of absence.
2.E Conclusions
Based on the assumptions provided, the contract will yield total revenue of £282,500k and will incur
total distribution costs of £16,950k.
However, as a result of a substantial payment under the performance penalty, the net cost will only be
£8,200k. The change in performance target terms provides a significant refund to PL – without this,
the contract would be significantly more expensive.
from the negotiations as its existing 5 year contract comes to an end on 31 May 2018.
logistics operations for PL in Retail are very different in nature.
40
PL should not proceed with the current contract as it requires international logistics services and the
terms are drafted heavily in RDN’s favour3.
PL should:
• negotiate T&Cs further with RDN

• research alternative logistics suppliers especially those with international operations
• obtain high-quality maternity cover for Tamsin Wright
• obtain legal advice on contract terms and use own advisers to evaluate the contract
• review all model assumptions for reasonableness and develop a more complex model
• [further idea]
3
41
Section 3 Ringford and Quincy
PL’s opportunity to work with Hospitality clients could benefit from the fact that more people are
visiting the UK, following the decline in sterling after the Brexit vote. However, some hotels are
delaying openings, which could reduce PL’s demand. Therefore the market could have changed
significantly by the launch date of May 2018, even though this would leave plenty of time for PL to
plan.
PL has an existing plan to expand into overseas markets by working with a hotel chain so the
opportunity to work with Quincy, which is based in the US, is attractive (although the company is not a
hotel chain specifically).
PL should take notice of reports that the Trump Presidency could affect Canadian industry and
therefore could impact on the Quincy opportunity as Quincy requires PL to use a Canadian supplier
for utensils (the same supply chain location as PL’s secondary manufacturer in relation to Cookware).
PL does not currently have a secondary manufacturer for utensils so the project with Quincy could
require a lot of management time, although it could then provide a benefit through a more diverse
supply chain.
3.B Ringford
The project with Ringford would represent approximately 10% of the gross profit currently earned by
the Hospitality stream and so appears to be a good opportunity.
Ringford is the only PL Hospitality customer to maintain revenue growth for several years so would be
a strong partner.
Ringford has an ambitious 10 year development plan which could boost future opportunities for PL.
Ringford’s emphasis on the business sector is sensible given recent growth in this segment (for
example, Dougal Hotels has capitalised well).
PL currently enjoys exclusive supplier status in relation to Ringford’s cookware and tableware so
should gain guaranteed demand.
Ringford is entering the conference market, representing a growth opportunity as this segment is
growing well at present.
The LuxoRooms loyalty scheme appears similar to the effective Dougal Hotels method. However,
Dougal Hotels may not react well to PL working with a competitor who uses the same policy.
The gross profit margin of 40% on work with Ringford is not very high and is lower than Quincy
Restaurants, reducing the profitability of the project.
Ringford uses a “value brand” approach which may not be consistent with PL’s emphasis on high-
quality: PL has already recognised that Ringford is not in line with other PL customers.
42
Using another celebrity chef in advertising could impact negatively on PL’s relationship with Lucy
Tyler, which has been very successful.
3.C Quincy
substantially more than the £552k possible on work with Ringford. The project with Quincy represents
approximately 15% of the gross profit currently earned by the Hospitality stream and therefore is
potentially significant.
The gross profit margin of 50% on work with Quincy is good and higher than that on Ringford,
increasing the profitability of the proposed project. However, it is lower than that available on Dougal
Hotels, another key Hospitality client.
PL is not required to include Quincy branding on products and so could gain a marketing advantage if
Piccolo branding can be included instead.
Selling utensils to Quincy could help PL diversify its income. Although Quincy is not a Retail client, if
PL starts to sell utensils to Hospitality clients it would help towards the goal of earning higher utensils
income (as reflected in the current target of 15% of Retail revenue from utensils by 31 May 2018).
PL has not previously offered any utensils sales to the Hospitality sector as it considers that the profits
obtained do not compensate for the hassles involved. The work with Quincy Restaurants may
therefore not lead on to a valuable opportunity.
Although the leading and strongly-performing PE7 could be used in theory, the anti-Canadian stance
of the Trump Presidency could prevent the Canadian company Rolson supplying this product,
impacting on the project with Quincy if Rolson ends up in financial or operational difficulties.
3.D Ethics
PFOA has recently been subject to health concerns and is subject to restrictions under US law.
However, PL is proposing to use PFOA in its sales to Quincy Restaurants, a US chain. This could
lead to reputational damage in the US with an impact on future relationships and opportunities. PL
should take expert advice on the use of PFOA and should act transparently in all dealings with Quincy
rather than hoping that use of PFOA will not be noticed.
PL will claim that “all available research” indicates that problems with Tableware have affected the
reputation of restaurants amongst the “vast majority of diners”. In fact, research performed by Zoto
indicates that only around 20% of diners have complained, not the “vast majority”: additionally, this is
only one article. PL may therefore not be acting honestly by overstating the findings of research.
Perhaps the PL Board is not aware of the Zoto finding, but even so, PL should research the matter
fully and not make extreme claims without evidence.
PL is proposing to market “top of the range” Tableware to Ringford. It is not clear whether such
products are really needed by a chain which markets itself on a “value” basis as it could show a lack
of integrity to sell unnecessarily expensive products. However, more information should be gathered
as it could be that Ringford does indeed want this kind of product.
3.E Evaluation of assumptions
Information has been provided by a Managing Director and a Chief Executive Officer so could
represent an attempt to upsell their businesses, rather than being independent. For example, Chuck
43
Steak states that the chain has 290 restaurants after continuing its “expansion” trajectory but the
chain had over 300 restaurants in August 20164 so perhaps the chain is not doing so well in reality.
The terms of Ringford’s 10 year development plan are not known.
There is no basis for the management time costs provided and the costs appear high.
3.F Conclusions
substantially more than the £552k possible on work with Ringford.
Selling utensils to Quincy could help PL diversify its income and also contribute towards the strategic
goal of significantly higher utensils income by 31 May 2018.
PL could lose its reputation and opportunity to work in the US so should discuss use of PFOA
transparently with Quincy.
PL must not overstate research findings simply to sell products and must confirm its statements are
accurate.
PL must not oversell products to a company which does not need them as this would lack integrity.
PL should proceed to work with Quincy, provided that the PFOA issue is resolved5.
3.H Commercial Recommendations
PL should:
• conduct market research on the outlook for the Hospitality market

• also enhance the relationship with Dougal Hotels or new customers
• reconsider whether PL could try to deepen relationships with both customers
• consider alternative projects
• [further idea]
1,256 words or 50 minutes of writing time at 25 words per minute
4
Note (not for inclusion in your answer) – Exhibit 8 (p25 to p26 of the Advance Information), which is the source of data on the
“over 300” Quincy Restaurants, is dated August 2016.
5
44
Mock Exam 2
Piccolo Limited –
Mock Exam 2
45
Mock Exam 2
List of Exhibits
46
Mock Exam 2
EXHIBIT 14

To: Charlie Sims
Date: 19 July 2017
Charlie,
1. A review of the results of PL and its Hospitality revenue stream for the year ended 31 May
2017.
You should analyse and comment on the revenue and gross profit performance of PL and its
Hospitality revenue stream (Exhibit 16), relative to the same figures for the prior year. Please
then assist the Board with the issue relating to Kaster (Exhibit 15). For the avoidance of
doubt, please first conduct your review of the performance of PL and its Hospitality revenue
stream before dealing separately with the Kaster matter.
2. A financial assessment of the “Classic” and “ClassicRetro” product lines (Exhibit 17).
Using the information provided, you should calculate and evaluate the incremental revenue
and net profit which PL should expect to earn through to 31 May 2019 on its additional sales
of the “Classic” and “ClassicRetro” product lines. Please also comment on any strategic
considerations that the PL Board should take into account. Finally, please evaluate any
ethical and business trust issues raised by the information provided. As part of your analysis,
you should discuss the adequacy of any assumptions provided in Exhibit 17.
3. A strategic evaluation of the opportunity to develop Piccolo’s operations in either Italy,

Canada or Erehwon (Exhibit 18).
You should respond to the request for advice on the potential strategic, operational and
financial benefits and risks of the proposals to expand PL’s operations in either Italy, Canada
or Erehwon. Where possible, please indicate whether the proposals are consistent with PL’s
current strategic plans. Finally, please also explain any ethical issues which appear to be
raised by the information provided. Where appropriate, you should provide brief calculations
to support your analysis.
Important notice
The lack of any detailed information on events during the most recent year in Exhibit 15 is not a fault with this Mock – some
recent past papers (for example, November 2015 and November 2014) contained no such information and therefore required
students to rely solely on their knowledge of the Advance Information. The July 2016 Advance Information had very minimal
information on events in the year.
We have therefore tried to give you an experience of this kind of Requirement 1 in this Mock. You would not receive this kind of
message in the examination and we are providing it here purely for clarification.
47
Mock Exam 2
EXHIBIT 15
Olivia,
We hope you and your team are well. The Board would like some help analysing performance over
the past year. As we already know that Retail experienced a pretty flat year, please focus your
analysis on the Hospitality stream only, whilst also giving some comments and figures in relation to
our business as a whole. We only require analysis of revenue and gross profit please.
Dougal Hotels opened their 300th hotel in the UK during the year and we were pleased to continue
working with this major client which was one of our few clients to undertake a major Tableware
replacement during the year (many others delayed expenditure due to uncertainty in the market): we
obtained our usual margin on all work. We then experienced a significant increase in input costs in
relation to Hospitality, which had to be passed on to our customers.
Please then assist us with a frustrating matter in relation to Kaster – same story as usual I am afraid.
We look forward to receiving your analysis.
Sabrina
Kaster issue
Earlier in the year we were very pleased to receive a large volume order from Kaster for one of our
high margin Tableware boxed sets, the Optissimus. Each Optissimus boxed set contains 4 large
plates, 4 side plates, 4 bowls and 4 cups. It was expected that Kaster would retail each set at £250
and we would supply the sets at £120 per set, based on our own costs of £50 per set.
RDN delivered the sets in palletloads of 10 sets per delivery and 1,500 deliveries were made.
We subsequently received an email from Kaster dated 3 April 2017 stating that the products were not
ordered at the specification delivered. Our invoice is dated 2 April 2017 and we have not heard
anything further from Kaster so it looks like it is going to be the same story as usual. It looks like we
don’t really have any choice but to write off the amount so we will look at putting the relevant journal
through soon: we have not adjusted our accounts as yet so please conduct the analysis discussed
above before looking at Kaster.
It was especially frustrating to see this happen as we had invested in some specialist plant specifically
in relation to the Kaster issue. Thank goodness we won’t have to deal with so many of these
European idiots once we leave the EU!
As we will be writing this amount out of the accounts, we will also remove the deliveries from our
assessment of RDN’s annual delivery rate. Excluding the affected deliveries, there were 2,550
delivered on time and to our satisfaction out of a total of 3,000 attempted deliveries by RDN (again
excluding the affected items).
Please assist the Piccolo Board to understand how our accounts for the year ended 31 May 2017
might be affected by this issue.
48
Mock Exam 2
EXHIBIT 16

£000
Revenue 1 41,242
Changes in inventories 910
Taxation (413)

£000
Current assets
Total assets 19,352
14,132
Current liabilities
49
Mock Exam 2

£000

Adjust for:
Depreciation 167
Change in inventories (910)
Net cash used in investing activities (774)


2017
£000
Revenue
Hospitality 8,348
Retail 32,894
41,242
Gross profit
Hospitality 3,095
Retail 13,010
16,105
Note 2: Other costs

2017
£000

14,047
50
Mock Exam 2

equipment
£000 £000 £000 £000
Cost
At 1 June 2014 139 1,208 237 1,584
Additions - 15 - 15
Disposals - (140) (59) (199)
At 1 June 2015 139 1,083 178 1,400
Disposals - - (54) (54)
At 1 June 2016 168 1,128 135 1,431
Additions 160 578 51 789
Disposals - (62) - (62)
At 31 May 2017 328 1,644 186 2,158
Depreciation
At 1 June 2014 114 907 145 1,166
Disposals - (128) (46) (174)
At 1 June 2015 138 869 117 1,124
Disposals - - (31) (31)
At 1 June 2016 142 961 105 1,208
Disposals - (13) - (13)
At 31 May 2017 164 1,073 125 1,362
Carrying amount
At 31 May 2014 25 301 92 418
At 31 May 2015 1 214 61 276
At 31 May 2016 26 167 30 223
At 31 May 2017 164 571 61 796

2017
£000

9,535

2017
£000

5,220
51
Mock Exam 2

£000
Dougal Hotels 1,266
Ringford 1,217
3,257
Other 5,091
8,348
Retail customers

£000
Longfield 4,901
Kaster 4,702
Gullen 2,881
12,484
Other 20,410
32,894
52
Mock Exam 2
EXHIBIT 17
Classic and ClassicRetro product lines email received from PL Board
Olivia,
The Piccolo Board would like your firm to help us with some project planning for our Tableware
products.
Unfortunately, the launch of our new “Classic” Tableware product line was delayed by a few months.
Sales were disappointing (perhaps due to the fact that we missed the crucial Christmas sales period
as a result of the delays) but on a prudent basis we are going to use the existing data as a baseline
for our forecasting. We believe that with some additional marketing efforts and the launch of the
Classic’s sister range (the ClassicRetro, based on a tweaking of the design of the Classic to reflect
Tableware designs from the 1950s and 1960s eras) then a better outcome is possible.
We would like your firm to calculate the additional revenue and gross profit which PL should expect to
earn through to 31 May 2019 on both the Classic and ClassicRetro product lines, taking into account
all revenue and cost implications for Piccolo. We also require analysis of any strategic considerations
that we should investigate.
As you know, Piccolo is proud of its ethical credentials so if there are any ethical or business trust
matters evident in the information provided then please include your evaluation of such issues in your
report.
To keep things simple, please work on the basis of whole months and assume that our monthly sales
forecasts kick in immediately. We can ignore the existing (somewhat disappointing) sales of the
Classic range in the calculation as we expect these to happen regardless of whether we implement
the plans described below.
We are hoping that we can achieve a good margin here as the ClassicRetro will be a minor variation
on the existing Classic design, allowing us to realise economies of scale and economies of scope.
Clive
Classic Sales and costing forecasts
We would expect to increase sales to Retail customers by 2,000 boxed sets per month. Each boxed
set will contain 8 large plates, 8 side plates, 8 bowls and 8 cups or mugs and will sell for £60 per
boxed set. Our costs would be around £20 per set. Additional marketing activities (see below) will
revitalise interest in the Classic product line.
ClassicRetro Sales and costing forecasts
We would expect to sell 1,500 boxed sets to Retail customers per month. Each boxed set will contain
2 large plates, 2 side plates, 2 bowls and 2 cups or mugs and will sell for £100 per boxed set. Our
costs would be around £40 per set.
53
Mock Exam 2
Production methodology
Whilst the Classic range would continue to be sourced from our Italian supplier, we propose to
manufacture the ClassicRetro in our home town of Birmingham. Lucy Tyler’s brother owns a high
quality ceramics company (Top Tableware) just outside the city centre. Top Tableware has
established a reputation for high quality production through work with leading companies such as
Fantastic Forks, Zoto and Brilliant Bowls. Lucy informs us that Top Tableware would consider
switching away from existing clients in order to help Piccolo with its proposals.
Marketing methodology
We would continue to capitalise on Lucy Tyler’s popularity by using Lucy to advertise and promote
both ranges as much as possible.
We would continue to use Thor to promote the Classic range. Thor will be receiving its fixed fee of
£900,000 for the year plus an additional project-specific amount of £500,000 in recognition of the
substantial amount of additional work required. For promotion of the ClassicRetro range, we would
engage a new supplier, Synergy Sales and Marketing (SS&M). SS&M have requested a fee of
£20,000 for the work required.
We would aim to launch the ClassicRetro range by early February 2018 at the latest. The variations to
the existing Classic range would be implemented by early April 2018 so please work on an
incremental basis from this date.
Brilliant Brummies Capitalist Monthly, May 2017
Despite the current economic uncertainties, the West Midlands region has maintained its recent trend
as the only UK region to enjoy a trade surplus with the rest of the world. Analysts believe that this
trend is based on a resurgent manufacturing base which has seen high levels of investment and
improvements in productivity in recent years, particularly in the areas surrounding the region’s biggest
city of Birmingham.
Under the region’s flagship Get On With It! assistance package, the local authorities have
implemented amendments to standard UK regulations in relation to health & safety and wage rates.
Both measures are designed to assist companies to confront the ever-increasing levels of
bureaucracy and red tape that have constrained growth in the UK for some time.
Another useful incentive provided by the region is the System for Capital Reuse And Production
(SCRAP). Under the SCRAP initiative, an internet-based system matches companies looking to
dispose of old machinery (defined as machinery aged 5 years or older) with smaller companies in
need of energy-intensive machinery but without the funds available to purchase the latest kit.
Further proposals under Get On With It! include greater access to training and development for
apprentices (a measure designed to counteract a possible large scale loss of labour supply once the
UK leaves the European Union) and measures to make better use of residential areas for recycling
and waste disposal by businesses. A consortium of local waste disposal companies has already
offered to fund and build a waste disposal facility powered by local deposits of coal.
This publication believes that if other UK regions would simply follow the example set by the brilliant
Brummies of Birmingham and the surrounding areas, then the country would be substantially richer
and significantly less dependent on imports.
54
Mock Exam 2
EXHIBIT 18
Italy, Canada or Erehwon Confidential memo from Piccolo Board
The Board is considering some opportunities overseas in Italy, Canada and Erehwon (a little-known
country somewhere in Asia). Ideally, we would like something in place for our 25th anniversary, as
previously envisaged in our strategic plan, but we can only pick 1 option due to time constraints.
To assist your firm with the analysis, please find below some market research reports and other
materials which the Board has obtained.
Italy project Notes drafted by Piccolo Board
We have been in touch with Mario Luigi, an ex-plumber who is now the owner and Managing Director
of PisaPans, a leading Italian manufacturer of Cookware and Tableware. We understand that
PisaPans are potentially very interested in working with Piccolo. Mario’s brother, Luigi, informs us that
the company is close to starting up its own utensils line. Luigi believes that we could purchase
300,000 units of utensils per year at a cost price of £10 per unit. We could then mark these up by
100% when sold in the UK. We would expect to sell all units each year.
PisaPans is certainly very ambitious and would be looking for us to move most (and preferably all) of
our Tableware production across to the company. We understand that, due to certain legal
requirements in Italy, it may take some time to get things up and running in Italy so we would not
expect to launch these activities until the end of 2018 at the earliest.
Canada project Notes drafted by Piccolo Board
We understand that Vancouver Vacations could be interested in some kind of collaboration with us.
The company is a medium-sized hotel chain which operates throughout Canada. The company has a
good existing working relationship with Toronto Tableware, a respected company in the country. We
would expect to be able to launch our new marketing strategy involving Canada in time for the year
beginning 1 June 2018.
Erehwon project Notes drafted by Piccolo Board
We have received an enquiry from Exotic Hotels, a large hotel chain in the little-known country of
Erehwon. Exotic have offered to move their custom away from PanOply if we can offer attractive
terms. The Board believes that if we can establish some kind of foothold in Erehwon then we may be
able to obtain access to new ranges of items such as woks and curry dishes. We would then enter
into a partial offshore arrangement with the relevant Erehwon parties, producing the items partly in
Erehwon and partly in the UK.
Italy: premium branding but IP concerns independent market research report
Production of Tableware in Italy is renowned for its emphasis on quality and premium branding.
Funded by the Italian government, many producers and retailers in Italy now also have market-
leading understanding of the use of internet sites to maximise sales. Recently, concerns have been
raised regarding the design of some Tableware produced in Italy as competitors in other countries
have alleged that there has been a breach of trademarks and other intellectual property (particularly in
relation to non-stick surfaces). The Italian producers have naturally denied all such charges.
55
Mock Exam 2
Canada: friendly service and a large market independent market research report
An example of a leading company in the market is Toronto Tableware. Its products are renowned for
their easy care, long-lasting, low cost and versatile nature. The company requires a detailed and
comprehensive Service Level Agreement with all its manufacturers. Senior staff at the company are
instrumental in the Canadian Kitchenware and Tableware Consortium (CKTC), a group of leading
Canadian retailers and manufacturers which looks for opportunities to work with other parties both
inside and outside Canada. The CKTC also offers trade financing to help both importers and
exporters manage their cash flows – many members of the consortium have been able to attract
overseas purchasers through delayed payment options. Canada’s infrastructure is impressive, with a
range of railway and port facilities that help to overcome the country’s large geographical area.
Erehwon: a new face in the kitchen independent market research report
The kitchenware industry is expected to grow quickly in Erehwon and the Erehwon Development
Department (EDD) (a governmental body which exists to promote investment into the country) has
forecast that the country will be able to increase its exports into the UK at a rate of 25% per year,
based on an assumed growth rate in the UK of 20% per year in the demand for kitchenware and
tableware. The EDD is extensively involved in managing all aspects of manufacturing in the industry.
As the Erehwon Groat (the country’s newly launched currency) is not yet freely convertible in
international markets, manufacturers in the country are often happy to accept the purchaser’s
domestic currency. With its plentiful number of sunshine hours per year (on some estimates, the
country receives 25 times the amount of sunshine per year compared to the UK), the government has
been quick to invest in renewable energy such as solar power.
Concerns regarding chemicals disrupt CKTC meeting Toronto Times, June 2017
The normally harmonious Annual General Meeting of the Canadian Kitchenware and Tableware
Consortium sensationally ended a day early after the unprecedented decision of Rolson, a leading
Canadian manufacturer, to resign from its membership of the CKTC on the grounds of the
Consortium’s continued support for the use of non-stick coatings which use PFOA.
Going Nowhere: The False Dawn of the Erehwon Kitchenware industry
Cooking Today, January 2016
Whilst organisations such as the Erehwon Development Department (EDD) have stressed the
progress the country has been making in international markets, it is the view of this magazine that
such beliefs are not well-founded.
Some manufacturers in Erehwon are believed to cut costs, even if this puts health and safety into
question. Our internal sources suggest that cheap coatings are used on non-stick pans in the country,
even when the items are supplied to top hotel chains.
If the country fails to maintain an adequate reputation and safety record then Erehwon will end up
going nowhere.
This magazine is grateful to acknowledge the financial support of the Canadian Kitchenware and
Tableware Consortium in the preparation of this report.
56
Mock Exam 2 Answers
Piccolo Limited –
57
Mock Exam 2 Answers
Appendix 1
Financial performance

Revenue £000 £000
Hospitality 8,348 8,837 (489) -5.5%
Retail 32,894 32,876 18 0.1%
Total 41,242 41,713 (471) -1.1%
2017 2016
Revenue mix % %
Retail 79.8% 78.8%

Hospitality 3,095 4,345 (1,250) -28.8%
Retail 13,010 11,974 1,036 8.7%
Total 16,105 16,319 (214) -1.3%
2017 2016 Change

Hospitality 37.1% 49.2% -12.1
Retail 39.6% 36.4% 3.2
Total 39.0% 39.1% -0.1
Client analysis
Hospitality revenues £000 £000
Dougal Hotels 1,266 1,056 210 19.9%
Ringford 1,217 1,299 (82) -6.3%
Quincy Restaurants 774 766 8 1.0%
Other 5,091 5,716 (625) -10.9%
Total 8,348 8,837 (489) -5.5%
£000 £000
Revenue
High 41,242 45,000 (3,758) -8.4%
Low 38,000 3,242 8.5%
Gross profit
High 16,105 18,000 (1,895) -10.5%
Low 12,500 3,605 28.8%
High 8,348 10,000 (1,652) -16.5%
Low 7,000 1,348 19.3%

High 3,095 5,000 (1,905) -38.1%
Low 3,000 95 3.2%
Exam Tip
It would be perfectly acceptable, and would not lose you any marks, if you were to use abbreviations such as H or Hosp for the
Hospitality stream and R or Ret for Retail stream throughout your Appendix 1 (and in the main narrative of your report) providing
that these are defined at the first mention i.e. in your Executive Summary.
To save time, we recommend that you only write the 2017 actual figure once in the Performance vs budget section – obviously,
there is only one actual result for the year for Revenue, GP and so on, so there is no point writing this twice.
58
Mock Exam 2 Answers
Optissimus revenue and GP
Deliveries made (Exh 15) 1,500

x boxed sets per delivery (Exh 15) 10
Total boxed sets delivered 15,000
Boxed sets Total

Revenue per boxed set (Exh 15) 120 x 15,000 1,800,000
Gross profit per boxed set (120 - 50 (Exh 15)) 70 x 15,000 1,050,000
GP margin 58.3%
RDN Delivery Rate
Excluding Optissimus
Deliveries on time 2,550 [Exh 15]
Total deliveries 3,000 [Exh 15]
Delivery rate 85.0% [2,550 / 3,000]
Including Optissimus
Deliveries on time 4,050 [Exh 15 plus 1,500]
Total deliveries 4,500 [Exh 15 plus 1,500]
Delivery rate 90.0% [4,050 / 4,500]
Impact of excluding Optissimus
Target delivery rate 90.0% [p35]

Actual delivery rate 85.0%
Difference in 0.1 percentage points 50 [5 full points so 50 x 0.1 points]

Penalty per 0.1 percentage points 10,000 [p35]
Total penalty due from RDN 500,000 [50 x 10,000]
an error.
59
Mock Exam 2 Answers
Appendix 2
Classic Year 1 Year 2 Total

(2 months) (12 months)
Boxed sets sold per month (Exh 17) 2,000 2,000 4,000
x revenue per set (Exh 17) 60 60
x months 2 12
Total revenue (£000) 240 1,440 1,680
x costs (total boxed sets x £20 (Exh 17)) (£000) (80) (480)
Gross profit (£000) 160 960 1,120

GPM % 66.7%
ClassicRetro Year 1 Year 2 Total

(4 months) (12 months)
Boxed sets sold per month (Exh 17) 1,500 1,500 3,000
x revenue per set (Exh 17) 100 100
x months 4 12
Total revenue (£000) 600 1,800 2,400
x costs (total boxed sets x £40) (Exh 17) (£000) (240) (720)
Gross profit (£000) 360 1,080 1,440

GPM % 60.0%
Classic 1,120
ClassicRetro 1,440
Thor fee (£000) (500)
SS&M fee (£000) (20)
Total net profit 2,040
an error.
60
Mock Exam 2 Answers
Appendix 3
Sales price per unit 20 [Markup Exh 18 cost by 100% i.e. double cost]
Cost per unit (Exh 18) (10)
Gross profit per unit 10
x 300,000 annual sales (Exh 18) (£000) Revenue 6,000 [£20 x 300,000]
Gross profit 3,000 [£10 x 300,000]
Retail revenue for YE 31 May 2017 32,894
Project revenue as % of Retail revenue 15.4% [6,000 / (6,000 + 32,894)] (Exh 16)]
an error.
introduce errors.
61
Mock Exam 2 Answers

♦ PL revenue & GP comment with figures ♦ Classic revenue and GP with figures
♦ Hospitality revenue comment with figures ♦ ClassicRetro revenue and GP with figures
♦ Hospitality GP comment with figures ♦ Professional scepticism on assumptions
♦ Kaster comment with figure ♦ Significant revenue and GP possible
♦ Explains change in Hospitality revenue ♦ Concludes on way forward
♦ Explains change in Hospitality GP ♦ Concludes on ethical issues
♦ Reconsider whether to deal with Kaster again ♦ Classic has struggled so figures optimistic
♦ Review cash position urgently ♦ Other commercial recommendations

E.5 Description
♦ Concludes on Italy (benefits and risks)
♦ Concludes on Canada (benefits and risks)
♦ Concludes on Erehwon (benefits and risks)
♦ Italy utensils opportunity significant
62
Mock Exam 2 Answers

♦ Total revenue: down marginally £471k AND down 1.1%
♦ Total GP: down marginally £214k AND down 1.3%
♦ Total GPM: from 39.1% to 39.0% AND down 0.1 percentage points
♦ Total revenue versus Budget: £3,758k AND 8.4% below High
♦ Total GP versus Budget: £1,895k AND 10.5% below High

♦ Press expectations of 10% growth at best and 5% decline at worst (p39)
♦ PL internal expectations 7.5% market growth at best and 2.5% decline at worst (p38)
♦ Dougal Hotels had 225 hotels in prior year (p26) – major expansion
♦ PL has experienced ongoing problems with Kaster (p20, p30)
♦ PanOply planned to sell products in Kaster stores from 1 September 2016 (p30)

1.3 Movements and basic narrative on issue 1 (Hospitality revenue)
♦ Revenue: down significantly £489k AND down 5.5%
♦ Revenue mix: down significantly from 21.2% to 20.2%
♦ Dougal Hotels: up impressively £210k AND up 19.9%
♦ Ringford: down significantly £82k AND down 6.3%
♦ “Other”: down significantly £625k AND 10.9%
1.4 Movements and basic narrative on issue 2 (Hospitality GP)

♦ GP: down very significantly £1,250k AND down 28.8%
♦ GPM: down significantly from 49.2% to 37.1%
♦ GPM: weak versus Retail improvement from 36.4% to 39.6%
♦ PL GP decline in line with PL revenue decline
1.5 Kaster issue calculations

♦ 15,000 boxed sets delivered to Kaster
♦ Total revenue of £1,800k
♦ Total GP of £1,050k AND GPM 58.3%
♦ RDN penalty triggered and £500k due back to PL
♦ Notes that price of items exceeds example benchmark (p21)
The term Optissimus has been invented for the purposes of this Mock and is not contained in the
Advance Information. Do not use this name in your answer to the real examination on 19 July 2017.
63
Mock Exam 2 Answers
Applying Judgement
1.6 Evaluation of Hospitality revenue
♦ PL decline in line with pessimistic press reports (p39)
♦ Hospitality decline in line with fall in prior year (p19)
♦ Hospitality decline more than offsets Retail growth
♦ Ignoring minor Quincy Restaurants growth, Dougal Hotels only element to see growth
♦ Decline in “Other” (Exh 15) smaller customers defecting when costs passed on (p19)
1.7 Evaluation of Hospitality GP

♦ Retail growth in GP does not offset Hospitality decline
♦ Hospitality gross profit decline significantly higher rate than revenue decline
♦ Big increase in sales to Dougal Hotels at 60% margin but GPM 37.1% – concerning
♦ PL may have been discounting to try to retain smaller customers
♦ Decline in Hospitality GPM offset by Retail increase due to Retail share in revenue mix
1.8 Evaluation of Kaster issue

♦ Supermarkets do not retail high margin products – PL mistaken in order?
♦ RDN is key partner (p21, p35) so must not upset RDN
♦ Not clear if Kaster will definitely not pay – has been assumed by PL/confirm facts
♦ CAPEX spend has drained cash and brought PL close to overdraft (Exh 16)
♦ If Kaster receivable written off, Retail not actually a “flat year” – actually a poor year

♦ Revenue: comment on total AND Hospitality stream with figures
♦ GP: comment on total AND Hospitality stream with figures
♦ CAPEX spend high, putting significant pressure on cash with figures
♦ Comment on impact of Kaster issue with figures

♦ Reconsider Kaster as a client/identify alternatives
♦ Determine if possible to sell off the “specialist plant” to recover cash
♦ Investigate reasons for decline in “Other” Hospitality category
♦ Implement cost controls in Hospitality/investigate reasons for poor GPM performance
The term Optissimus has been invented for the purposes of this Mock and is not contained in the
Advance Information. Do not use this name in your answer to the real examination on 19 July 2017.
64
Mock Exam 2 Answers
Requirement 2 markscheme – financial evaluation (Classic and ClassicRetro)

♦ Uses example boxed set revenue and costs per p21 AND comment that just an example
♦ ClassicRetro involves work with unknown suppliers (Top Tableware and SS&M)
♦ Compares SS&M fee with Thor (Exh 17)
♦ Both product launches miss Christmas sales period – missed sales/data concerns

♦ “Retro” designs can be popular (p10) OR comparison to relevant R1 figures
♦ Lucy Tyler has been highly effective (p12)
♦ Christmas sales important to PL (p23)
♦ Brexit: impact on exchange rate certainty and overseas suppliers
♦ SS&M fee appears extremely low OR SS&M is unknown quality (Exh 17)

2.3 Calculation results – Classic
♦ Revenue £240k/£1,440k so £1,680k in total
♦ GP £160k/£960k so £1,120k in total
♦ GPM % 66.7%
♦ Marketing costs £520k in total
2.4 Calculation results - ClassicRetro

♦ Revenue £600k/£1,800k so £2,400k in total
♦ GP £360k/£1,080k so £1,440k
♦ GPM % 60.0%
♦ Total net profit £2,040k
2.5 Comments on ethical and business trust issues

♦ PL requires all suppliers to have strong health & safety records
♦ PL requires all suppliers to pay more than minimum wage in relevant country
♦ PL requires all suppliers to use latest energy-efficient equipment and procedures
♦ PL committed to encouraging recycling and minimising of waste
♦ No indication that potential suppliers use Get On With It! or SCRAP
♦ Potential impact on PL staff morale
Note – the term “Brummie” is an affectionate term for an inhabitant of Birmingham or its surrounding
areas.
The terms ClassicRetro, Synergy Sales and Marketing, Fantastic Forks, Brilliant Bowls, Get On With
It! and SCRAP have been invented for the purposes of this Mock and are not contained in the
Advance Information. Do not use these names in your answer to the real examination on 19 July
2017.
There is also no reference to Lucy Tyler’s brother in the Advance Information.
The “Classic” is referred to in the Advance Information on pages 19, 23 and 32 but there is no
indication that a delay in launch is envisaged or that sales will be disappointing – these 2 facts have
been invented for the purposes of this Mock.
65
Mock Exam 2 Answers
Requirement 2 markscheme – financial evaluation (Classic and ClassicRetro)
Applying Judgement
2.6 Evaluates all assumptions
♦ Revenue optimistic as Classic expected to produce £0.1m per month (p32)
♦ Margin appears high relative to example boxed set (p21)
♦ Use of existing data might not be comparable if product is new to the market
♦ Compares revenue/margins to R1 OR compares Classic v ClassicRetro
♦ Changes in assumptions will affect results OR sales will not kick in instantly

♦ Top Tableware has high quality (Exh 17), in line with PL ethos (p11, p19)
♦ UK production shortens supply chain/avoids exchange rate issues
♦ Use of Top Tableware could affect relationship with Ravino and Auty (p31)
♦ Similarity of products could simply lead to replacement purchasing
♦ Zoto entering tableware market (p40) – could help challenge a rival
♦ Use of Lucy Tyler’s brother (Exh 17) queried OR impact on Lucy relationship
2.8 Evaluates ethical and business trust issues – recommendations

♦ Investigate full details of schemes
♦ Discuss details of schemes with government officials
♦ Continue to perform supplier audits and inspections
♦ Discuss production techniques/staffing with Top Tableware
♦ Risk of damage to PL reputation by association
♦ Avoid association with environmentally-damaging production – integrity

♦ Significant opportunities
♦ Concludes on calculations with figures
♦ Concludes on strategic issues
♦ Concludes on ethical and business trust issues

♦ Perform due diligence on Top Tableware and SS&M
♦ Market research on demand for “Retro” products
♦ Confirm all model inputs to independent sources
♦ Investigate alternative suppliers to Top Tableware and SS&M
♦ Negotiate T&Cs with Thor and Lucy Tyler
Note – the term “Brummie” is an affectionate term for an inhabitant of Birmingham or its surrounding
areas.
The terms ClassicRetro, Synergy Sales and Marketing, Fantastic Forks, Brilliant Bowls, Get On With
It! and SCRAP have been invented for the purposes of this Mock and are not contained in the
2017.
There is also no reference to Lucy Tyler’s brother in the Advance Information.
The “Classic” is referred to in the Advance Information on pages 19, 23 and 32 but there is no
indication that a delay in launch is envisaged or that sales will be disappointing – these 2 facts have
been invented for the purposes of this Mock.
66
Mock Exam 2 Answers
Requirement 3 markscheme – strategic evaluation (Italy, Canada or Erehwon)

♦ GP per unit £10
♦ Calculates mark-up and profit
♦ Scepticism regarding source of data
♦ Assesses utensils revenue (Italy) versus 15% target (p37)
♦ Notes that no financial information at all on Erehwon and Canada

♦ Brexit: uncertainty relating to EU rules and regulations
♦ PL’s existing strategy covers May 2016 to May 2018 period (p37)
♦ PL has existing relationships in Italy and Canada but not Erehwon
♦ Reputation for quality (p11, p19) OR Valid comparison to relevant R1 figures
♦ Expansion overseas a PL objective (p37)

3.3 Issue 1 – Benefits and risks – Italy
♦ Emphasis on internet sales (Exh 18) good fit with market (p8)
♦ Premium branding and quality good fit with market (p8)
♦ Use of Italy only for tableware could affect Auty relationship
♦ Use of a single supplier not a fit with plan to use alternatives (p37)
♦ Italy is in the EU so potentially affected by Brexit issues
♦ Concerns regarding licensing and intellectual property (Exh 18)
3.4 Issue 2 – Benefits and risks – Canada

♦ Canada is not in the EU so less affected by Brexit issues
♦ 4 key Canadian characteristics (Exh 18) good fit with market (p8)
♦ Linkage with hotel chains a good fit with PL objectives (p37)
♦ Offer of detailed and comprehensive SLA – good quality fit with PL (p31)
♦ Rolson not involved in CKTC – risk of damage to relationship (Exh 18)
♦ Use of PFOA could lead to reputational impact
3.5 Issue 3 – Benefits and risks – Erehwon

♦ Erehwon is not in the EU so less affected by Brexit issues
♦ Erehwon suppliers happy to be paid in sterling (reduced forex risk) (Exh 18)
♦ Use of solar energy a good fit with PL ethos on environment (p31)
♦ Distant market – time/cost of frequent visits required by PL (p31)
♦ Exotic already using PanOply – quality a fit with PL? (p30)
♦ Some Erehwon woks unsafe/coating problems (Exh 18)
Note – the terms Erehwon, Mario Luigi, PisaPans, Luigi Luigi, Vancouver Vacations, Toronto
Tableware, Exotic Hotels, CKTC, EDD and Groat have been invented for the purposes of this Mock
and are not contained in the Advance Information. Do not use these names in your answer to the real
examination on 19 July 2017.
67
Mock Exam 2 Answers
Requirement 3 markscheme – strategic evaluation (Italy, Canada or Erehwon)
Applying Judgement
3.6 Evaluation of Italy option (including ethics)
♦ Opportunity to develop utensils sales but no current experience
♦ Plenty of time to plan as project not implemented until end of 2018 (Exh 18)
♦ Lack of detailed financials for full appraisal
♦ Legal requirements could be onerous – management/staff time
♦ Not in place for 25th anniversary marketing strategy (p37)
♦ PL must respect laws – impact on Rolson (p19, p33)
3.7 Evaluation of Canada option (including ethics)

♦ Provides PL with an important strategic base for North America (p33)
♦ Good infrastructure available – supply chain impact (Exh 18)
♦ Good cash flow offer with delayed payment (Exh 18)
♦ Implemented in time for 25th anniversary marketing strategy (Exh 18, p37)
♦ Sales of Rolson-developed PE7 very strong (p19, p33)
♦ PL must be transparent, even if this impacts on sales to US
3.8 Evaluation of Erehwon option (including ethics)

♦ Spicy food and woks/dishes a good fit with market popularity (p7)
♦ Does not represent full offshoring – some manufacturing in the UK
♦ PL has no existing relationships in Erehwon
♦ EDD forecasts appear very optimistic versus UK press (p39) – EDD expertise?
♦ Press article is out of date (January 2016) OR Canadian sponsorship (Exh 18)
♦ Investigate allegations regarding coatings – do not associate if harmful

♦ Concludes on strategic, operational AND financial benefits and risks

♦ Visit overseas countries and assess quality/opportunities
♦ Review all inputs provided for reasonableness
♦ Obtain information other than press reports as basis for decision
♦ Obtain consultancy on impact of changes in UK trading relationships
♦ Investigate ethical issues independently/obtain legal advice
Note – the terms Erehwon, Mario Luigi, PisaPans, Luigi Luigi, Vancouver Vacations, Toronto
Tableware, Exotic Hotels, CKTC, EDD and Groat have been invented for the purposes of this Mock
and are not contained in the Advance Information. Do not use these names in your answer to the real
68
Mock Exam 2 Answers
♦ Figures are as required by question – GP ♦ Legible
♦ Figures are as required by question – Kaster ♦ Correctly numbered pages
♦ Calculates Classic revenue and net profit ♦ Tactful/ethical comments
♦ Calculates ClassicRetro revenue and net profit ♦ Reasonable spelling/grammar
69
the examination.
Ingleby Grant
19 July 2017
70
Executive Summary
Revenue declined marginally by £471k (1.1%) from £41,713k to £41,242k and finished £3,758k
(8.4%) below the High budget estimate.
Hospitality revenue declined significantly by £489k (5.5%) from £8,837k to £8,348k, in line with the
5% revenue decline experienced in the prior year.
GP declined marginally by £214k (1.3%) from £16,319k to £16,105k, which was in line with the
decline in PL’s total revenue.
Hospitality GPM was down drastically from 49.2% to 37.1%, indicating cost concerns. This
represented very weak performance given that the GPM of the Retail stream actually increased
significantly from 36.4% to 39.6%.
The expenditure on specialist CAPEX has been considerable at nearly £800k for the year and,
combined with working capital issues, this expenditure has brought PL close to entering an overdraft
position so the cash position must be reviewed urgently.
The Kaster issue involves revenue of £1,800k, GP of £1,050k and a high GP margin of 58.3% so the
matter is significant to PL.
If the Kaster receivable is written off and the revenue is removed from the accounts, the Board’s
suggestion of a “pretty flat year” would no longer be accurate as PL would actually have had a poor
year.
PL may have to consider whether it should continue to deal with Kaster in future if this latest problem
is not resolved.
Commercial recommendations
PL should:
• identify alternative supermarket clients

• implement cost controls in Hospitality
Section 2 Classic and ClassicRetro
The Classic would generate incremental revenue of £1,680k and incremental GP of £1,120k whilst
the ClassicRetro would generate incremental revenue of £2,400k and incremental GP of £1,440k. Net
profit would be £2,040k.
This would be a significant boost from just 2 product lines as annual revenue of around £3,200k
(based on the full year of sales in year 2) amounts to approximately 8% of PL’s latest revenue figure.
The estimated figures appear high, given that the Classic has struggled recently.
The margin appears high relative to the example boxed set sold to Longfield. However, the Longfield
figures are simply an example and not a standard price for all customers.
Use of existing data on the Classic may not be comparable in the case of a new product such as the
ClassicRetro, particularly when the important Christmas sales period was missed as data on this
period would be critical to forecasts.
71
Use of Top Tableware could negatively affect PL’s existing and successful relationship with Ravino
and Auty.
PL must not be associated with practices that put health and safety at risk or involve low wage levels:
this would be wrong in itself but also inconsistent with PL’s presentation of itself to the market.
However, it is not clear whether suppliers for this project are in fact involved in the schemes in
question.
PL should proceed with the project, provided that the ethical issues are resolved and the reasons for
the Classic’s existing poor performance can be dealt with6.
PL should:
• perform due diligence on Top Tableware and SS&M

• negotiate T&Cs with Thor and Lucy Tyler
Section 3 Italy, Canada and Erehwon
The Italy project would realise revenue of £6,000k and gross profit of £3,000k, meaning that the
project’s revenue would be equivalent to a very significant 18.2% of PL’s latest Retail revenue figure
(or 15.4% if the £6,000k is added). As such, the project would on its own allow PL to achieve the
target of earning 15% of Retail revenue from utensils sales by 31 May 2018.
The Italy option provides an opportunity to develop utensils sales but the proposed partner currently
has no experience of this product.
The offer of a detailed and comprehensive SLA in the Canada opportunity is a good fit with PL’s
emphasis on quality.
Canada has good infrastructure available, allowing an efficient supply chain and cost savings.
Erehwon suppliers are happy to be paid in sterling, reducing PL’s currency risk.
As Exotic Hotels are already using PanOply, there could be some concerns regarding the fit with PL’s
quality emphasis as PL is known to regard PanOply’s quality as well below its own.
PL must respect all licensing laws and not use any stolen technologies as this would be illegal and
could have negative implications for PL’s relationship with Rolson, from whom PL licenses
technology.
PL must investigate the use of PFOA and act transparently, even if this means harming its reputation
in the US, which has restrictions on the use of PFOA.
Some woks produced in Erehwon could be unsafe due to coating problems. PL must investigate the
allegations regarding coatings and must not be associated with anything of a harmful nature as this is
likely to be illegal and would damage PL’s reputation.
6
72
PL should proceed with the Canada option given the emphasis on quality, provided that the PFOA
matter can be resolved7.
PL should:
• review all inputs provided for reasonableness

• obtain information other than press reports to inform decisions
7
73
PL’s revenue has declined marginally in the year which is worse performance than best-case press
estimates of 10% growth and not far off the worst-case estimates of a 5% decline.
PL has also performed better than its worst-case budget expectation of a 2.5% decline but has not
achieved the best-case outcome of a 7.5% increase.
PL appears to have capitalised on the major expansion of Dougal Hotels which had 225 hotels in the
prior year but now has 300: revenue from Dougal Hotels increased very impressively by £210k
(19.9%) from £1,056k to £1,266k.
1.B Revenue
Revenue declined marginally by £471k (1.1%) from £41,713k to £41,242k and finished £3,758k
(8.4%) below the High budget estimate. The decline in Hospitality more than offsets growth in Retail,
which is disappointing.
5% revenue decline experienced in the prior year, and Hospitality’s share of the revenue mix declined
significantly from 21.2% to 20.2%
Revenue from Ringford was down significantly by £82k (6.3%) from £1,299k to £1,217k whilst
revenue from the “Other” category was down significantly by £625k (10.9%) from £5,716k to £5,091k
which could be due to smaller customers leaving PL when costs were passed on.
Ignoring a minor increase in revenue from Quincy Restaurants, Dougal Hotels appears to be the only
element of the Hospitality portfolio to see growth in the year, indicating a lack of diversity amongst
PL’s customers.
1.C Gross profit
decline in PL’s total revenue. The growth in Retail GP does not offset the decline in Hospitality, a
similar pattern to revenue.
GP was £1,895k (10.5%) below the High budget estimate and GPM declined marginally from 39.1%
to 39.0%, a fall of 0.1 percentage points.
Hospitality GPM was down drastically from 49.2% to 37.1%. This represented very weak performance
given that the GPM of the Retail stream actually increased significantly from 36.4% to 39.6%. As
Retail has increased its share in the revenue mix and has achieved very good GPM for the year, the
decline in Hospitality GPM is largely offset at the company level.
Hospitality GP was down very significantly by £1,250k (28.8%) from £4,345k to £3,095k, a rate which
is significantly higher than the decline in revenue, indicating cost concerns.
There has been a big increase in sales to Dougal Hotels which are normally at a 60% margin but the
Hospitality GPM for the year was down heavily to only 37.1%, suggesting significant cost problems
with other customers. PL may also have been offering discounts to try to retain smaller customers in
the “Other” category.
74
1.D Kaster
PL has previously experienced problems with Kaster so it is disappointing to see a recurrence.

PanOply had existing plans to obtain sales from Kaster so perhaps Kaster is now more aggressive in
its dealings with PL.
However, the price of the sets significantly exceeds the typical price of a set sold to a customer such
as Longfield which operates at a higher end of the market compared to a supermarket like Kaster so
the figures should be confirmed. Similarly, supermarkets do not retail high margin products so with a
margin of 58.3% there is a possibility of error in the figures.
If the deliveries in question are removed from the delivery rate calculation, a penalty of £500k will be
due back to PL. RDN is a key partner for PL as it is the only logistics supplier so PL should not do
anything to harm the RDN relationship, particularly if it relates to something outside RDN’s control.
It has not yet been confirmed that Kaster will definitely withhold payment, although PL has not heard
anything since April. Even so, PL should not assume the worst case and should confirm the facts.
position.
year.
1.E Conclusions
Revenue declined marginally by £471k (1.1%) from £41,713k to £41,242k and ended up £3,758k
(8.4%) below the High budget estimate.
5% revenue decline experienced in the prior year.
decline in PL’s total revenue.
Hospitality GPM was down drastically from 49.2% to 37.1%. This represented very weak performance
given that the GPM of the Retail stream actually increased significantly from 36.4% to 39.6%.
position.
year in terms of revenue.
PL should:
75
• reconsider Kaster as a client and identify alternative supermarkets

• determine if it is possible to sell off the specialist plant to recover cash
• investigate the reasons for the decline in the “Other” Hospitality category
• implement cost controls in Hospitality
• investigate the reasons for poor Hospitality margin performance
• [further idea]
76
Section 2 Classic and ClassicRetro
“Retro” designs can be popular in the market so it may be an appropriate time for PL to launch such a
product.
Brexit has caused an impact on exchange rate uncertainty and overseas suppliers by increasing costs
in pound terms. The ClassicRetro project involves work with a UK company so these issues might be
avoided.
The SS&M fee appears extremely low relative to the fee quoted for Thor and the company has an
unknown level of quality: the fee may be low because the company does not generate much
business.
the ClassicRetro would generate incremental revenue of £2,400k and incremental GP of £1,440k.
After marketing costs, the products would generate a combined net profit of £2,040k.
It is unclear why the new product would generate better returns than the existing Classic, especially
as the Classic has struggled.
The revenue forecast appears optimistic as previously the Classic was expected to bring in only £0.1
million per month.
There is no basis for the substantially higher total revenue from the ClassicRetro, given that the
existing Classic has struggled to perform well recently.
The GPM of both products is extremely high at 20 to 25 percentage points above PL’s overall GPM.
It is unlikely that sales will “kick in immediately” as it takes time for a new product to develop demand.
Changes in assumptions will affect the results of the model so inputs must be confirmed.
2.D Strategic and ethical issues
Top Tableware claims to have a high quality, which would be in line with the PL quality-driven ethos.
and Auty.
77
The similarity of the 2 products could simply lead to replacement purchasing (customers purchasing
the ClassicRetro but not also the Classic) so net revenue and GP growth could be impacted.
As a rival (Zoto) works with Top Tableware, PL may be able to work on challenging that rival if it
develops a good relationship with Top Tableware.
Using a company owned by a close relative of Lucy Tyler might not be independent and could
damage the relationship with Lucy Tyler if there is a problem with Top Tableware: PL cannot afford to
damage the relationship with Lucy Tyler as she has proven highly effective in the past.
The ClassicRetro involves work with 2 unknown suppliers, which could be risky.
Both products would be launched after the busy Christmas sales period but this would ensure that the
release is not rushed operationally.
Ethics
There is no indication that PL’s potential suppliers use the relevant schemes so this should first be
confirmed.
PL requires all its suppliers to have strong health and safety records and to pay more than the
minimum wage in the relevant country. PL should investigate the details of the schemes in full and
discuss them with government officials to ensure that no laws are broken.
There could also be a negative impact on PL staff morale if PL is associated with unacceptable
treatment of workers.
PL requires all suppliers to use the latest energy-efficient equipment and procedures and is
committed to encouraging recycling and minimising waste. It would lack integrity for PL to be
associated with environmentally-damaging production.
PL should continue to perform supplier audits and inspections to enforce its standards and should
discuss production techniques and staffing with Top Tableware.
PL risks damage to its reputation by association with questionable practices.
2.E Conclusions
the ClassicRetro would generate incremental revenue of £2,400k and incremental GP of £1,440k. Net
profit would be £2,040k.
and Auty.
PL must not be associated with practices that put health and safety at risk or involve low wage levels:
this would be wrong in itself but also inconsistent with PL’s presentation of itself to the market.
78
However, it is not clear whether suppliers for this project are in fact involved in the schemes in
question.
PL should proceed with the project, provided that the ethical issues are resolved and the reasons for
the Classic’s existing poor performance can be dealt with8.
PL should:
• perform due diligence on Top Tableware and SS&M

• conduct market research on the demand for “Retro” products
• confirm all model inputs to independent sources
• investigate alternative suppliers to Top tableware and SS&M
• negotiate T&Cs with Thor and Lucy Tyler
• [further idea]
8
79
Section 3 Italy, Canada and Erehwon
[Note – not for inclusion in your answer – you will note that our section lettering is different for this
model answer compared to most other model answers in this pack. This is not an error: the box layout
for this mock is based on the July 2016 markscheme where (rather exceptionally) the examiner asked
candidates to analyse 3 different projects (not just the normal 2 projects, or risks and benefits of a
single project). This meant that there was a further issue to consider and a reduced emphasis on
ethics. We have retained our ethics section as we would still recommend that you make a good
attempt at this area because it should be relatively straightforward. However, you will need to insert
an additional section in the project evaluation part of your answer, in order to cover 3 areas.]
Brexit has caused uncertainty relating to EU rules and regulations, which could affect dealings with
suppliers in Italy to a greater extent than suppliers in Canada and Erehwon as the latter 2 countries
are not within the EU.
PL’s existing strategic plan covers the May 2016 to May 2018 period and it wishes to have a major
marketing activity from 1 June 2018 as it celebrates its 25th anniversary.
PL has set a strategic objective of expanding overseas, and particularly via a hotel chain so the
opportunity in Erehwon would be a greater fit, although all opportunities involve work outside the UK.
3.B Italy
The emphasis in Italy on Internet sales is a good fit with market trends as online sales have become
more important.
Premium branding and emphasis on quality would also be a good fit with what the market demands
as customers will pay a premium for quality.
Using Italy alone for tableware could affect the relationship with PL’s supplier Auty, a UK company.
There would be plenty of time to plan as the project will not be implemented until the end of 2018.
However, the project would then miss the start of PL’s 25th anniversary celebrations and it may be that
the legal requirements in Italy are very complicated, taking up management time.
Moving all Tableware demand across to the Italian provider would not allow PL to diversify its supplier
base, contrary to its strategy plan.
project’s revenue would be 18.2% of PL’s latest Retail revenue figure (or 15.4% if the £6,000k is
added). As such, the project would on its own allow PL to achieve the target of earning 15% of Retail
revenue from utensils sales by 31 May 2018.
3.C Canada
The 4 qualities for which Toronto Tableware’s products are said to be “renowned” fit exactly with what
the market requires.
The opportunity to link up with hotel chains is a good fit with PL’s strategic objectives.
80
The offer of a detailed and comprehensive SLA is a good fit with PL’s emphasis on quality.
As Rolson is not involved with the CKTC (and seems to be unhappy with the organisation) there could
be a risk of damaging the relationship by becoming involved with other Canadian suppliers who
participate in the CKTC.
Working in Canada would provide PL with an important strategic base to enter the North American
market.
The offer of delayed payment would be very helpful for PL’s cash flow.
It would be possible to implement the Canada option in time for PL’s 25th anniversary marketing
strategy (which needs to take effect from 1 June 2018).
3.D Erehwon
The use of solar energy is a good fit with PL’s ethos on the environment: PL does prefer suppliers to
use solar equipment where possible.
Erehwon is a distant market from the UK so there could be time and cost implications of the frequent
inspection visits required by PL as well as operational challenges relating to language, currency, time
zone and other factors.
Spicy food and the woks and dishes required to produce such food are currently popular in the market
so the project would allow access to this kind of item.
The project does not represent full offshoring as some manufacturing will still be taking place in the
UK, avoiding issues relating to distance.
PL has no existing relationships in Erehwon (unlike Italy and Canada) so there could be more risk.
3.E Ethics
There are currently concerns regarding licensing and intellectual property in Italy. PL must respect all
laws and should not use any techniques stolen from other companies. There would be negative
implications for PL’s relationship with Rolson, from whom PL licenses technology.
The use of PFOA could lead to reputational impact for PL. Sales of the Rolson-developed PE7 have
been very strong so there would be major profit and reputational implications for PL if PFOA were to
be used in this product. PL must act transparently, even if this damages its potential future sales to
the US where there are restrictions on use of PFOA.
81
3.F Evaluation of assumptions
The information regarding the proposed utensils line in Italy is not detailed and has also been
provided by the brother of a Managing Director of the proposed partner company so the data could be
optimistic in order to secure a deal.
There is no financial information at all on the Canada and Erehwon projects, preventing a full
comparison.
The forecasts of the EDD appear very optimistic in suggesting that there will be growth of 20% per
year in the UK as the UK press suggests 10% growth at the very best and possibly a decline of 5%.
The press article on production in Erehwon is somewhat out of date as it was written nearly 18
months ago and was supported by the CKTC, which would have a vested interest in disparaging a
competitor country to Canada.
3.G Conclusions
project’s revenue would be 18.2% of PL’s latest Retail revenue figure (or 15.4% if the £6,000k is
added). As such, the project would on its own allow PL to achieve the target of earning 15% of Retail
revenue from utensils sales by 31 May 2018.
The offer of a detailed and comprehensive SLA in the Canada opportunity is a good fit with PL’s
emphasis on quality.
PL must respect all licensing laws and not use any stolen technologies as this would be illegal and
could have negative implications for PL’s relationship with Rolson, from whom PL licenses
technology.
PL must investigate the use of PFOA and act transparently, even if this means harming its reputation
in the US, which has restrictions on the use of PFOA.
PL should proceed with the Canada option given the emphasis on quality, provided that the PFOA
matter can be resolved9.
9
82
PL should:
• visit overseas countries and assess quality/opportunities

• review all inputs provided for reasonableness
• obtain information other than press reports to inform decisions
• obtain consultancy advice on impact of changes in UK trading relationships
• investigate ethical issues independently and obtain legal advice
• [further idea]
83
Mock Exam 3
Piccolo Limited –
Mock Exam 3
84
Mock Exam 3
List of Exhibits
85
Mock Exam 3
EXHIBIT 14

To: Charlie Sims
Date: 19 July 2017
Charlie,
You should analyse and comment on the revenue, gross profit and operating profit
performance of PL and its 2 revenue streams (Exhibit 16) relative to the same figures for the
prior year. Please then assist the Board with its request for assistance on the matter relating
to RDN (Exhibit 15). For the avoidance of doubt, please complete your review of
performance for the year before separately addressing the issue relating to RDN.
2. A financial assessment of the opportunities with Dougal Hotels and Ringford (Exhibit 17).
Using the information provided, you should calculate and evaluate the gross profit which PL
would earn over a 5 year period from each opportunity. Please then comment on any
operational and ethical issues raised by the information provided. As part of your analysis,
you should discuss the adequacy of any assumptions provided in Exhibit 17.
3. A strategic evaluation of an opportunity in relation to cutlery or glasses (Exhibit 18).
You should respond to the request for advice on the potential strategic, operational and
financial benefits and risks of the opportunity for PL to retail cutlery or glasses to both
Hospitality and Retail customers. Please then assist PL to understand the cash flow
implications of the proposals. You should then also evaluate any ethical and business trust
issues which appear to be raised by the information provided. Where appropriate, you should
provide brief calculations to assist PL with any requested numerical analysis.
86
Mock Exam 3
EXHIBIT 15
The Piccolo Board is pleased to send on the company’s latest accounts for your review (Exhibit 16).
Please help the Board to understand how Piccolo (and its constituent revenue streams) has
performed in revenue, gross profit and operating profit terms compared to the prior year.
After you have completed this evaluation, please help us to understand the implications of a matter
relating to RDN. We have included full details below. Unfortunately, as I have had to attend a number
of ICAEW events relating to IFRS 13 (most stimulating and exciting presentations, I must say – well
worth the modest entrance fee), I have not had time to look at the RDN delivery rate data or include
any implications in our management accounts. I now have to attend further events on IFRS 9 so may
not be able to look into it properly for some time. Therefore we require you to explain the impact on
Piccolo’s operating profit as well as any strategic or operational matters we should consider. We do
not think this matter will be very material so please complete all of your general performance analysis
first and then draft a separate report section looking at RDN as a separate matter.
We were pleased to introduce our XLoS inter-stream cross-selling scheme for all employees in the
final quarter of the year: we have been meaning to launch something formal in this regard for some
time. We then found we had to develop a response to PanOply’s efforts regarding Kaster.
We look forward to reading your report. Please get this in soon as we will be catching up with Lucy
Tyler and Thor soon and I expect they may have some questions for us. I will be handing over a
cheque to Thor for £100,000, representing the variable element of their fee for the year, and also
thanking Lucy for her work as our main advertising method in the launch of our UberUtensils range at
the start of the year (total Utensils revenue for the year reached £6,270k), and also for her work on
Gullen … Lucy provided a weekly cooking event at Gullen stores, using the new UberUtensils to good
effect.
Sabrina
RDN Issue
Unfortunately, we believe that a dispute is going to arise with RDN, our logistics provider. As a result
of a recent “ransomware” attack which knocked out RDN’s servers for a few days, 300 deliveries
which were originally scheduled to be received by clients on 28 May 2017 were received a week later.
The average revenue on these deliveries was £500 and the average gross profit margin was 40%.
Using our PL-RDN integrated portal, we have downloaded the latest RDN delivery rate data from the
RDN servers and based on a download date of 10 June 2017, RDN has recorded all the late 28 May
2017 deliveries as being received on time! The RDN data indicates that we requested 50,000
deliveries during the year ended 31 May 2017 and we agree with this figure: it is just the 28 May 2017
deliveries which seem to be wrong. The RDN data indicates 45,000 on-time deliveries.
We believe that it would be reasonable to exclude the 28 May 2017 deliveries referred to above from
the number of deliveries treated as received on time but we think RDN will argue that there were
“exceptional circumstances” due to the unanticipated nature of the ransomware issue. We have
therefore instructed our lawyers to begin drafting some strongly-worded letters to RDN to protect our
position.
Please indicate the impact on PL’s profit for the year of this matter.
87
Mock Exam 3
EXHIBIT 16

£000
Revenue 1 43,869
Changes in inventories 1,031
Taxation (434)

£000
Current assets
Total assets 18,947
14,217
Current liabilities
88
Mock Exam 3

£000

Adjust for:
Depreciation 192
Change in inventories (1,031)
Change in trade and other receivables (775)
Change in trade and other payables (1,363)
Cash generated from underlying operations (697)
Purchase of property, plant and equipment (1,032)


2017
£000
Revenue
Hospitality 9,036
Retail 34,833
43,869
Gross profit
Hospitality 4,344
Retail 11,721
16,065
Note 2: Other costs

2017
£000

13,918
89
Mock Exam 3

equipment
£000 £000 £000 £000
Cost
At 1 June 2014 139 1,208 237 1,584
Additions - 15 - 15
Disposals - (140) (59) (199)
At 1 June 2015 139 1,083 178 1,400
Disposals - - (54) (54)
At 1 June 2016 168 1,128 135 1,431
Additions 251 760 21 1,032
Disposals (118) (412) (51) (581)
At 31 May 2017 301 1,476 105 1,882
Depreciation
At 1 June 2014 114 907 145 1,166
Disposals - (128) (46) (174)
At 1 June 2015 138 869 117 1,124
Disposals - - (31) (31)
At 1 June 2016 142 961 105 1,208
Disposals (31) (255) (12) (298)
At 31 May 2017 146 848 108 1,102
Carrying amount
At 31 May 2014 25 301 92 418
At 31 May 2015 1 214 61 276
At 31 May 2016 26 167 30 223
At 31 May 2017 155 628 (3) 780

2017
£000

8,570

2017
£000

4,730
90
Mock Exam 3

£000
Dougal Hotels 1,070
Ringford 1,391
3,238
Other 5,798
9,036
Retail customers

£000
Longfield 5,153
Kaster 4,958
Gullen 3,219
13,330
Other 21,503
34,833
91
Mock Exam 3
EXHIBIT 17
Strategic plans: Dougal and Ringford email sent to Ingleby Grant
I am pleased to send on some further information on our opportunities with Dougal and Ringford over
the next few years. As you are aware, our Hospitality clients replace their tableware and cookware
based on a regular “cycle” of investment so we would like to investigate how this cycle could affect our
gross profit from these clients.
As Sabrina has been extremely busy, I have put together the data below myself as we want your firm
to get on with the analysis as soon as possible so that we can make the necessary arrangements.
Please evaluate the projects using our usual accounting reference date and assuming that the first
year is a full year ending as normal on 31 May 2018. Replacements for breakages should be included
in the model with a 1 year time lag, to allow for the fact that we will need to receive data from our
clients before orders for replacements are made. In other words, in year 2 we will earn revenue from
replacing broken items purchased in year 1, and so on. To keep the model manageable, we will
assume no growth over the next 5 years in the number of hotels specified in the information below.
You should assume that the hotels in each chain will have their opportunity for a major replacement of
items on a “queuing” basis – once a batch of hotels have made a purchase of items, that batch will go
to the back of the queue and will not have any major replacements until all other batches in the hotel’s
chain have been served. However, replacements for breakages will continue to be provided, based on
a share of the prior year revenue, as explained already (and see further information below).
Please then also help us deal with the matters identified in the operations note included below.
Clive
Dougal opportunity
Dougal have explained that they are going to replace their cookware and tableware at each hotel
every 5 years, with a first replacement due during the year ending 31 May 2018. However, there will
be an additional one-off expenditure equivalent to 25% of the normal expenditure in the first year of
the next 5 year cycle (starting in the year ending 31 May 2018) to make up for the fact that Dougal
has delayed its replacements due to Brexit. This amount should be excluded from the 10% growth
figure mentioned below.
Each hotel will spend £30,000 each time that its items are refreshed but this amount will increase by
10% per annum as Dougal will be investing into better quality cookware and tableware over time as it
expects to earn additional room revenue from price increases to business customers. Tableware will
feature plain/neutral colour combinations as it will be aimed at a target market of 60+ year olds (“baby
boomers”).
We will assume a gross margin of 40% on the work at Dougal’s 235 hotels.
We have assumed that 15% of items (by revenue) bought in any particular year will need to be
replaced the following year to allow for breakages. We would earn the normal gross margin of 40% on
these items.
We will offer a cross-selling bonus to staff involved in the Dougal opportunity in order to promote
sales. Staff will also be given the opportunity to spend 6 months on secondment to Dougal: such staff
will enjoy a range of opportunities to participate in Board-level discussions and will be given the
chance to perform work at a greater level of responsibility to their work at Piccolo in order to promote
staff development.
92
Mock Exam 3
Ringford opportunity
Ringford have explained that they are going to replace their cookware, tableware and utensils at each
hotel every 3 years, with the first replacement due during the year ending 31 May 2018.
Each hotel will spend £20,000 each time that its items are refurbished. About 30% of its orders will
relate to utensils. We will assume a gross margin of 60% on the work at Ringford’s 270 hotels.
We have assumed that 5% of items (by revenue) bought in any particular year will need to be
replaced the following year to allow for breakages. We would earn the usual 60% gross margin on
these items.
Ringford has requested that we rationalise our supplier base by allocating all of Piccolo’s Cookware
and Tableware purchases to Auty and Delite, our 2 UK suppliers.
We will be introduced to Ringford’s new partner in the US, Muppet Holdings, a leading hotel chain.
Wealth of baby boomers increases further Intergenerational Justice Weekly
The latest data released by the UK Office of National Data (OND) reveals a further increase in the
relative wealth of adults aged 60 years or more (the “baby boomers”). According to the OND, as a
result of a substantial increase in house prices over the last 15 years, as well as gold-plated “final
salary” pension schemes no longer available to the majority of the current workforce, the “baby
boomers” find themselves as the only segment of the population with the possibility of high levels of
discretionary spending on items such as electronics, travel, restaurants and stairlifts.
“The situation is deeply unfair,” comments Christopher Cross of the Young People’s Alliance. “Not
only have the baby boomers benefited from free university education, they have also seen a huge
increase in wealth (purely as a matter of luck) from house prices. With adults under 40 now really
feeling the squeeze, I doubt we will see much discretionary spending other than from oldies.” Alan
Angry of the Young People’s Alternative Alliance (YPAA) largely agreed, with the exception of a few
fundamental hair-splitting differences between the YPA and the YPAA. Both organisations agree that
spending several hours per day on Facebook is definitely the very best way to get things changed.
Intergenerational Justice Weekly – bitterness in a handy weekly paper format!
Operations note memo received from Tamsin Wright
We understand that if we go ahead with our proposed offering to Dougal, we will need to obtain a
quote from another logistics provider, just in case RDN is unable to cope with demand. I have
identified that NDR, a local provider based in Birmingham, may be interested in helping. I have
passed on some information obtained from our RDN contract to NDR in order to help with their pricing
analysis and NDR’s offer certainly looks attractive. We could save costs equivalent to 5-10% of our
revenue if we switch some of our work to NDR.
Unfortunately, we have just been notified that, due to a break-in at our Birmingham facility, a
significant amount of our inventories have been stolen or broken. The thieves seem to have been
particularly interested in the “fine bone china” plates that we market to Dougal … but I think we have
had the last laugh as these items are actually just coated plastic. The thieves also set off the
sprinklers at our storage facility, ruining a large number of cardboard boxes. We should be able to
repackage the items for sale quite quickly so we do not propose to notify any customers. The issue
affected all items stored in Birmingham.
93
Mock Exam 3
EXHIBIT 18
Confidential – cutlery and glasses opportunity
The Piccolo Board requires advice on 2 alternative opportunities to expand our sales lines.
Cutlery opportunity
We understand that several leading UK department stores are looking to purchase UK-manufactured
cutlery as a result of significant recent increases in costs as a result of the decline in the value of
sterling.
We believe that the time may be right to establish our own manufacturing base and we have identified
a suitable plot of land on the outskirts of Birmingham, close to our existing head office. The land is
disused so could be obtained at cost of only £2m and we could then install the necessary plant at a
cost of £7m. The plant will then use an extremely low-cost technique, allowing Piccolo to save costs
on the chemicals normally added to strengthen cutlery. The costs saved will be invested instead into
high-quality engraving of artwork and cutting-edge designs.
This opportunity has arisen after senior staff at House of Lewis, a major UK department store, viewed
one of Lucy Tyler’s cooking shows. A close competitor, John Fraser, then apparently heard about the
interest from House of Lewis and so may also be interested.
House of Lewis are keen to launch the items in the shops before the end of 2017 and they are
proposing that we roll-out sales to all 225 stores nationwide. This looks like a great opportunity. We
expect to hear that John Fraser will want to do the same.
As a co-operative, House of Lewis is keen to incentivise British manufacturers and has offered Piccolo
an interest-free loan for the entire cost of land, buildings and machinery. House of Lewis will require
monthly repayment of capital but no interest will be charged.
We understand that if we are not successful in gaining the work with House of Lewis and John Fraser
then the stores will look at alternatives such as Zoto, which is looking to diversify its activities.
Glasses opportunity collaboration between Piccolo and PanOply
PanOply would like to use its newly-recruited celebrity chef Eric Franks to head up the marketing of
our joint venture.
The opportunity with PanOply would launch on or around 1 June 2018. PanOply has promised to “pull
out all the stops” and initiate a major marketing drive for this proposal and we understand that Eric
Franks would be interested in offering a month of free cookery workshops during June 2018 to
advertise the products. Eric has offered Piccolo a 5% share of his intellectual property royalties,
starting immediately, as a goodwill gesture. Eric believes that an association with him could be “the
best thing that has ever happened to Piccolo”.
PanOply is aiming to leverage its increasingly close relationship with Kaster for this opportunity:
PanOply requests that Kaster is given exclusivity over sales of the relevant glassware. The items
would be introduced gradually in 10% of Kaster stores per year until, eventually, the items are stocked
nationwide.
PanOply has agreed to help finance the project by paying for all purchases itself: the company will
then invoice Piccolo 4 months in arrears. Piccolo will be required to raise a fixed charge (issued in
favour of PanOply’s bank, Vulture Capital plc) over its PPE and receivables. Compound interest of 5%
94
Mock Exam 3
will accrue on any financing of working capital but PanOply has negotiated a grace period such that
Piccolo will not actually have to pay any accrued interest in cash until 5 years after the project starts.
PanOply has already identified a supplier in Erehwon who can provide glasses of PanOply’s usual
quality level. The glassware has undergone extensive product testing in Erehwon and as PanOply
believes that nowhere has higher safety standards than Erehwon, it has proposed not to test the
items to full EU standard after import on the basis that EU rules will soon not apply to the UK anyway
following Brexit.
Retailers flout laws on the retail of sharp knives Marketing Monthly, June 2017
As all UK retailers should know, it is currently illegal to sell a knife to anyone under the age of 18
unless the knife has a folding blade 3 inches or less. However, 16 to 18 year olds in Scotland can buy
cutlery and kitchen knives … something that some unscrupulous traders appear to be using as an
excuse for their activities. In an apparent attempt to cut costs (and perhaps even boost sales), some
suppliers have stopped applying legally-required warning stickers to shipments of knives for sale to
the public, claiming that the shipments are destined for Scotland. When unlabelled shipments end up
elsewhere in the UK, staff at retailers are not reminded of the necessary rules and so children have
been able to purchase knives illegally.
Ellie Copter, a concerned parent and extremely active member of the Parent Teacher Association at
her son’s school, has spoken out about the practice on social media. “Retailers know full well that
their packages are not being sold in Scotland but rather being sent on to other parts of the country.
Our children deserve to be properly protected and that means ensuring the retailers know the law.
Supermarkets such as Adsa, Waitburys, Kaster and Sainsco really should know better – they make
enough money already, don’t they?”
Kaster receivable issue Memo from Sabrina Kroos
Olivia,
Kaster has informed us that it disputes some of the latest invoices received. We have not had any
explanation of the reasons as yet but we believe that 20% of our total trade receivables balance (as at
the most recent year end) will now not be paid in August as expected. We expect that it will take 3
months to resolve this matter so hopefully the cash will be received by the end of October at the
latest. In the meantime, we are concerned that we may go overdrawn as we had budgeted to use the
cash from the Kaster payment to invest in some essential fixed assets, at a total cost of £1m in
August and £0.75m the following month.
Our bank makes an assessment at each month end. If we are overdrawn at the month end date, our
bank will charge monthly interest of 10% on the overdraft figure at that date, which will be payable in
the same month of the relevant assessment. If we go overdrawn by more than £1m then a fixed fee of
£20,000 per month will also be due in the month of assessment. (Interest is not due on the fixed fee
itself – this is treated as a separate penalty.)
I am quite busy and, to be honest, too annoyed with Kaster to be able to think straight here, so please
can someone on your team analyse the impact on Piccolo of these matters? For this purposes,
please ignore all cash flows other than those in relation to the facts provided here. Our opening cash
level is unchanged from the latest accounts.
95
Mock Exam 3 Answers
Piccolo Limited –
96
Mock Exam 3 Answers
Appendix 1

Revenue £000 £000
Hospitality 9,036 8,837 199 2.3%
Retail 34,833 32,876 1,957 6.0%
Total 43,869 41,713 2,156 5.2%
2017 2016
Revenue mix % %
Retail 79.4% 78.8%

Hospitality 4,344 4,345 (1) 0.0%
Retail 11,721 11,974 (253) -2.1%
Total 16,065 16,319 (254) -1.6%
2017 2016 Change

Hospitality 48.1% 49.2% -1.1
Retail 33.6% 36.4% -2.8
Total 36.6% 39.1% -2.5

£000 £000
2017 2016 Change

% %
Return on advertising KPI 2017

£000
Thor fee 1,000
Lucy Tyler fee 800
Total 1,800
Increase in total revenue 2,156

KPI calculation 120%
KPI target 120%
Client analysis
Retail revenues £000 £000
Longfield 5,153 4,889 264 5.4%
Kaster 4,958 4,720 238 5.0%
Gullen 3,219 2,872 347 12.1%
Other 21,503 20,395 1,108 5.4%
Total 34,833 32,876 1,957 6.0%
Note
The KPI result reflects a rounding to the nearest whole number, per the Advance Information. The exact result is
119.78%.
Exam Tip
97
Mock Exam 3 Answers
£000 £000
Revenue
High 43,869 45,000 (1,131) -2.5%
Gross profit
High 16,065 18,000 (1,935) -10.8%
High 9,036 10,000 (964) -9.6%
Revenue - Retail
High 34,833 35,000 (167) -0.5%

High 4,344 5,000 (656) -13.1%

High 11,721 13,000 (1,279) -9.8%
RDN issue
Deliveries on time per RDN data (Exh 15) 45,000

Total deliveries requested per RDN data (Exh 15) 50,000
Delivery Rate per RDN data 90.0%
No penalty due as target of 90% achieved
Deliveries on time per PL method 44,700 [45,000 - 300 late deliveries]

Total deliveries requested per PL method (Exh 15) 50,000
Delivery Rate per PL method 89.4%

Target delivery rate (p35) 90.0%
Difference in 0.1 percentage points 6

Penalty per 0.1 percentage points (£000) (p35) 10
Total penalty due from RDN (£000) 60
Revenue not recognised (£000) 150 [300 x £500 (Exh 15)]
GP not recognised (£000) 60 [40% x £150k]
an error.
98
Mock Exam 3 Answers
Appendix 2
Note – as the calculation for Dougal Hotels is quite complicated, we have included a full explanation on the next page. None of
the explanation on the next page would need to be included in your examination answer – it is merely for explanatory purposes.
Please note that the Dougal Hotels calculation has been rounded to the nearest £ thousand at each relevant stage – you would
not lose marks for rounding differences in the examination and the examiners would in fact be likely to pick figures where
rounding issues do not arise … much as we would love to spend hours messing around with Excel to find these for the Dougal
Hotels calculation, we have 2 more mocks to write …
Dougal Hotels
Hotels 235
x 1/5 receiving replacements each year 47
Year 1 Year 2 Year 3 Year 4 Year 5
Hotels 47 47 47 47 47
Total revenue (£000) - cyclical replacements 1,410 1,410 1,410 1,410 1,410
Growth factor at 10% 1.1 1.21 1.331 1.4641
Additional year 1 revenue (25%) 353
Total revenue (£000) - cyclical, after growth at 10%, rounded 1,763 1,551 1,706 1,877 2,064
Total revenue from breakages (£000) 264 233 256 282
Total 1,763 1,815 1,939 2,133 2,346
Total annual gross profit (£000) at 40% GPM 705 726 776 853 938
Total gross profit from Dougal work 3,998
Sensitivity test - apply 60% GPM
Total annual gross profit (£000) at 60% GPM 1,058 1,089 1,163 1,280 1,408
5,998
Ringford
Hotels 270
x 1/3 receiving replacements each year 90
Total annual revenue (£000) - cyclical replacements 1,800 [90 hotels x £20k (Exh 17)]
Total annual gross profit (£000) 1,080 [1,800 x 60% GPM (Exh 17)]
x 5 years = total gross profit (£000) 5,400
Total revenue (£000) - breakages 360 [1,800 x 5% (Exh 17) x 4 years]
Total gross profit (£000) - breakages 216 [360 x 60% GPM (Exh 17)]
Total gross profit from Ringford work 5,616
an error.
99
Mock Exam 3 Answers
Detailed explanation of Appendix 2 – for explanatory purposes only – not for inclusion in your
answer
Dougal Hotels calculation
Total revenue is calculated as number of hotels x £30k per hotel (Exh 17).
We then apply a 10% increase in revenue but only for year 2 onwards. As the growth is 10% per year,
we need to use a cumulative factor and not just 10% separately each year.
In year 1 only there is a 25% increase in revenue (Exh 17). This should be excluded from the 10%
increase because Exhibit 17 indicates this.
We have applied rounding to the nearest £ thousand as indicated in the Total revenue for “cyclical”
replacements. By “cyclical” we mean the yearly replacements, as opposed to breakage replacements,
which are dealt with separately.
Revenue from breakages is then calculated as 15% of the prior year revenue, allowing for the one-off
expenditure in year 1 as presumably some of these items would break at the normal rate, and also
allowing for the 10% growth factor. Remember to allow for the 1 year time-lag so year 2 breakages
are 15% of the year 1 revenue of £1,763k, and so on. We again apply rounding to the nearest £
thousand here.
The remaining rows of the calculation should be straightforward.
There was no specific request to perform a sensitivity test but that is normal in Case Study as we
have never seen such a request in Exhibit 14 (or equivalent) but there are sometimes marks either for
performing a sensitivity test or at least discussing the benefits of performing one. Here the GP margin
for Dougal seemed very low and it is relatively quick to rerun the model at a margin of 60% because
there would be no other figures to change. The fact that the margin assumption appears to be so far
out of line with what we know in the Advance Information, together with the ease of applying
sensitivity, could be indicators that sensitivity is required. However, if you do opt to perform a
sensitivity analysis in your own exam, always ensure that you do so quickly because there may not
actually be any marks available and, even if there are, then the marks will be minimal (maybe 1-2
marks at the maximum).
Please note that this calculation is definitely towards the top end of what would normally be expected
in Case Study – in the real examination, we would not be surprised to see just one of the calculations
tested here.
Ringford calculation
This should be more straightforward than Dougal.
The trick here relates to replacements for breakages – as none are required in year 1 by the
assumption of the 1 year time-lag, we need to multiply the annual revenue of £1,800 by 5% but then
only by 4 years (not 5 years): replacements regarding year 5 are made in year 6, outside the time
period of the model.
It would be valid to mention that because of the time-lag, in each model, a year of breakage
replacement revenue will be missed in the total revenue earned because only 5 years are analysed.
We have made this point in our markscheme and model answer.
100
Mock Exam 3 Answers
Appendix 3
Receivables at 31 May 2017 (Exh 16) (£000) 7,185

x 20% unpaid = cash unpaid (£000) (Exh 18) 1,437
Aug Sep Oct
Opening cash (£000) (Exh 16) 630 (407) (1,293)

Fixed asset expenditure (£000) (1,000) (750)
Kaster income (£000) 1,437
Closing cash before bank fees (£000) (370) (1,157) 144
Bank interest charge at 10% (£000) (37) (116)
Closing cash after interest (£000) (407) (1,273)
Bank fixed fee (£000) (20)
Closing cash after bank fees (£000) (407) (1,293)
No fixed fee in August as overdraft is below £1m but the fixed fee is due in September as overdraft exceeds £1m.
No interest or fixed fee is due in October as receipt of the Kaster income clears the overdraft.
an error.
introduce errors.
101
Mock Exam 3 Answers

♦ Revenue comment with £, % and comparative figure ♦ Calculates Dougal GP with figures
♦ GP comment with £, % and comparative figure ♦ Calculates Ringford GP with figures
♦ OP comment with £, % and comparative figure ♦ Sensitivity test with figure
♦ RDN issue with figures ♦ Professional scepticism on assumptions
♦ Explains GP weak performance – e.g. Gullen ♦ Concludes on way forward
♦ PL cash performance weak – CAPEX ♦ PL must not lose high calibre staff
♦ PL must not upset RDN nor Lucy Tyler ♦ Significant ethical concerns for key clients
♦ Makes commercial recommendations ♦ Other commercial recommendations

E.5 Description
♦ Concludes / comments on Cutlery project
♦ Concludes / comments on Glasses project
♦ Kaster continuing to cause problems
♦ Other recommendations
102
Mock Exam 3 Answers

♦ Total revenue: up £2,156k AND 5.2%
♦ Total GP: down £254k AND 1.6%
♦ Total GPM: down from 39.1% to 36.6% AND down 2.5 percentage points

♦ Press expectations of 10% growth at best (p39)
♦ PL internal expectations 7.5% market growth at best (p38)
♦ PL aims to earn 15% of Retail revenue from utensils by 31 May 2018 (p37)
♦ Low CAPEX recently (p20) – significant spending this year (£1,032k per Exh 16)
♦ Lucy Tyler success fee requires PL revenue to grow to £44m (p12)

♦ Hospitality: up marginally £199k AND 2.3%
♦ Retail: up significantly £1,957k AND 6.0%
♦ Hospitality revenue mix: marginal movement from 21.2% to 20.6%
♦ Retail revenue mix: marginal movement from 78.8% to 79.4%
♦ Retail rev. from utensils 18.0% (6,270 (Exh 15) / 34,833 (Exh 16)), beating 2018 target (p37)
♦ Hospitality: down immaterially £1k AND 0.0%*
♦ Retail: down marginally £253k AND 2.1%
♦ Hospitality GPM: down significantly from 49.2% to 48.1%
♦ Retail GPM: down very significantly from 36.4% to 33.6%
♦ OP: down very significantly £1,016k AND 32.1% – increase in Other costs
1.5 RDN – figures

♦ Revenue £150k not recognised (no transfer of risks and rewards)
♦ GP £60k not recognised
♦ RDN data delivery rate 90.0% AND no penalty due
♦ PL method delivery rate 89.4% so 6 x 0.1 percentage points below target
♦ Penalty due to PL £60k
♦ Penalty is equal to the GP temporarily foregone (recognised following year)
* Although there has been a change in Hospitality GP, this correctly rounds to 0.0% to one decimal
place – you are required to report all percentage changes in Case Study to 1 decimal place.
Per p21 of the Advance Information, Piccolo follows a usual transfer of “risks and rewards” approach
to revenue recognition and recognises revenue when goods are physically transferred to customers.
Piccolo would therefore not have recognised revenue and gross profit on the 300 items delayed as a
result of RDN’s problems.
The terms XLoS, UberUtensils and the PL-RDN integrated portal have been invented for the
purposes of this Mock and are not contained in the Advance Information. Do not use these names in
We have invented the information that Lucy Tyler provides a weekly cooking event at Gullen stores.
Do not use this piece of information in your answer to the real examination on 19 July 2017.
103
Mock Exam 3 Answers
Applying Judgement
1.6 Evaluation of revenue
♦ PL has beaten pessimistic market forecasts and not quite achieved High budget
♦ Hospitality growth much better than prior year 5% decline (p19)
♦ Retail growth below 9% prior year growth (p19)
♦ Advertising KPI achieved* but Lucy Tyler will not be given success fee
♦ Both streams grew revenue – impact of cross-selling scheme? (Exh 15)
1.7 Evaluation of GP and OP

♦ GP/GPM decline despite revenue growth – disappointing
♦ Gullen to be given increasing discount as revenue grows (p30) – hits GP margin
♦ Kaster revenue low margin as PL is matching low quality PanOply (p30, Exh 15)
♦ Utensils have lower GP margin for PL (p13) so growth hits margins
♦ All Other costs up in line with revenue so OP squeezed by poor GP performance
1.8 RDN – evaluation

♦ Timing issue only – GP will be recognised in next year
♦ RDN has always previously agreed actual rates (p35) – early to assume problem?
♦ RDN is crucial to PL’s operations – must not upset RDN
♦ Failure to deliver has affected revenue and so advertising KPI – unfair to Lucy Tyler?
♦ Including Lucy Tyler success fee would affect OP
♦ Scepticism of data: PL has not yet discussed rates with RDN

♦ Results for the year: good revenue growth not turning into GP, OP or cash
♦ GP and OP: comment AND comparative figure
♦ RDN: comment AND figure

♦ Discuss openly and transparently with RDN as soon as possible
♦ Urgently assess potential impact of ransomware via “integrated portal”
♦ Review outcome of XLoS cross-selling scheme
♦ Review advertising KPI and include a profitability/margin metric
♦ Review “Other costs” to identify possible cost savings
The terms XLoS, UberUtensils and the PL-RDN integrated portal have been invented for the
purposes of this Mock and are not contained in the Advance Information. Do not use these names in
We have invented the information that Lucy Tyler provides a weekly cooking event at Gullen stores.
*The KPI is achieved when rounded to the nearest whole number, as per the Advance Information.
The markscheme is likely to alternatively accept a statement that the KPI has been marginally missed
if calculated to 1 or more decimal places as 119.8% etc.
104
Mock Exam 3 Answers
Requirement 2 markscheme – financial evaluation (Dougal and Ringford)

♦ Number of hotels per year 47 and 90
♦ Revenue per hotel £30k and £20k
♦ Growth factor at Dougal 10% per year and not applied to Ringford
♦ Breakage rates 15% and 5% with 1 year time-lag

♦ Brexit positive impact: higher number of visitors coming to the UK (p37)
♦ Brexit negative impact: delay in hotel openings/refurbishments (p37)
♦ PL aiming to explore relationships with global hotel chains (p37)
♦ Comparison to relevant R1 figures
♦ “Baby boomers” have wealth and spending power (Exh 17)
♦ Utensils performing well/Lucy Tyler marketing working well per R1

2.3 Calculation results – Dougal & Ringford
♦ Additional one-off revenue from Dougal £353k
♦ GP from Dougal £3,998k
♦ GP from Ringford £5,616k
♦ Sensitivity test (e.g. reversing the margins) (own figure)
2.4 Ethics – issues and evaluation (including recommendations)

♦ PL may have provided confidential information to a competitor of RDN
♦ Lack of integrity given PL claims (p31) – inform RDN immediately/disciplinary action
♦ PL has dishonestly provided plastic serving bowls to Dougal (Exh 17)
♦ Inform Dougal and replace bowls at no cost/offer compensation
♦ May not be safe/legal to sell damaged items – do not sell these items without informing
♦ B’ham 5% of inventory (p21) for replacements (p35) – inform all customers

♦ Margins: Dougal margin has been 60% – Ringford margin has been 40% (p26, p27)
♦ No. of hotels: no backing for 235 hotels (Dougal) – 270 excludes Reeve (Ringford) (Exh 17, p26 & p27)
♦ No hotel growth: PL client hotels have generally been adding hotels (p26 and 27)
♦ Pricing growth: 10% appears high AND if items are better quality, could affect margin
♦ Breakages rates: unclear why there should be such a big difference between chains
♦ Time-lag: unlikely that it will take so long to replace items
The terms OND, Muppet Holdings and NDR have been invented for the purposes of this Mock and
are not contained in the Advance Information. Do not use these names in your answer to the real
105
Mock Exam 3 Answers
Requirement 2 markscheme – financial evaluation (Dougal and Ringford)
Applying Judgement
2.6 Evaluation of calculations
♦ Compares results to Hospitality stream GP for YE 31 May 2017 per R1
♦ Calculations only consider gross profit – important also to consider timing of cashflows
♦ Changes in the inputs will have an impact on model results/5 year forecasting uncertain
♦ May be other costs or revenues to consider with example of each
♦ Perform a sensitivity test/simulation, given the number of different variables
2.7 Operational issues

♦ Dougal – cross-selling opportunity (Exh 17) fits with PL plans (p37)
♦ Dougal – PL concerned about loss of high calibre staff (p37)
♦ Dougal – PL does not normally target 60+ market /staff time (p23)
♦ Ringford – PL does not normally sell utensils to Hospitality clients due to hassles (p21)
♦ Ringford – PL concerned about risk of single suppliers (p37)
♦ Ringford – high utensils demand per R1 – capacity for PL available?
2.8 More complex points on assumptions

♦ Margins: has PL reversed margins? Data not prepared by Sabrina Kroos (Exh 17)
♦ Number of hotels: likely to be highly dependent on progress with Brexit
♦ No hotel growth: market outlook not strong, according to some (p37)
♦ Pricing growth: optimistic but Brexit has been driving visitor numbers/scarcity of rooms?
♦ Breakages rates: rates are lower at upmarket hotels (i.e. not Ringford) (p25)
♦ Time-lag: PL provides replacements quickly OR timing difference only

♦ Concludes on assumptions/professional scepticism
♦ Concludes on ethics AND operational issues

♦ Review all model inputs for reasonableness
♦ Negotiate T&Cs/discuss further with Dougal and Ringford
♦ Consider impact on other Hospitality clients/ensure other Hospitality clients not neglected
♦ Market research on outlook for UK Hospitality market
♦ Ensure key staff are not lost after Dougal secondment
The terms OND, Muppet Holdings and NDR have been invented for the purposes of this Mock and
106
Mock Exam 3 Answers
Requirement 3 markscheme – strategic evaluation (Cutlery and Glasses)

♦ Receivables at 31 May 2017 £7,185k (Exh 16)
♦ Cash unpaid by Kaster £1,437k
♦ Bank interest charge £37k in August and £116k in September
♦ Bank fixed fee £20k in September only
♦ Reconsider fixed asset purchases to save bank charges
♦ Considers impact on Glasses opportunity (Exh 18) (working with Kaster)

♦ PL does not currently sell glassware or cutlery (p12)
♦ Cookery tie-ins with celebrity chefs common in the market (p7)
♦ Zoto research that tableware affects diners (p40)
♦ PL used to manufacture products but had bad experience (p11)
♦ Comments on Eric Franks experience (p39) versus promises (Exh 18)

3.3 Issue 1 – Benefits & Risks – Cutlery
♦ Could prevent potential competitor Zoto (p40) gaining market share
♦ Sales via department stores good margin (p8)/PL quality ethos (p11)
♦ High operational requirement with full store roll-out (Exh 18)
♦ Christmas demand may be high – good sales but operational challenges
♦ Can use cheap financing to obtain a permanent manufacturing base (Exh 18)
♦ Terms of House of Lewis Foundation attractive (Exh 18) but John Fraser?
3.4 Issue 2 – Benefits & Risks – Glasses

♦ Partnership with PanOply unlikely to fit PL quality emphasis
♦ Supermarkets offer lower priced/quality products (p8) – strategic fit?
♦ Trial run allows PL to enter cautiously
♦ Later launch than Cutlery provides time but market could change
♦ PanOply offering generous financial terms – helps cash flow
♦ Security taken by Vulture Capital creates risk for PL

♦ PL is proposing to use a low-cost cutlery technique
♦ PL must not sell dangerous items
♦ PL may work with a customer that does not respect laws on knife sales
♦ PL not directly at fault but duty of care to purchasers including children
♦ Lack of EU and UK testing of glasses and related chemicals concerning
♦ PL must be certain that products are tested and safe
Note – the terms House of Lewis, John Fraser, Erehwon, Ellie Copter and Vulture Capital have been
invented for the purposes of this Mock and are not contained in the Advance Information. Do not use
these names in your answer to the real examination on 19 July 2017.
We have invented the relationship between Eric Franks and PanOply for the purposes of this Mock.
107
Mock Exam 3 Answers
Requirement 3 markscheme – strategic evaluation (Cutlery and Glasses)
Applying Judgement
3.6 Issues 1 & 2 – Further issues
♦ New markets – diversification but no PL prior experience
♦ Could be cross-selling opportunity into other PL lines
♦ Impact on management time of establishing new business lines
♦ Kaster has persistently caused operational problems for PL (p30, Exh 18)
♦ Lack of detailed financial information on opportunities
♦ Glasses opportunity could coincide well with PL’s anniversary celebrations (p37)
3.7 Cash flow implications

♦ Cutlery – own manufacturing will require substantial upfront investment
♦ Cutlery – significant sales at Christmas but also investment in inventories
♦ Cutlery – monthly loan repayments will cause a drain
♦ Glasses – royalty share could help generate cash in initial phase
♦ Glasses – no cash inflows for some time
♦ Glasses – “rolled up” interest helps cash flow but large single outflow at end

♦ Confirm status of the technique/take independent advice
♦ Consider alternative techniques to preserve quality, reputation and safety
♦ Confirm facts – press report only
♦ Insist on laws being respected – refuse to work with retailer if necessary
♦ Ensure that glasses conform to UK/EU standards
♦ Consider impact on PL reputation of breaching any ethical/legal standards

♦ Concludes on strategic, operational AND financial issues

♦ Market research on outlook for cutlery and glasses sales
♦ Due diligence on all potential partners/Investigate alternative partners
♦ Obtain detailed and independent financial forecasts
♦ Speak to PL’s bank regarding financing/cash/overdraft
Note – the terms House of Lewis, John Fraser, Erehwon, Ellie Copter and Vulture Capital have been
invented for the purposes of this Mock and are not contained in the Advance Information. Do not use
these names in your answer to the real examination on 19 July 2017.
We have invented the relationship between Eric Franks and PanOply for the purposes of this Mock.
108
Mock Exam 3 Answers
♦ Figures are as required by question – RDN ♦ Correctly numbered pages
109
the examination.
Ingleby Grant
19 July 2017
110
Executive Summary
PL has achieved very good revenue growth but this has not turned into gross profit, operating profit or
cash.
Revenue increased significantly by £2,156k (5.2%) from £41,713k to £43,869k due to growth in both
revenue streams, as a result of the new cross-selling scheme.
GP decreased marginally by £254k (1.6%) from £16,319k to £16,065k and GPM declined significantly
from 39.1% to 36.6%, a decline of 2.5 percentage points, due to an increased level of activity with
Gullen.
OP was down very significantly by £1,016k (32.1%) from £3,163k to £2,147k as a result of a
significant increase in Other costs. Combined with delayed capital expenditure, PL’s cash position is
weaker than the prior year with only £630k of cash available (PY £2,826k).
If allowance is made for the 300 non-deliveries in the Delivery Rate calculation, then PL is due a
penalty payment of £60k from RDN. PL should not prematurely assume that RDN is attempting to
manipulate its statistics and should allow RDN to present its own version of the data.
The penalty payment is equal to the GP not recognised in the year. The GP will be recognised in the
following year so the issue is only one of timing but PL will benefit from the penalty regarding the year
ended 31 May 2017.
Lucy Tyler is pivotal to PL’s advertising strategy and it is not her fault that RDN failed to deliver
products on time. Given her efforts to boost utensils sales, which appear to have been very
successful, PL may wish to offer the success fee to protect the relationship with Lucy Tyler.
PL should:
• discuss the RDN situation openly and transparently as soon as possible

• review Other costs to identify possible cost savings
Section 2 Dougal and Ringford
The Dougal contract would yield GP of £3,998k over 5 years whilst the Ringford contract would yield
GP of £5,616k over the same period. However, applying Dougal’s normal 60% margin (not the 40%
assumed in the model) would increase profit to £5,998k, exceeding the Ringford contract.
Based on around £800k to £1,000k of GP per year, either project would make a very significant impact
of around 25% of current GP levels for the Hospitality stream.
The pricing growth of 10% in the Dougal model could be optimistic, given uncertainty in the market,
although the number of visitors to the UK is increasing which could push up prices.
If Dougal spends additional income on higher quality items then the margin on these items may be
different in future years whereas the model assumes a flat (and probably underestimated) gross profit
margin.
PL is currently concerned about the risk of only having a single supplier for each type of product but
unfortunately Ringford’s required efficiency measure would leave PL in exactly this risky position.
111
PL should take disciplinary action against staff involved in breaching PL’s commitment to respect the
confidentiality of supplier information.
PL should inform Dougal of its dishonest actions and replace all affected items immediately, at no
charge.
PL should confirm that items can be resold without detriment to customers and should proactively
contact the many customers likely to be affected by the loss of substantial amounts of stock at its
Birmingham facility, rather than simply assuming that PL can carry on without any issues.
PL should not proceed with either opportunity until further information has been obtained and the
ethical issues have been resolved as these are significant problems which could affect key client
relationships10.
PL should:
• review all model inputs for reasonableness

• ensure that key staff are not lost if they are seconded to Dougal
Section 3 Cutlery and Glasses
As a result of the latest delay in payment by Kaster, PL would incur an otherwise unnecessary interest
charge of £37k in August and £116k in September together with a fixed fee of £20k in September
only. Any ongoing dispute could make it impossible to work with Kaster, threatening the Glasses
opportunity.
Kaster has once again caused problems for PL so perhaps PL should reconsider working with this
client.
PL does not currently sell glassware or cutlery so it has no experience in this market but the
opportunities could diversify revenue.
Rolling out the cutlery products to all department stores could offer a good level of sales but would put
pressure on PL’s operations.
Offering the glasses on a trial basis and phasing in sales gradually would allow PL to enter the market
cautiously, without putting pressure on operations, but could reduce the level of sales.
PL could use the cutlery opportunity to obtain a permanent manufacturing base, using cheap
financing as the terms of the House of Lewis Foundation offer appear very attractive.
PL should not use low-cost techniques if these endanger safety.
PL should confirm the facts regarding knife sales but should refuse to work with any retailer that puts
children’s safety at risk.
PL should ensure that UK and EU rules on the testing of products are respected and so may not be
able to use the imports from Erehwon without further detailed testing.
10
112
PL should proceed with the Cutlery opportunity, provided that the ethical issues are resolved11.
PL should:
• perform due diligence on all potential partners and investigate alternative partners
• obtain independent financial forecasts for the projects
11
113
PL’s revenue performance has been good and falls only slightly below PL’s internal expectations of
7.5% growth in the market at best: PL has not, however, achieved best case press forecasts of 10%
growth.
PL aims to earn 15% of retail revenue from utensils sales by 31 May 2018 but this target was
achieved a year early, with 18.0% of retail revenue coming from utensils, following the successful
launch of UberUtensils.
PL has reduced its capital expenditure in recent years but plans to increase this and has done so in
the current year, spending a significant £1,032k on necessary upgrades.
1.B Revenue
revenue streams, as a result of the new cross-selling scheme. PL therefore beat pessimistic market
forecasts of a 5% decline in kitchenware sales but was £1,131k (2.5%) below the High budget for the
year.
Hospitality revenue increased marginally by £199k (2.3%) from £8,837k to £9,036k possibly due to
purchases delayed in the prior year now taking place. Growth in the Hospitality stream represents
much better performance than the prior year decline of 5%. The Hospitality revenue mix moved
marginally from 21.2% to 20.6%.
Retail revenue increased significantly by £1,957k (6.0%) from £32,876k to £34,833k due to the
introduction of UberUtensils. Although growth was good, this stream did not achieve the 9% recorded
in the prior year. The Retail revenue mix moved marginally from 78.8% to 79.4%.
Lucy Tyler was due a performance fee of £200,000 if PL earned £44 million for the year. Despite her
significant efforts in providing weekly marketing, which appears to have helped successfully launch
UberUtensils, Lucy Tyler will not qualify for her success fee this year.
This might be considered unfair to Lucy Tyler, particularly as PL was able to achieve its advertising
KPI with a ratio of 120% being recorded, exactly equal to target.
1.C Gross profit and operating profit
Gullen, a client which has been given an increasing level of discount from PL as sales increase over
time.
Additionally, PL may have earned low margins on increased revenue to Kaster as it has tried to
respond to the low quality offering of PanOply.
Utensils have a lower GP margin for PL than other products so the impressive growth in this revenue
stream may also have hit the gross profit margin.
Therefore there has been a decline in GP and GPM despite revenue growth, representing
disappointing performance. GP also fell well below the High budget for the year by £1,935k (10.8%).
114
Hospitality GP decreased immaterially by £1k (0.0%) from £4,345k to £4,344k and GPM was down
significantly from 49.2% to 48.1%, possibly indicating that PL had to offer incentives to encourage
sales delayed in the prior year.
Retail GP decreased marginally by £253k (2.1%) from £11,974k to £11,721k and GPM was down
very significantly from 36.4% to 33.6% as a result of higher sales to Gullen and Kaster.
significant increase in Other costs. Generally, the increase in Other costs was in line with revenue so
OP has been squeezed by the poor GP performance.
1.D RDN
As a result of the non-delivery of items before the year-end, PL has not recognised revenue otherwise
due of £150k nor GP of £60k.
penalty payment of £60k from RDN.
ended 31 May 2017.
RDN has always previously agreed the actual rates of delivery with PL so it may be too early to
assume that a problem has occurred as the relationship has been strong. There might be another
explanation for the treatment of the data.
RDN has not yet presented its own version of the figures which have merely been extracted by PL so
it would be unfair to jump to conclusions.
RDN is crucial to all of PL’s operations so it is essential that PL does not take any action which could
damage the relationship: suggesting that PL’s lawyers should draft letters of complaint is premature
and inadvisable.
The failure to deliver on time would affect revenue and if the revenue of £150k were to be included in
PL results, Lucy Tyler would have been due her success fee of £200k as PL revenue would exceed
£44m: including this fee, assuming that PL would assist Lucy Tyler on a goodwill basis, would reduce
PL’s OP for the year.
1.E Conclusions
PL has achieved very good revenue growth but this has not turned into gross profit, operating profit or
cash.
revenue streams, as a result of the new cross-selling scheme.
Gullen.
115
significant increase in Other costs.
penalty payment of £60k from RDN.
ended 31 May 2017.
PL should:
• discuss the RDN situation openly and transparently as soon as possible

• assess the potential impact of ransomware on PL’s systems via the “integrated portal”
• review further detail on the outcome of the new cross-selling scheme
• review the Advertising KPI and include a profitability/margin element
• review Other costs to identify possible cost savings
• [further idea]
116
The decline in the value of the pound following Brexit has led to a rise in visitors coming to the UK so
the Dougal model might reflect this.
On the other hand, Brexit uncertainty has led many hotel chains to delay plans, due to uncertainty.
The assumption of no growth in hotel numbers in the models may fit with this.
PL is currently experiencing very high demand for utensils after a successful product launch and
effective advertising by Lucy Tyler in the last year. PL may lack the capacity to deal with even more
utensils demand as required by the Ringford opportunity.
PL does not normally target the “baby boomer” market as it normally targets the 25-40 market. There
may be significant investment in staff time required to reorientate activities. However, it has been
noted in the press that “baby boomers” have considerable wealth and spending power so it may be
sensible to diversify into this market.
Based on around £800k to £1,000k of GP per year, either project would make a very significant
contribution of around 25% of current GP levels for the Hospitality stream.
The models only consider GP and the timing of cashflows should be considered.
Changes in the inputs will have an impact on results, particularly over a long (therefore uncertain) 5
year time period. PL may wish to use simulation or other sensitivity tests to confirm the possibilities,
given the number of different inputs.
There may be additional costs such as distribution costs and other revenues such as the benefits of a
cross-selling scheme under the Dougal opportunity or breakage replacement revenues not included
due to the time-lag (year 5 breakage revenue is received in year 6, which is not considered).
The margin assumed for Dougal appears low as the normal margin for this client is 60%. The margin
for Ringford appears high as the normal margin for this client is 40%. It is possible that PL has
mistakenly reversed the margins for these clients as the data has not been prepared by Sabrina
Kroos, the company’s Financial Director.
The assumption of 235 hotels in the Dougal model will need to be confirmed: Dougal had 225 hotels
as at August 201612 and there is currently uncertainty in the markets which has reduced investment
into new properties as a result of Brexit.
12
Note (not for inclusion in your answer) – Exhibit 8 (p25 to p26 of the Advance Information), which is the source of data on the
225 Dougal hotels, is dated August 2016.
117
The assumption of 270 hotels in the Ringford model appears to exclude the proposal of the chain to
purchase 40 properties from a struggling rival in 2017. However, it is possible that this investment did
not take place as a result of the uncertainty caused by Brexit.
It has been assumed that there will be no growth in the number of hotels over the next 5 years but
PL’s clients have generally been adding to their portfolios in recent years. The assumption of no
growth has probably been made to simplify the model but it could in fact be appropriate as the market
outlook over the next few years is not strong, according to some commentators.
margin.
It is unclear why there should be such a big difference between breakage rates in the 2 models,
particularly as PL has noted that rates of breakage are lower at upmarket hotels: the PL model
assumes that breakage rates at a “value” chain such as Ringford will be lower than at an upmarket
chain such as Dougal.
It is unrealistic to assume a full year time-lag in the replacement of items as PL is normally required to
provide replacements quickly and works closely with clients to ensure this happens. However, the
issue of time-lag is a timing difference only and would not affect PL’s total income from the projects
(although it reduces replacement income in year 1 of each model due to the time-lag).
2.D Operational issues and ethics
The opportunity to cross-sell items with Dougal fits with PL’s medium term plans whilst the opportunity
to work with Muppet Holdings fits with PL’s wish to enter international markets via an overseas hotel
chain.
Although seconding staff to Dougal may be a good opportunity, PL is currently concerned about
losing high-calibre staff and this proposal could increase the chances of such a loss.
The Ringford opportunity involves extensive supply (30%) of utensils, even though PL does not
normally sell utensils to Hospitality clients due to the hassle involved outweighing the financial
benefits.
PL already has high utensils demand, based on its most recent financial results, so it is not known if
PL has capacity for more utensils works.
Ethics
PL appears to have inappropriately provided confidential information to a competitor of RDN, an

action which also lacks integrity as PL claims to respect the confidentiality of suppliers. PL should
inform RDN immediately and consider disciplinary action against Tamsin Wright on the basis of her
unacceptable behaviour.
PL has dishonestly provided plastic serving bowls to Dougal. PL should inform the client immediately
and offer to replace the bowls with genuine items at no cost and also to offer compensation for the
inconvenience caused.
118
It might not be safe or legal to sell the items that have been damaged following the break-in at the
Birmingham facility and PL should certainly not sell these items to clients without informing them of
the position. As the Birmingham facility stores 5% of PL’s inventory including for breakage
replacements, this is likely to have a significant impact on customers so they should be proactively
informed: PL should not simply assume it can continue without any disruption.
2.E Conclusions
margin.
PL should take disciplinary action against staff involved in breaching PL’s commitment to respect the
confidentiality of supplier information.
PL should inform Dougal of its dishonest actions and replace all affected items immediately, at no
charge.
PL should confirm that items can be resold without detriment to customers and should proactively
contact the many customers likely to be affected by the loss of substantial amounts of stock at its
Birmingham facility, rather than simply assuming that PL can carry on without any issues.
PL should not proceed with either opportunity until further information has been obtained and the
ethical issues have been resolved13.
PL should:

• discuss the opportunities and negotiate T&Cs further with Dougal and Ringford
• consider the impact of the projects on other Hospitality clients and ensure that they are not
neglected
• perform market research on the outlook for the UK hospitality market
• ensure that key staff are not lost if they are seconded to Dougal
• [further idea]
As noted, this example answer is longer than is required to pass the exam as we wanted to illustrate all available
markscheme points.
13
119
Section 3 Cutlery and Glasses
Tie-ins with celebrity chefs are common in the market and can appear to work well as PL has
benefited from an association with Lucy Tyler, so work with Eric Franks may be beneficial.
PL used to manufacture its own products but experienced problems and there would be a significant
investment of management time required to establish new business lines, including PL’s own
manufacturing operations.
Research carried out by Zoto indicates that restaurants are affected by low quality tableware so PL
may experience the ability to cross-sell to its Hospitality customers if it can produce better quality
cutlery and glasses.
3.B Cutlery
The opportunity could prevent a potential competitor (Zoto) gaining market share.
Sales would be via department stores which normally offer products at relatively high prices based on
high quality, a strategy which is fully compatible with PL’s quality ethos. PL should obtain good
margins.
Rolling out the items to all department stores could offer a good level of sales but would put pressure
on PL’s operations.
Implementing sales by the end of the year would mean PL could capitalise on high demand during
Christmas 2017 but would place pressure on PL’s operations.
PL could use this opportunity to obtain a permanent manufacturing base, using cheap financing as
the terms of the House of Lewis Foundation offer appear very attractive. However, it is unclear how
John Fraser would react to PL working so closely with a rival.
3.C Glasses
The partnership with PanOply is unlikely to fit with PL’s emphasis on quality as PL has previously
considered PanOply’s quality to be well below that of PL itself.
Although selling items via supermarkets could generate high levels of demand, supermarkets
generally offer lower-priced and lower quality products than department stores, meaning a lack of
strategic fit with PL’s quality ethos.
Offering the items on a trial basis and phasing in sales gradually would allow PL to enter the market
Launching the Glasses initiative later than the Cutlery project would allow PL more time to plan its
operations but demand in the market could change in the meantime.
The launch date, together with the apparent huge efforts to be made by PanOply and Eric Franks at
the time of the launch, would fit well with PL’s strategic plan to have a major event/strategy which
coincides with the company’s 25th anniversary (1 June 2018).
120
PanOply appears to be offering generous financial terms in relation to working capital which could
help PL’s cash flow.
However, the security demanded by Vulture Capital creates risk for PL if the project does not
succeed.
Kaster has persistently caused operational problems for PL by disputing invoices and paying cash
late. PL has now experienced another such problem with this customer. The Glasses opportunity
could therefore involve working with an unreliable partner.
charge of £37k in August and £116k in September, together with a fixed fee of £20k in September
only. If PL cannot force Kaster to pay soon, PL may have to reconsider its fixed asset purchases to
save these bank charges. Any ongoing dispute could make it impossible to work with Kaster,
threatening the Glasses opportunity.
3.D Ethics
PL is proposing to use a low-cost cutlery technique on the basis that it will allow improved quality in
other respects. If the cutlery is made dangerous in any way due to the exclusion of strengthening
chemicals, PL should not be involved. PL should confirm the status of the technique and take
independent advice. PL should use an alternative production technique to preserve quality, reputation
and safety.
A press article indicates that Kaster may not respect UK laws on sales of knives. Although PL would
not be directly at fault on such sales, it has a duty of care to protect purchasers, including children, so
it should not be associated with a company that profits from this kind of behaviour. PL should confirm
the facts as the allegation is only a press report and apparently based on the view of just one
individual but PL must insist on laws being respected and should refuse to work further with any
retailers if necessary.
The lack of UK or EU testing of glasses and related chemicals on products imported from Erehwon is
concerning. PL must be certain the products are tested and safe before putting them on sale. PL
should ensure that UK standards are respected and should consider the impact on its reputation of
breaching any legal standards in this respect.
Based on uncertainty regarding his recent projects, promises made by Eric Franks should be treated
with caution.
There is a lack of detailed financial information on these opportunities, preventing a full financial
evaluation.
3.F Impact on cash flow
Undertaking its own manufacturing will require substantial upfront investment by PL, albeit supported
by a generous loan initially.
The opportunity to implement sales quickly before Christmas 2017 could allow significant levels of
sales but would require investment of cash into inventories, with the likely level of sales being
uncertain (given that the product is new).
The requirement to make monthly loan repayments on the loan from the House of Lewis Foundation
will cause a drain on PL’s cash flows.
121
The promise of a royalty share on income from Eric Franks could help PL generate useful cash during
the initial phase of the Glasses project. Eric Franks is known to be interested in entering the market
but his popularity may be on the decline so PL may not experience a benefit from association with
him.
However, other than this there would be no cash inflows for some time as the project will not start until
halfway through June 2018.
Vulture Capital’s offer to delay payment of interest by rolling it up into a final payment helps cash flow
for PL on a monthly basis but will result in a challenging single large outflow at the end of the period: if
this cannot be met, Vulture Capital might be able to seize PL’s assets.
3.G Conclusions
charge of £37k in August and £116k in September together with a fixed fee of £20k in September
only. Any ongoing dispute could make it impossible to work with Kaster, threatening the Glasses
opportunity.
Rolling out the cutlery items to all department stores could offer a good level of sales but would put
pressure on PL’s operations.
Offering glasses on a trial basis and phasing in sales gradually would allow PL to enter the market
PL could use the cutlery opportunity to obtain a permanent manufacturing base, using cheap
financing as the terms of the House of Lewis Foundation offer appear very attractive.
PanOply appears to be offering generous financial terms in relation to working capital which could
help PL’s cash flow. However, the security demanded by Vulture Capital creates risk for PL if the
project does not succeed.
PL should not use low-cost techniques if these endanger safety.
PL should confirm the facts regarding knife sales but should refuse to work with any retailer that puts
children’s safety at risk.
PL should ensure that UK and EU rules on the testing of products are respected and so may not be
able to use the imports from Erehwon without further detailed testing.
PL should proceed with the Cutlery opportunity, provided that the ethical issues are resolved14.
PL should:
• negotiate any T&Cs further

• perform market research on the outlook for cutlery and glasses sales
• perform due diligence on all potential partners and investigate alternative partners
• obtain detailed and independent financial forecasts for the projects
14
122
• speak to PL’s bank regarding the financing of the projects as well as cash and overdraft
implications
• [further idea]
123
Mock Exam 4
Piccolo Limited –
Mock Exam 4
124
Mock Exam 4
List of Exhibits
125
Mock Exam 4
EXHIBIT 14

To: Charlie Sims
Date: 19 July 2017
Charlie,
In response to the client’s request (Exhibit 15), you should analyse and comment on PL’s
revenue, gross profit and operating profit performance (Exhibit 16) relative to the same
figures for the prior year. Please analyse the performance of PL’s 2 revenue streams as part
of your analysis. You should also evaluate PL’s performance relative to its previously provided
Budget for the year.
2. A financial assessment of a potential product recall (Exhibit 17).
Using the information provided, you should calculate the gross profit that PL should expect to
lose on its proposed recall of tableware items sold to Kaster. Please then comment on any
strategic and operational issues raised by the information provided. Finally, please evaluate
any ethical issues raised by the information provided. As part of your analysis, you should
discuss the adequacy of any assumptions provided in Exhibit 17.
3. A strategic evaluation of the opportunity to launch a new utensils range (Exhibit 18).
You should respond to the request for advice on the potential strategic and operational
benefits and risks of launching PLUtensils, a new utensils range aimed at both Retail and
Hospitality customers. You should then provide an evaluation of the different incentives
offered to PL’s advertising partners as part of your analysis. Please also explain any ethical
issues which appear to be raised by the information provided. Where appropriate, you should
provide brief calculations to support your analysis.
Important notice
The lack of any detailed information on events during the most recent year in Exhibit 15 is not a fault with this Mock – some
recent past papers (for example, November 2015 and November 2014) contained no such information and therefore required
students to rely solely on their knowledge of the Advance Information. The July 2016 Advance Information had very minimal
information on events in the year.
We have therefore tried to give you an experience of this kind of Requirement 1 in this Mock. You would not receive this kind of
message in the examination and we are providing it here purely for clarification.
126
Mock Exam 4
EXHIBIT 15
Olivia,
Piccolo has just completed a challenging year of trading and urgently requires assistance to analyse
the performance of the company, and its constituent revenue streams, over the past year. Please
provide a report on Piccolo’s revenue, gross profit and operating profit performance.
Unfortunately, due to time constraints, the Board is unable to supply any update on events during the
year so please base any explanations on what you already know about our business and the
surrounding market situation. The Board will then match this up with our knowledge of recent events
at a later date. We do need the analysis very soon: Lucy Tyler has asked for an urgent (and
unscheduled) meeting to discuss her success fee which she believes is due as a result of hard work
promoting utensils revenue, which reached around £3,100k for the year.
Many thanks and again we need this analysis soon so you will have to resort to pen and paper and
calculations by hand if necessary – as long as it is bashed out in 4 hours or so, we don’t care.
Sabrina
127
Mock Exam 4
EXHIBIT 16

£000
Revenue 1 40,631
Taxation (629)

£000
Current assets
Cash at bank and in hand 3,122
Total assets 20,955
14,997
Current liabilities
128
Mock Exam 4

£000

Adjust for:
Depreciation 128
Loss/(profit) on sale of property, plant and equipment -
Change in trade and other receivables (444)
Cash generated from underlying operations 1,658
Net cash from operating activities 1,019
Proceeds on disposal of property, plant and equipment -
Change in cash and cash equivalents 296

Cash and cash equivalents at the end of the year 3,122

2017
£000
Revenue
Hospitality 8,860
Retail 31,771
40,631
Gross profit
Hospitality 4,472
Retail 11,921
16,393
Note 2: Other costs

2017
£000

13,272
129
Mock Exam 4

equipment
£000 £000 £000 £000
Cost
At 1 June 2014 139 1,208 237 1,584
Additions - 15 - 15
Disposals - (140) (59) (199)
At 1 June 2015 139 1,083 178 1,400
Disposals - - (54) (54)
At 1 June 2016 168 1,128 135 1,431
Additions 75 642 29 746
Disposals - - - -
At 31 May 2017 243 1,770 164 2,177
Depreciation
At 1 June 2014 114 907 145 1,166
Disposals - (128) (46) (174)
At 1 June 2015 138 869 117 1,124
Disposals - - (31) (31)
At 1 June 2016 142 961 105 1,208
Disposals - - - -
At 31 May 2017 158 1,056 122 1,336
Carrying amount
At 31 May 2014 25 301 92 418
At 31 May 2015 1 214 61 276
At 31 May 2016 26 167 30 223
At 31 May 2017 85 714 42 841

2017
£000

8,239

2017
£000

5,958
130
Mock Exam 4

£000
Dougal Hotels 1,061
Ringford 1,300
3,130
Other 5,730
8,860
Retail customers

£000
Longfield 4,763
Kaster 4,581
Gullen 2,743
12,087
Other 19,684
31,771
131
Mock Exam 4
EXHIBIT 17
HIGHLY CONFIDENTIAL – Potential Product Recall
The Piccolo Board urgently requires the assistance of Ingleby Grant in a highly confidential matter.
Please help the Board to understand the potential impact of the issue described below, quantifying
the matter as far as possible and evaluating any strategic and operational issues. Please also
evaluate any ethical and business trust issues arising from the information provided.
Unfortunately, due to a high level of demand at the business, we did not carry out our last 2
inspections at Auty. Instead, these were entrusted to an external assurance provider, Checkitt &
Tickitt Ltd. Checkitt & Tickitt have unexpectedly found trace quantities of
acetlypetrotetrotetraterethyleneacarbohydrosodiumcarbotrisuplhate (ATCS), an additive designed to
reduce the brittleness of plates, in some deliveries of plates leaving the Auty factory: ATCS is believed
to be highly hazardous to health if consumed in significant quantities and it is currently illegal to sell
items which contain more than a specified maximum quantity of ATCS.
Most of the Piccolo deliveries that could have been affected were sold to Kaster over a 5 month
period from February 2017 to June 2017. Although some of the Board members state that the toxicity
of ATCS is unlikely to be high enough to warrant a product recall, we would like to forecast the
possible implications if we decide to go ahead with a recall. If we go ahead, then we will need to act
quickly and decisively to ensure that the UK regulators are reassured by our actions. RDN say they
are ready to help and we have also made an initial enquiry with Standin Logistics Limited, a specialist
in short-notice, high volume delivery processes.
The affected deliveries include both boxed sets of plates, bowls, mugs etc and also non-boxed sets
i.e. items sold to Kaster for sale on an individual basis, outside of boxed sets. For convenience, we
are terming these non-boxed sets sales as “loose sales”.
Kaster states that we supplied them with 20 orders of boxed sets per month at a cost to Kaster of
£100 per boxed set. Our own costs were £30 per boxed set for a boxed set of 4 large plates, 4 side
plates, 4 bowls and 4 cups or mugs. With respect to the loose items, we sold a mixture of 2,000 large
plates, 2,000 side plates, 2,000 bowls and 2,000 cups or mugs in total and for the purposes of your
calculation please convert these figures into the number of equivalent boxed sets and then treat all
other variables as if the items were part of a boxed set.
According to Kaster, each order contained 30 boxed sets. Kaster claims that it now cannot sell half of
the boxed sets or equivalents received: these would have been sold by Kaster for £120 per boxed set
so the gross profit not obtained on these items will constitute its lost gross profit as the items will be
scrapped for zero revenue. Kaster then claims it will have to spend an average of £150 per set
already sold as compensation and this will be recharged in full to Piccolo. Kaster then wants to
reclaim Piccolo’s gross profit on all items as a part of its own compensation.
Kaster’s legal advisers, Kannicht & Glauben GmbH, have suggested that a significant amount of
money could be due to their clients if Piccolo is found to have taken any actions that could damage
Kaster’s goodwill. Kannicht & Glauben GmbH have suggested that payment of a multiple of 50x the
gross profit lost by Kaster on items in stock which could not be sold (and not any other elements of
Kaster’s claim) would be a reasonable initial offer to settle the matter outside of court. Our advisers,
Jarndyce & Jarndyce LLP, have suggested that we could defend the case fully but have warned that
the matter could become quite protracted.
Alternatively, we may be able to offer Kaster some replacement products sourced from a different
provider, Ytua Tableware & Utensils GmbH, which is based in Germany and should therefore be safe
and of high quality.
132
Mock Exam 4
Breaking Limits is Bad Chemical Inputs Monthly June 2017
UK manufacturer Auty is understood to be under pressure from customers following revelations that
its factory facilities have been found to contain ATCS, a highly poisonous and non-banned chemical
which used to be used to provide strength to china plates.
“They seem to be breaking all the bad records here when it comes to chemical use,” said Walter
White, a renowned US toxicologist and chemical expert.
Auty vigorously contests the claims. Whilst accepting that the levels of ATCS are high, it denies that it
was responsible for the ATCS entering its factory and has suggested that a number of its own
suppliers could have used the chemical without its knowledge.
Auty Know Better Social Media Allegations Weekly June 2017
“Auty Chemicals Outrage” ranks as one of the most visited stories in this month’s top 10 social media
stories analysed by this magazine. The UK-based company stands accused of knowingly using toxic
chemicals in its attractive florally-designed plates.
“Naughty Auty,” exclaimed Peter Paronomasia. “I bet companies like Delite are delighted with this
kind of behaviour as it leaves the market wide open. If you thought the floral designs were a fashion
crime, now it seems you really do have a reason to avoid Auty’s products.”
133
Mock Exam 4
EXHIBIT 18
PLUtensils Project memo from Piccolo Board
Piccolo requires your assistance to evaluate our proposal to launch our new PLUtensils range of
utensils, for both Retail and Hospitality clients, by the start of the final quarter of this accounting year.
We will invest a significant sum in advertising, both via the use of Thor and celebrity chefs, and also
by the launch of a PLUtensils-dedicated website. We are keen to get items into the shops as soon as
possible so we will use our own facilities as storage.
We will work both with Auty, our existing supplier of utensils, but also with Unbelievably Good Utensils
Ltd (UGUL), a new start-up based in Birmingham. UGUL have already got some exciting plans for
their second birthday celebrations, to be held starting in June 2018, and we have been offered the
possibility to take part in these if we go ahead with the project.
We have not yet begun our detailed review of customer interest but we know already that Dougal
would be very interested. Other clients we believe could be interested within our Hospitality stream
include Super Stays, Happy Hotels and John Adams Restaurants. We then think that clients such as
Deafenhams, Sparks & Mencer, Tescdaburys and Humorous Name would be interested within our
Retail stream. We would expect to earn a gross margin of 35% on sales of PLUtensils.
Advertising methods – celebrity chefs (Eric Franks and Lucy Tyler)
We will invite Eric Franks to join our team with immediate effect. Eric will use the complete range of
items on his weekly cookery Masterclass, to be broadcast via YouCylinder, a leading online video-
hosting website that attracts millions of hits each day. Lucy Tyler will also produce a weekly
Masterclass and this will be shown on one of the major UK television channels, during prime time
viewing hours and then repeated again at weekends. We will then adopt one of 2 different ways of
rewarding our advertising partners (which will replace any existing arrangements):
Package 1
Thor will receive a fixed fee of £900,000 plus an additional amount of £50,000 in recognition of the
substantial amount of work required on PLUtensils.
Lucy Tyler will receive £800,000 plus a success fee of £250,000 if PL’s total revenue increases to
£44m.
Package 2
Thor will receive a fixed fee of £500,000 plus an additional amount of £750,000 if sales of PLUtensils
exceed £5m for 3 consecutive years.
Lucy Tyler will receive £500,000 plus a success fee of £700,000 if the proportion of PL’s Retail
revenue from sales of utensils reaches 15% for the year ended 31 May 2018.
(As we are not quite sure which package would work best, do not worry about doing any calculations
in relation to these options: please just provide some narrative evaluation.)
Advertising methods – other Piccolo sales staff
Other sales staff will be given a range of incentives, including generous performance bonuses if they
are able to sell tableware or cookware to purchasers of PLUtensils.
We also believe that there will be a natural synergy between PLUtensils and the time which all Piccolo
staff are required to spend each year on volunteer work in care homes and retirement villages: many
134
Mock Exam 4
of our PLUtensils are designed to reduce the force necessary to perform certain cooking activities and
are also designed to be simple to operate – perfect for the older market. Staff involved in these
activities will have 50% of their remuneration based on sales commission.
We will also publish a range of newspaper, magazine and internet advertisements in the traditional
way. Sabrina, who will be heading up the marketing and design of PLUtensils, has provided an
example advert for your review here:
Draft advertisement for PLUtensils prepared by Sabrina Kroos
We here at Piccolo pride ourselves on being in tune with the market. PLUtensils are known for their
easy-care, long-lasting, low-cost and versatile nature. Our exciting new range of PLUtensils provide
easy to use items for your complete range of culinary needs and have been made to our exacting and
innovative specifications by UK manufacturers.
Lifetime guarantee!
We here at Piccolo are so confident in the quality of our PLUtensils that we are pleased to offer a
market-leading lifetime guarantee on all purchases, subject to a reasonable level of use (to be
determined by PLUtensils staff at our sole discretion). (Other limitations available on request. PL
reserves the right to add further limitations if deemed necessary.)
Financial forecasts prepared by Unbelievably Good Utensils Limited
Based on our research, during the first year of operations, we believe that PL could sell 250,000
PLUtensils items to Hospitality customers at an average price of £7.50. PL could sell 500,000
PLUtensils items to Retail customers at an average price of £5.
Based on these figures, we hope you agree that there is nothing ugly about the opportunity to work
with UGUL.
Peter Prognostication, Managing Director, Unbelievably Good Utensils Limited
Unbelievably good? You’d better believe it! Celebrating 12 months in business in June 2017
A simmering rivalry? Prima Donnas Today Magazine (June 2017)
Strong rumours continue to circulate that all is not well in the world of celebrity chefery. The renowned
celebrity chef Aaron Swepson has allegedly refused to have anything further to do with fellow
professional Eric Franks after Swepson accused Franks of rehashing simple and straightforward
recipes in his latest TV series Simply Eric. “Avocado on toast??? What’s next?” fumed Swepson,
“Phaseolus vulgaris on a bed of panne brûlée with a tomato jus? Pretentious twaddle. Eric always has
been extremely difficult to work with but now he is becoming extremely difficult to take seriously.”
Franks responded that Swepson’s allegations were made on the same day that Swepson’s stepson,
Heston, was thrown out of cookery college for attempting to caramelise some toffee icecream with a
blowtorch. Swepson has stepped in to defend his stepson by claiming that there is nothing wrong with
a bit of innovation in the kitchen. “Better than avocado on toast, anyway,” fumed Swepson.
Prima Donnas Today Magazine – Definitely the best in the market (what did you expect us to say?)
135
Mock Exam 4 Answers
Piccolo Limited –
136
Mock Exam 4 Answers
Appendix 1

Revenue £000 £000
Hospitality 8,860 8,837 23 0.3%
Retail 31,771 32,876 (1,105) -3.4%
Total 40,631 41,713 (1,082) -2.6%
2017 2016
Revenue mix % %
Retail 78.2% 78.8%

Hospitality 4,472 4,345 127 2.9%
Retail 11,921 11,974 (53) -0.4%
Total 16,393 16,319 74 0.5%
2017 2016 Change

Hospitality 50.5% 49.2% 1.3
Retail 37.5% 36.4% 1.1
Total 40.3% 39.1% 1.2

£000 £000
Operating profit 3,121 3,163 (42) -1.3%
2017 2016 Change

% %
Operating profit margin 7.7% 7.6% 0.1
2017 2016 Change Change % 2017 2016

Other costs £000 £000 % of Revenue % of Revenue
Sales and distribution 4,065 4,034 31 0.8%
Product innovation and design 2,163 2,153 10 0.5%
Advertising and marketing 4,094 4,038 56 1.4% 10.1% 9.7%
Administration and support 2,950 2,931 19 0.6%
Total 13,272 13,156 116 0.9%
Client analysis
Hospitality revenues £000 £000
Dougal Hotels 1,061 1,056 5 0.5%
Ringford 1,300 1,299 1 0.1%
Quincy Restaurants 769 766 3 0.4%
Other 5,730 5,716 14 0.2%
Total 8,860 8,837 23 0.3%

Longfield 4,763 4,889 (126) -2.6%
Kaster 4,581 4,720 (139) -2.9%
Gullen 2,743 2,872 (129) -4.5%
Other 19,684 20,395 (711) -3.5%
Total 31,771 32,876 (1,105) -3.4%
Exam Tip
137
Mock Exam 4 Answers
£000 £000
Revenue
High 40,631 45,000 (4,369) -9.7%
Low 38,000 2,631 6.9%
Gross profit
High 16,393 18,000 (1,607) -8.9%
Low 12,500 3,893 31.1%
Other costs
High 13,272 14,000 (728) -5.2%
Low 12,000 1,272 10.6%
Operating profit
High 3,121 4,000 (879) -22.0%
Low 500 2,621 524.2%
High 8,860 10,000 (1,140) -11.4%
Low 7,000 1,860 26.6%
Revenue - Retail
High 31,771 35,000 (3,229) -9.2%
Low 31,000 771 2.5%

High 4,472 5,000 (528) -10.6%
Low 3,000 1,472 49.1%

High 11,921 13,000 (1,079) -8.3%
Low 9,500 2,421 25.5%
138
Mock Exam 4 Answers
Appendix 2
PL profit on affected sets
Boxed sets per order (Exh 17) 30

x orders per month (Exh 17) 20
Total boxed sets supplied per month 600 [30 x 20]
x months of supply (Exh 17) 5
Total boxed sets supplied 3,000

Plus "equivalent boxed sets" 500 [2,000 / 4 items per set (Exh 17)]
Total affected boxed sets 3,500
PL sales price per boxed set (Exh 17) 100

x affected boxed sets 3,500
PL revenue (£) 350,000
PL costs per boxed set (£) (Exh 17) 30

x affected boxed sets 3,500
PL costs (105,000)
PL gross profit 245,000
Kaster lost GP
Boxed sets in stock which cannot be sold (Exh 17) 1,750 [3,500 x 50%]
Kaster revenue on sets which cannot be sold 210,000 [1,750 x 120 (Exh 17)
Kaster costs on sets which cannot be sold (175,000) [1,750 x 100 = PL sales price (Exh 17)]
Kaster lost GP 35,000
Kaster compensation recharged
1,750 units x £150 (Exh 17) 262,500
Total Kaster claim
Kaster compensation to customers recharged to PL 262,500

Kaster loss of GP 35,000
Piccolo GP claimed by Kaster as compensation 245,000
Total before payment to prevent court action 542,500
Multiple of Kaster GP claimed by Kaster to prevent court action 1,750,000 [35k lost GP x 50 multiple (Exh 17)]
Total including payment to prevent court action 2,292,500
an error.
139
Mock Exam 4 Answers
Appendix 3
Hospitality
Items (Exh 18) 250,000

x sales price (£) (Exh 18) 7.5
Revenue (£000) 1,875

x GP margin (Exh 18) 35%
Gross profit (£000) 656.25
Retail
Items (Exh 18) 500,000

x sales price (£) (Exh 18) 5
Revenue (£000) 2,500

x GP margin (Exh 18) 35%
Gross profit (£000) 875
Revenue as % of PL Retail for YE 31 May 2017 (Exh 16) 7.9% [£2,500k / £31,771k]
Total revenue (£000) 4,375
Total GP (£000) 1,531.25
an error.
introduce errors.
140
Mock Exam 4 Answers

♦ Revenue comment with figures ♦ Calculates claim before 50x multiple with figures
♦ GP comment with figures ♦ Calculates claim after 50x multiple with figures
♦ OP comment with figures ♦ Professional scepticism on assumptions
♦ Budget analysis with figures ♦ Must proceed with recall if product unsafe
♦ PL suffering from general market trends ♦ Concludes on way forward
♦ Hospitality not too bad – Retail concerning ♦ Could affect PL’s reputation
♦ Investigate Retail – Other revenue category ♦ Kaster advisers may not be independent
♦ Integrate analysis of recent events ♦ Other commercial recommendations

E.5 Description
♦ Concludes / comments on benefits
♦ Concludes / comments on risks
♦ Significant revenue at 7.9% of Retail YE 31 May 2017
♦ Other recommendations
141
Mock Exam 4 Answers

♦ Total revenue: down £1,082k AND 2.6%
♦ Total GP: up £74k AND 0.5%
♦ Total GPM: up from 39.1% to 40.3% AND up 1.2 percentage points
♦ Total revenue versus Budget: £4,369k AND 9.7% below High (or comparison to Low)
♦ Total GP versus Budget: £1,607k AND 8.9% below High (or comparison to Low)

♦ Comparison to PL own estimates (+7.5%/-2.5% (p38)) OR market (+>10%/-5% (p39))
♦ Hospitality revenue dropped 5% in PY* (p19) – good performance this year
♦ Retail revenue grew almost 9% in PY* (p13, p19) – very poor performance this year
♦ Retail revenues should be more stable than Hospitality (p13)
♦ Gullen expected to continue to grow (p19) – has not done so

♦ Hospitality: up marginally £23k AND 0.3%
♦ Retail: down significantly £1,105k AND 3.4%
♦ Hospitality revenue mix : marginal movement from 21.2% to 21.8%
♦ Retail revenue mix: marginal movement from 78.8% to 78.2%
♦ As revenue fell, it is impossible for Lucy Tyler to earn a success fee
♦ Hospitality: up significantly £127k AND 2.9%
♦ Retail: down marginally £53k AND 0.4%
♦ Hospitality GPM: up significantly from 49.2% to 50.5%
♦ Retail GPM: up significantly from 36.4% to 37.5%
♦ OP: down significantly £42k AND 1.3%
1.5 Budget analysis – figures

♦ Other costs: correct figures versus High or Low per App 1 (£k AND % change)
♦ Hospitality – rev: correct figures versus High or Low per App 1 (£k AND % change)
♦ Hospitality – GP: correct figures versus High or Low per App 1 (£k AND % change)
♦ Retail – rev: correct figures versus High or Low per App 1 (£k AND % change)
♦ Retail – GP: correct figures versus High or Low per App 1 (£k AND % change)
Note – we have termed several of the GP and OP movements as “significant” because they are
significant given other changes: for example, revenue has declined but Hospitality GP has increased
by £127k which is a significant performance in context. Similarly, GP has risen so it is therefore
significant that OP has declined by 1.3%.
* PY = prior year
142
Mock Exam 4 Answers
Applying Judgement
1.6 Evaluation of revenue
♦ Retail decline more than offsets Hospitality – Retail larger fall and large revenue share
♦ Hospitality flat – hotels/restaurants delaying major investment due to Brexit?
♦ Kaster decline – European supermarket – Brexit? Or PanOply?
♦ Gullen down significantly due to ongoing discounting? Also affects GPM
♦ Utensils approx. 10% Retail sales (3,100/31,771*) – similar to prior year
1.7 Evaluation of GP and OP

♦ GPM and revenue moving in opposite directions – significant change in product mix
♦ PL GPM up – move towards higher margin Hospitality in revenue mix
♦ Retail GPM up despite good level of utensils sales (lowest margins) – impressive
♦ Advertising close to normal 10% of rev. (p23) – Thor and Lucy Tyler fees largely fixed
♦ All Other costs increased despite revenue decline – weak overhead control
1.8 Budget analysis – evaluation

♦ Other costs: generally increasing despite revenue fall – not flexing costs
♦ Hospitality – rev.: all customers grew but only marginally so well below High budget
♦ Hospitality – GP: below High budget by similar percentage to revenue
♦ Retail – revenue: decline in all clients pushes close to Low budget – disappointing
♦ Retail – GP: growth in GPM helps stay well clear of Low budget – better than revenue
♦ Revenue and GP shortfalls from High similar but growth in Other costs has hit OP

♦ Results for the year: disappointing year but in line with tough market – Retail a concern
♦ GP and OP: comment AND comparative figure
♦ Budget: comment AND figure

♦ Integrate analysis with current year events as soon as possible
♦ Review Other costs to identify cost savings
♦ Review size of fixed fee (or fixed nature of fee) regarding Thor
♦ Speak to Lucy Tyler as soon as possible to protect crucial relationship
♦ Discuss position with Kaster and Gullen/offer amended terms
* £3,100k per Exhibit 15 and £31,771k Retail revenue per Exhibit 16
143
Mock Exam 4 Answers
Requirement 2 markscheme – financial evaluation (Product Recall)

♦ 600 boxed sets affected per month AND 2,000 loose items of each type affected
♦ Number of months 5
♦ PL sales price £100 AND PL purchase cost £30
♦ Kaster sales price £120 AND “goodwill” multiplier as 50x

♦ Competitive market with new entrants (p22) OR comparison to relevant R1 figures
♦ Auty is secondary manufacturer of Tableware and primary for Utensils (p31) – wide impact
♦ PL has had product recalls in the past but not since 2009 (p29)
♦ Timescale: requires immediate decision and implementation – no time to plan
♦ PL has had a poor year per R1 – cannot afford too much reputational damage

2.3 Calculation results
♦ PL gross profit £245,000
♦ Kaster claim before payment to prevent court action £542,500
♦ Kaster claim after payment to prevent court action £2,292,500
♦ Notes that could be other costs to consider with example
2.4 Ethics – issues and evaluation

♦ Some PL Board members are proposing not to recall a potentially unsafe product
♦ PL Board must not put profits ahead of safety
♦ Confirm all facts and must proceed with product recall if products unsafe
♦ PL appears not to be inspecting on a regular basis
♦ Lack of integrity and honesty as PL holds itself out as inspecting regularly (p31)
♦ Resume factory inspections immediately and make up for inspections missed

♦ Number of boxed sets in an order: appears high as a “typical” order is 10 (p21)
♦ PL sales price per boxed set: appears high as £100 is typical for specialist Longfield (p21, p30)
♦ PL purchase cost: appears low as typical cost is £60 (or 60% of sales price) (p21)
♦ Kaster sales price: margin appears low as Longfield would mark up by 50% (p21)
♦ Loose items: normally all inputs are very different compared to boxed sets (p21)
♦ Most data from Kaster – reliable, given past PL problems? (p30)
The terms Checkitt & Tickitt, ATCS, Standin Logistics, Kannicht & Glauben, Jarndyce & Jarndyce,
Ytua Tableware & Utensils have been invented for the purposes of this Mock and are not contained in
the Advance Information. Do not use these names in your answer to the real examination on 19 July
2017.
144
Mock Exam 4 Answers
Requirement 2 markscheme – financial evaluation (Product Recall) R2_2
Applying Judgement
♦ Could have significant impact on PL reputation and future profitability
♦ Possible impact on relations with other customers/suppliers
♦ Impact on key Auty relationship – supplies 2 PL product lines (p31)
♦ Switching to Ytua would mean extensive non-UK dependence
♦ Court dispute (Exh 17) could drag on and result in negative publicity
♦ Regulation risk identified as key risk for PL (p37)
2.7 Operational issues

♦ Impact on other products and streams
♦ High management time/staff time
♦ Impact on RDN’s operations needs to be considered
♦ PL has a process in place to deal promptly (p29) so ensure process used
♦ Unknown quality/reliability of StandIn Logistics
♦ Consider calculating a range of scenarios (sensitivity) to plan better
2.8 More complex points on assumptions/practical impact

♦ Number of boxed sets in an order: impact is to increase Kaster’s claim
♦ PL sales price per boxed set: impact is to reduce Kaster’s claim
♦ PL purchase cost: cheaper for supermarket? OR increases Kaster’s claim
♦ Kaster sales price: impact is to reduce Kaster’s claim
♦ Comparing to L’field, a kitchenware specialist (p30), may not be comparable
♦ Kaster could be overstating case to obtain high “loss of goodwill” payment

♦ Concludes on assumptions/professional scepticism
♦ Concludes on strategic AND operational issues AND ethics

♦ Confirm all model inputs for reasonableness
♦ Discuss matter further with Kaster
♦ Discuss implications with RDN as quickly as possible/suspend Target Rate?
♦ Obtain additional legal advice as soon as possible
♦ Consult with PR advisers to limit impact on PL’s reputation
The terms Checkitt & Tickitt, ATCS, Standin Logistics, Kannicht & Glauben, Jarndyce & Jarndyce,
Ytua Tableware & Utensils have been invented for the purposes of this Mock and are not contained in
the Advance Information. Do not use these names in your answer to the real examination on 19 July
2017.
145
Mock Exam 4 Answers
Requirement 3 markscheme – strategic evaluation (PLUtensils)

♦ Uses unit figures per Exh 18
♦ Uses sales price per Exh 18
♦ Calculates revenue and GP for both Retail and Hospitality
♦ Queries 35% GPM – quite high for utensils?
♦ Assesses versus 15% Retail revenue target (p37) (excl Hospitality sales)
♦ Professional scepticism (e.g. new product/limited financial information)

♦ “Easy-care”, “long-lasting”, “low-cost” and “versatile” are key factors (p8)
♦ Online sales increasingly important (p8) OR specialists entering (p22)
♦ Utensils low margin for PL (p13) OR no opportunity to advertise brand (p21)
♦ PL strategic aim to increase utensils to 15% of Retail revenue (p37)
♦ PL has 1 utensils supplier (p31) – usually prefers to have alternatives (p37)

3.3 Issue 1 – Benefits (Strategic and operational)
♦ PL has a strategic emphasis on cross-selling (p9, p37)
♦ Dougal is a major client – enhances relationship
♦ PL does not sell utensils to Hospitality customers (p13) so diversifies
♦ UGUL based in Birmingham (Exh 18) like PL (p11) – cost and time savings
♦ Could diversify supplier base, reducing risk
♦ Media and advertising (Exh 18) could have an impact on other PL sales
3.4 Issue 2 – Risks (Strategic and operational)

♦ Design normally handled by Daniel Lejeune (p11)
♦ Eric Franks/Aaron Swepson impact on Lucy Tyler (Exh 18) but only press
♦ Selling utensils to Hospitality customers involves a lot of hassle (p13, p21)
♦ Storage in Birmingham possible? Already stores 5% inventory (p21)
♦ No prior experience of working with Eric Franks – recent problems (p39)
♦ No prior experience of working with UGUL, which is a startup (Exh 18)

♦ PL is making a promise to customers with the lifetime guarantee
♦ List of exceptions seems unclear/discretionary – could lack integrity
♦ Adding further restrictions could lack transparency
♦ PL unfairly using “volunteer” time to make sales
♦ Purchasers may be vulnerable/not know full facts – duty of care
♦ PL might give an incentive for pressure sales tactics
Note – the terms PLUtensils, UGUL, Super Stays, Happy Hotels, John Adams Restaurants,
Deafenhams, Sparks & Mencer, Tescdaburys, Humorous Name, YouCylinder and Peter
Prognostication have been invented for the purposes of this Mock and are not contained in the
2017.
Note – the Advance Information does not specifically indicate that PL volunteers work at “retirement
villages” but page 24 does specifically mention that meals are served at “care homes” so we have just
slightly expanded this idea for the purposes of this Mock.
146
Mock Exam 4 Answers
Requirement 3 markscheme – strategic evaluation (PLUtensils)
Applying Judgement
3.6 Issues 1 & 2 – Further benefits & risks (strategic and operational)
♦ Emphasis on “Other” clients in both Retail and Hospitality – diversifies
♦ Able to capitalise on Christmas demand
♦ Second birthday celebrations would coincide with 25th anniversary plans (p37)
♦ Significant impact on management/staff time OR short set up period
♦ New supplier also UK-based – could bring advantages
♦ Dedicated IT website could be expensive/fail – set up costs
3.7 Advertising remuneration packages – evaluation

♦ Packages remain revenue-based – what about margin on sales?
♦ Thor – Package 1 – no savings on fixed fee but £50k (Exh 18) very low (p23)
♦ Thor – Package 2 – sales and long-term incentive but low fixed fee unattractive?
♦ Lucy Tyler – Package 1 – better than current but not linked to PLUtensils
♦ Lucy Tyler – Package 2 – closer connection to PLUtensils but no Hosp incentive
♦ No indication of Eric Franks’ remuneration – likely to require something

♦ PL must be honest with customers and fulfil commitments – reputation
♦ PL should make terms clearer and ensure limitations are understood
♦ Do not launch adverts until properly reviewed by legal advisers
♦ Ensure “voluntary” or community work is genuinely of this type
♦ Dropping sales within care homes and retirement villages – reputation
♦ Adjust remuneration package to reduce pressure tactics

♦ Concludes on strategic/operational issues AND remuneration packages

♦ Confirm all costings and figures to independent information
♦ Due diligence on new partners OR review experience with existing partners
♦ Market research on outlook for utensils sales in the UK
♦ Legal advice on lifetime guarantee
Note – the terms PLUtensils, UGUL, Super Stays, Happy Hotels, John Adams Restaurants,
Deafenhams, Sparks & Mencer, Tescdaburys, Humorous Name, YouCylinder and Peter
Prognostication have been invented for the purposes of this Mock and are not contained in the
2017.
Note – the Advance Information does not specifically indicate that PL volunteers work at “retirement
villages” but page 24 does specifically mention that meals are served at “care homes” so we have just
slightly expanded this idea for the purposes of this Mock.
147
Mock Exam 4 Answers
♦ Figures are as required by question – Budget ♦ Correctly numbered pages
♦ Logical approach and numbers clearly derived ♦ Relevant disclaimer AND report from Ingleby Grant
♦ Calculates claim before 50x multiple ♦ Tactful/ethical comments
♦ Calculates claim after 50x multiple ♦ Reasonable spelling/grammar
148
the examination.
Ingleby Grant
19 July 2017
149
Executive Summary
PL has had a disappointing year suffering a concerning fall in Retail revenues but the market is
currently tough and PL has at least avoided its Low budget estimates by some margin.
Revenue declined significantly by £1,082k (2.6%) from £41,713k to £40,631k and was therefore in
line with PL’s own estimate of a Low outcome but better than market fears of a decline of 5% in the
market.
Hospitality revenue was up marginally by £23k (0.3%) from £8,837k to £8,860k, representing good
performance as Hospitality revenue dropped 5% in the prior year. The flat performance may be due to
hotels and restaurants delaying major investments due to uncertainties relating to Brexit.
Retail revenue was down significantly by £1,105k (3.4%) from £32,876k to £31,771k, representing
extremely poor performance as Retail revenue grew almost 9% in the prior year. Retail revenues are
expected to be more stable than Hospitality so it is worrying to see the year-on-year variance here.
The decline in the “Other” category of Retail revenue was particularly significant and should be
investigated through a more detailed analysis by client.
GP increased marginally by £74k (0.5%) from £16,319k to £16,393k despite the decline in revenue.
GPM increased significantly from 39.1% to 40.3% or 1.2 percentage points which may be partly due
to a move in the revenue mix towards Hospitality, which has a higher gross profit margin than Retail.
The fact that GPM and revenue have moved in opposite directions suggests there has been a
significant change in PL’s product and customer mix.
Overall, revenue and GP fell below the High estimate by approximately equal percentages but the
high increase in Other costs hits OP and leads to a decline of £42k (1.3%) from £3,163k to £3,121k
despite GP increasing, representing poor and concerning performance.
PL should:
• integrate Ingleby Grant’s analysis with an understanding of current year events

• review Other costs to identify cost savings
Section 2 Product recall
PL has earned gross profit of £245k on the items that may have to be recalled and Kaster has
threatened to claim this plus its own lost GP of £35k and recharged compensation of £262.5k, a total
of £542.5k. This does not appear to be a material amount to PL.
However, if PL were to pay the additional amount suggested by Kaster’s legal advisers then the total
cost would increase significantly to a material £2,292.5k. PL should consider whether such an amount
is reasonable as it has been suggested by Kaster’s legal advisers who may understandably be acting
to benefit their client.
The number of boxed sets in each order appears high as a typical order would contain 10. The impact
is to increase Kaster’s claim by increasing the number of units affected.
150
Normally, PL and its retail client achieve a very different level of sales price and margin on items not
in a boxed set so the methodology of calculating the number of “equivalent boxed sets” may be
flawed.
The issue could also impact on relations with other customers and suppliers if PL loses its reputation
for dealing appropriately with customers and for inspecting suppliers properly.
It will be helpful to work with RDN as a known and trusted supplier but this could create a negative
impact on RDN’s standard operations for PL.
PL must recall products which are unsafe and which breach UK law so must proceed with a recall if the
levels of chemical exceed permitted levels.
PL must ensure that it maintains its regular inspections, given that it holds itself out to the market as a
responsible company that demands high standards from suppliers.
PL should proceed with a recall if necessary but should not make any payments to Kaster until all facts
have been confirmed independently15.
PL should:
• confirm all model inputs for reasonableness

• consult with Public Relations advisers to limit the impact on PL’s reputation
Section 3 PLUtensils
Based on UGUL’s figures, revenue of £4,375k and GP of £1,531.25k would be possible in year 1. The
Retail revenue of £2,500k would make a substantial impact on PL’s aim to earn 15% of Retail
revenue from utensils sales by 31 May 2018 as Retail revenue under the project is equivalent to 7.9%
of PL’s Retail revenue from the latest accounts.
PL currently has a strategic emphasis on cross-selling so the proposed remuneration strategy for
sales personnel has a strategic fit.
PL has no prior experience of working with UGUL, a recent start-up company, so both these factors
could lead to operational difficulties.
Both proposed advertising packages remain revenue-based, in line with PL’s existing approach. This
may neglect the importance of achieving a good margin on sales to make the activity worthwhile,
particularly as utensils generate a low margin for PL.
PL should ensure that its lifetime guarantee promise is fair and transparent, without unreasonable use
of discretion being made.
PL should abandon its plans to use “volunteers” to sell products as this is an inappropriate use of time
intended to be non-commercial. The target market of such activities is vulnerable so PL’s reputation
will suffer if it abuses its duty of care.
15
151
PL should not proceed with the project as there is insufficient information available and the project
seems to be rushed, with major ethical concerns16.
PL should:
• confirm all costings and figures to independent information

• perform market research on the outlook for utensils demand in the UK
16
152
[Note (not for inclusion in your answer) – in this model answer we have dropped the Market
Background section because of the lack of events during the year in the client information: as such,
all comments that you make need to relate to the Advance Information and so there is no need for a
separate Market background section. Please do not forget to include your own research (with a brief
source in brackets) somewhere in your answer.]
1.A Revenue
market. As PL’s revenue for the year fell, Lucy Tyler cannot qualify for her success fee as this
required an increase up to £44 million.
The Hospitality revenue mix share increased marginally from 21.2% to 21.8%.
Additionally, revenues from Gullen were expected to grow further as the company opened more
outlets but revenue from this customer actually fell by £129k (4.5%) from £2,872k to £2,743k in the
year. PL may have continued its ongoing level of discounting to this client, without seeing any volume
increase.
Revenue from Kaster also declined by £139k (2.9%) from £4,720k to £4,581k which could represent
the impact of PL’s competitor PanOply in a market which is becoming more price conscious and/or
the decisions of a European supermarket to change its level of activity due to Brexit.
The Retail revenue mix share decreased marginally from 78.8% to 78.2%.
The decline in retail revenue more than outweighs the increase in Hospitality as the Retail fall was
larger in absolute terms and Retail has a higher proportion of the revenue mix.
Utensils sales as a proportion of Retail revenue were approximately 10% (£3,100k/£31,771k), similar
to the prior year and not suggesting significant progress towards the 15% target by 31 May 2018.
1.B Gross profit and operating profit
significant change in PL’s product and customer mix. The GPM movement may also be due to a
reduced level of trading with Gullen, which receives an increasing level of discounting from PL.
Hospitality GP increased significantly by £127k (2.9%) from £4,345k to £4,472k and Hospitality GPM
was up significantly from 49.2% to 50.5%.
153
Retail GP was down marginally by £53k (0.4%) from £11,974k to £11,921k and Retail GPM was up
significantly from 36.4% to 37.5%. The increase in GPM is impressive given that PL has had a good
level of sales of utensils, which have the lowest margins of all PL’s products.
Advertising costs are close to the usual 10% of revenue (10.1% this year) which could reflect the fact
that the fees to Lucy Tyler and Thor are largely fixed in nature and so cannot be flexed downwards
when revenue performance is poor.
All the other items in Other costs increased, despite a decline in revenue, indicating weak control of
overheads.
1.C Comparison to budget
Revenue was £4,369k (9.7%) below the High budget figure whilst GP was £1,607k (8.9%) below the
High budget figure, reflecting a challenging market and PL’s unexpected drop in Retail revenue.
Other costs were only £728k (5.2%) below the High estimate, showing a significant increase despite
the fall in revenue so PL has not been able to flex these costs.
Hospitality revenue was £1,860k (26.6%) above the Low estimate as a result of its only moderate
increase, therefore falling well above the assumptions in the Low budget. All Hospitality clients saw an
increase in revenue but this was only marginal so PL fell £1,140k (11.4%) short of the High estimate.
Hospitality GP was £1,472k (49.1%) above the Low estimate as a result of a significant increase in
GPM (above). PL fell below the High estimate by £528k (10.6%) which was essentially in line with the
shortfall in revenue for this stream, again indicating that GPM performance was good.
Retail revenue fell £3,229k (9.2%) below the High estimate as a result of the decline in all clients,
including the Other category, representing disappointing performance which was close to the Low
estimate. However, Retail GP was £2,421k (25.5%) clear of the Low estimate as a result of the growth
in GPM so performance here appears to be better than revenue.
1.D Conclusions
PL has had a disappointing year suffering a concerning fall in Retail revenues, but the market is
currently tough and PL has at least avoided its Low budget estimates by some margin.
market.
154
significant change in PL’s product and customer mix.
1.E Commercial Recommendations
PL should:
• integrate Ingleby Grant’s analysis with an understanding of current year events

• review Other costs to identify cost savings
• review the size of the fixed fee and/or fixed fee nature of advertising payments to Thor
• speak to Lucy Tyler as soon as possible to protect this crucial relationship, given that Lucy
Tyler will not receive a success fee this year, despite her efforts
• discuss the position with Kaster and Gullen and consider offering these clients amended terms
• [further idea]
155
Section 2 Product Recall
The market is currently very competitive with several new entrants so customers are likely to switch
away from PL if this matter is not handled well.
PL requires an immediate decision in order to implement its plans, reducing the time to plan
effectively.
PL has had a disappointing year based on the most recent financial results so it can ill afford to suffer
reputational damage and the further loss of sales and profitability that could result from a product
recall.
is reasonable as it has been suggested by Kaster’s legal advisers.
PL has sufficient cash reserves to pay the amount (assuming these are largely unchanged from the
year ended 31 May 2017) but this would not leave PL with much cash for other projects, nor to pay
any additional legal fees not considered in the model.
The number of boxed sets in each order appears high as a typical Retail order would contain 10 sets.
The impact is to increase Kaster’s claim by increasing the number of units affected.
The PL sales price per boxed set appears high: £100 would be typical on sales to a specialist retailer
such as Longfield and a specialist would achieve a higher sales price than a supermarket such as
Kaster. Presumably PL should be able to determine what its own sales price was, rather than relying
on what Kaster has claimed.
The PL purchase cost appears low as the typical cost of a set sold by PL for £100 would be £60
(equivalent to 60% of the sales price). However, this could result from the items being sold to a
supermarket which would sell cheaper items than a specialist such as Longfield. The impact of this
assumption is to increase Kaster’s claim.
The margin on the Kaster sales price appears low as Longfield would normally mark up the items by
50% but Kaster’s mark-up is lower. The impact is to reduce Kaster’s claim, perhaps suggesting that
the PL sales price per boxed set is overstated.
Normally, PL and its retail clients achieve a very different level of sales price and margin on items not
flawed.
Most of the data in the model is provided by Kaster who could have a self-interest in overstating the
monetary value in order to obtain a high “loss of goodwill” payment. PL has already experienced
156
problems in dealing with Kaster and such a disputatious customer may not be an entirely reliable
source of information.
2.D Strategic, operational and ethical issues
There will likely be a negative impact on the relationship with Auty unless PL takes appropriate action.
This would be a problem as Auty is PL’s current supplier of utensils, as well as being a secondary
supplier of Tableware.
Switching to Ytua Tableware and Utensils might be helpful in the short term but it would leave PL with
extensive dependence on non-UK suppliers, contrary to its strategic plans – it would be left with only
Delite as a UK supplier.
A court dispute with Kaster could drag on for some time and result in considerable negative publicity
for PL.
Regulation risk has been identified as a key risk for PL so any problems in relation to safety and
factory inspections could be serious.
Dealing with the product recall is likely to take up a large amount of management and staff time, which
could impact on PL’s other products and revenue streams.
impact on RDN’s normal operations for PL.
Although PL has not suffered a product recall since 2009, it has a process in place to deal with such
issues and so should ensure this process is used effectively.
PL has no assurance regarding the quality or reliability of Standin Logistics as PL has never worked
with this company before. It may be inadvisable to gain their first experience of this provider in an
emergency situation.
The financial model developed here has a number of shortcomings (above) and many variables are
unknown so PL may wish to calculate a range of different scenarios or perform sensitivity analysis to
plan its operations in a better way.
Ethics
Some PL Board members are proposing not to recall a potentially unsafe product, even though the
party allegedly at fault (Auty) fully accepts that high levels of the chemical have been found on its
premises. The PL Board must not put profits ahead of consumer safety. PL should confirm the facts
but must proceed with a product recall if any unsafe levels of the chemical could potentially have
entered its products.
PL appears not to have been inspecting its suppliers on a regular basis which would lack integrity and
honesty as PL holds itself out as company which carries out regular inspections and which respects
safety at all times. PL should resume its factory inspections immediately and make up for any
inspections missed, including at other suppliers.
157
2.E Conclusions
is reasonable as it has been suggested by Kaster’s legal advisers.
The number of boxed sets in each order appears high as a typical order would contain 10 sets. The
impact is to increase Kaster’s claim by increasing the number of units affected.
Normally, PL and its retail clients achieve a very different level of sales price and margin on items not
flawed.
impact on RDN’s standard operations for PL.
PL must recall products which are unsafe and which breach UK law so must proceed with a recall if the
levels of chemical exceed permitted levels.
PL must ensure that it maintains its regular inspections, given that it holds itself out to the market as a
responsible company that demands high standards from suppliers.
PL should proceed with a recall if necessary but should not make any payments to Kaster until all facts
have been confirmed independently17.
PL should:
• confirm all model inputs for reasonableness

• discuss the matter further with Kaster
• discuss the implications with RDN as quickly as possible and consider suspending the Target
Rate temporarily
• obtain additional legal advice as soon as possible
• consult with Public Relations advisers to limit the impact on PL’s reputation
• [further idea]
17
158
Section 3 PLUtensils
Online sales are increasingly important in PL’s market so the suggestion to implement a dedicated
website could be beneficial, provided that it does not have high setup costs and that failures can be
prevented.
PL has traditionally not sold utensils to Hospitality customers so the opportunity could diversify
revenues: the advertising of the products via cookery Masterclasses could overcome PL’s traditional
concern that utensils are not normally seen by the public and so cannot promote its brand.
A number of specialist utensils suppliers have recently entered the market so PL will face strong
competition.
Although PL’s strategy is based on having alternative suppliers for its products, PL currently only has
a single supplier for utensils so the opportunity to start working with UGUL could diversify its supplier
base, reducing risk.
Customers are known to prefer products which are “easy-care”, “long-lasting”, “low-cost” and
“versatile” so there is a perfect match between the terminology in PL’s draft advertisement and market
demand.
3.B Benefits
Dougal Hotels is currently one of PL’s largest Hospitality customers so it would be good to enhance
this relationship.
UGUL is based in Birmingham, close to PL, which could reduce operational costs and time.
The media and advertising efforts in relation to PLUtensils would surely have a spillover effect on PL’s
other products as the plans seem ambitious and would reach a large audience.
There appears to be interest from outside both PL’s top 3 Retail clients and top 3 Hospitality clients,
diversifying PL’s sales.
If implemented on time, sales could capitalise on Christmas demand.
As UGUL would be celebrating its second anniversary at a similar time to PL celebrating its 25th
anniversary, there could be some opportunities for a major marketing event, in line with PL’s strategic
plan (provided that a joint event does not detract from the benefit to PL specifically).
However, the 35% GPM appears quite high for utensils as it is not far off PL’s other products which
have higher margins than utensils.
159
3.C Risks
Design of items is normally handled by Daniel Lejeune so there is a risk that Sabrina Kroos may not
manage this project effectively.
As Lucy Tyler was tutored by Aaron Swepson, the apparent dispute between him and Eric Franks
could cause a problem if Eric Franks joins the PL team: this could damage the relationship with Lucy
Tyler, who is crucial to PL’s current marketing efforts.
PL has previously resisted selling utensils to Hospitality customers on the basis that it involves a lot of
hassle relative to the low margin earned (compared to other products) and it is unclear why this would
be any different with the PLUtensils project. Utensils also offer limited advertising opportunities if they
are not seen outside the kitchen.
PL already stores around 5% of the inventory recorded in its financial statements at its Birmingham
centre so it is not clear if there would be space for a major amount of inventory relating to PLUtensils.
PL has no prior experience of working with Eric Franks who, according to previous press reports, has
been involved with a failed restaurant venture recently. Eric Franks may not be effective and there
could be time lost developing a relationship with him.
The major marketing and sales efforts required on PLUtensils would take up a significant amount of
management and staff time and could have an opportunity cost for other PL projects.
The set up period is quite short for a new product involving multiple partners so there is a risk of
operational difficulties or mismanagement.
3.D Ethics
PL is making a promise to customers through its lifetime guarantee. However, the list of exceptions
seems unclear and discretionary so it would lack integrity for PL to attempt to make sales based on a
guarantee that it will then try not to honour. Adding further restrictions at a later date may not be
transparent if customers are not made aware.
PL must be honest with customers by fulfilling its commitment to a lifetime guarantee and should
make its terms clearer, ensuring limitations are properly understood. PL should not launch its current
adverts until they have been properly reviewed by its legal advisers.
PL is proposing to unfairly make use of “volunteer” time to promote sales: this is an inappropriate use
of staff time on community projects. Potential purchasers in care homes or similar institutions could be
vulnerable and not know all the facts behind PLUtensils. PL clearly has a duty of care not to abuse
customers in a vulnerable position: its reputation would suffer from such abuse.
PL’s use of remuneration with a heavy commission element could lead to sales people using pressure
tactics against vulnerable people. This would damage PL’s reputation.
PL should ensure that its purported “voluntary” or community work is genuinely of this type and should
consider dropping sales within care homes and retirement villages. PL should adjust its remuneration
package to reduce the incentive for salespeople to apply pressure tactics.
The product is new so the information provided, which is very limited in nature, could be unreliable.
160
Some promises have been made by the Managing Director of UGUL who could be up-selling his
business and the project in order to obtain the contract.
Rumours regarding the relationship between Eric Franks and Aaron Swepson are based on a press
report only and need to be confirmed.
3.F Advertising packages
Both proposed packages remain revenue-based, in line with PL’s existing approach. This may neglect
the importance of achieving a good margin on sales to make the activity worthwhile, particularly as
utensils generate a low margin for PL: targets based entirely on revenue could lead to PL ending up
dealing with unrewarding activity.
Package 1 provides the existing fixed fee to Thor, preventing any savings for PL, but the variable
element is very low at £50,000 and this may not be enough to motivate Thor sufficiently: offering this
amount might also anger Thor as it has been offered higher amounts before.
Package 1 provides a better deal for Lucy Tyler with a higher success fee but the same revenue
targets as were applied to the year ending 31 May 2017. However, there is no direct link to PLUtensils
so Lucy Tyler could earn the success fee even if her work on utensils specifically is not very helpful.
Package 2 provides a greater level of incentive for Thor to boost PL sales as the variable element is
now very substantial and it also requires PLUtensils to perform well for several years. However, the
fixed fee is now almost halved so Thor may not be interested in this option, given that there is no
historical data at all in relation to PLUtensils.
Package 2 provides Lucy Tyler with a high success fee which is more closely related to utensils sales
specifically and would help PL achieve its strategic objective but as it is limited to Retail sales, Lucy
Tyler would have no incentive in relation to Hospitality sales.
Neither package provides any indication of the remuneration for Eric Franks, which is likely to be
considerable as he is a celebrity chef. His package would need to ensure fairness to Lucy Tyler.
3.G Conclusions
Both proposed advertising packages remain revenue-based, in line with PL’s existing approach. This
may neglect the importance of achieving a good margin on sales to make the activity worthwhile,
particularly as utensils generate a low margin for PL.
PL should ensure that its lifetime guarantee promise is fair and transparent, without unreasonable use
of discretion being made.
PL should abandon its plans to use “volunteers” to sell products as this is an inappropriate use of time
intended to be non-commercial. The target market of such activities is vulnerable so PL’s reputation
will suffer if it abuses its duty of care.
161
PL should not proceed with the project as there is insufficient information available and the project
seems to be rushed, with major ethical concerns18.
PL should:
• confirm all costings and figures to independent information

• perform due diligence on new partners and review experience with existing partners
• perform market research on the outlook for utensils demand in the UK
• obtain legal advice on the proposed lifetime guarantee
• [further idea]
18
162
Mock Exam 5
Piccolo Limited –
Mock Exam 5
163
Mock Exam 5
List of Exhibits
164
Mock Exam 5
EXHIBIT 14

To: Charlie Sims
Date: 19 July 2017
Charlie,
You should analyse and evaluate the revenue, gross profit and operating profit performance
of PL and also the revenue and gross profit performance of PL’s Retail revenue stream
(Exhibit 16) relative to the same figures for the prior year. Please then assist the Board with
the requested loss of profits calculation (Exhibit 15).
2. A financial assessment of the proposed contracts with Dougal Hotels and Ringford (Exhibit
17).
Using the information provided, you should calculate the revenue, gross profit and net profit
that PL should expect to earn over the 5 year period from 1 January 2018 to 31 December
2022 under the contract terms proposed. Please then comment on any strategic and
operational issues raised as well as any ethical matters which would be involved in the
contracts. As part of your analysis, you should discuss the adequacy of any assumptions
provided in Exhibit 17.
3. A strategic evaluation of the opportunity to develop the WonderWok (Exhibit 18).
You should respond to the request for advice on the potential strategic and operational
benefits and risks of working with each of the three partner companies being considered for
the WonderWok project. Please also explain any ethical issues which appear to be raised by
the information provided. Where appropriate, you should provide brief calculations to support
your analysis.
165
Mock Exam 5
EXHIBIT 15
Olivia,
The Board is pleased to send on our management accounts for the most recent year. Please draft
some analysis of how the company has performed in revenue, gross profit and operating profit terms.
We feel that the Retail division may have struggled this year so please also analyse the revenue and
gross profit of this revenue stream – we are comfortable that Hospitality performed well so there is no
need to analyse this stream in detail: please focus most of your analysis on the Retail stream.
We would then like you to separately assist with the loss of profits issue which we discuss in our email
attachment. Unfortunately, we believe that we have lost a considerable amount of revenue and profit
as a result of criminals attempting to benefit from our brand by selling cheap versions of our Piccolo
pans. Please let us know what you think the impact has been and please advise us what we should
do about this.
Sabrina
Charlie,
I am forwarding on an email from the Piccolo Board, together with their email attachment. Please
provide some draft report sections for my review, looking at both Piccolo and the Retail division’s
performance and then dealing with the loss of profits issue.
I look forward to reading your analysis – thanks again for your hard work.
Olivia
PS – VERY IMPORTANT – Charlie, we know you are under a bit of stress with your final
examinations looming but you are nearly there now and I am sure you have prepared very thoroughly,
using first-rate materials from a tuition provider that genuinely wants to help, so just one last push and
then hopefully qualified very soon, no doubt! Best of luck from all of us!
Summary of events during the year Copy of email sent by Piccolo Board
The relationship with Kaster continued to prove challenging and we have some payments outstanding
at the year end as usual. It seems that a competitor has managed to gain some traction with Kaster
so in return we had to offer some financial incentives, including price-matching and longer credit
periods.
News was more positive in relation to Gullen where we rolled out the systems previously tested with
Longfield. We think that this was a win-win for Piccolo as we have capitalised on our existing
knowledge whilst strengthening our relationship with Gullen. We therefore saw no need to change any
terms with Gullen.
We worked hard to promote our products in the usual way and indeed increased our advertising
spend once the “fake products” issue broke in the national press. We include below a typical press
article which was published shortly after the matter emerged.
166
Mock Exam 5
Potential loss of profits Sale of fake Piccolo cookware
Towards the start of October 2016, the Midlands Police Force notified Piccolo of some apparent sales
of fake Piccolo products at various prosperous rural towns in southern England.
The criminals have been selling fake import products at a “discount” to the normal Piccolo prices:
customers are attracted by this lower pricing for what they believe is an original Piccolo pan. We have
to hand it to the criminals as they have been quite ingenious: we have seen use of the term “Pickolo”,
“Piccol” and of course (everyone’s favourite misspelling) “Picollo”.
One product of particular interest is the PESeven, which we believe is a “knock off” copy of our own
popular PE7 pan. We estimate that we have lost sales and profits on 1,000 PE7s per month since the
matter came to light on 1 October 2016. The criminals were selling these for around £60, representing
an average discount of 50% on the true price. We normally sell PE7s at a mark-up of 50% so we
obviously think we have lost out here.
Please can your firm calculate the loss of revenue and gross profit between October 2016 and 31
May 2017, based on the information given here?
Rakitt & Inn LLP, our legal advisers, are quite keen for us to pursue this matter and they have even
offered to put 2 of their Partners on the case on a full-time basis. The firm also says that it has PR
advisers who could help Piccolo turn this matter into a more positive outcome … we hope that is
possible as it could not really get any worse!
Cookery Crooks Consumer Watch Weekly, November 2016
Piccolo, a respected UK supplier of quality cookware and tableware based in Birmingham, has
become the latest in a long line of companies to have been affected by imports of fake cookware
designed to trick customers into purchasing what customers believe to be top quality brands at low
prices.
Following the arrest of Gary Eezer, the criminal mastermind behind the importing of a range of fake
products, the police have identified some of the products imported and have duly notified the
companies who are likely to have suffered a loss of profits. Robert Ozzer, Chief Constable of the
Midlands Police Force, has promised to “unleash hell” on the perpetrators.
Customers have expressed frustration with the fake products purchased. “My PESeven pan was
purchased in good faith but I am disgusted with the product. My venison sausages were frightfully
burned. Companies need to do more about this kind of thing. I am never going to buy another Pickolo
after this fiasco,” lamented Hyacinth Bouquet at the annual “Britain is Best” Farmers’ Market. “I blame
the immigrants for this, as for everything”, echoed JP, a local resident who wished to remain
anonymous. “Once we leave the EU there will be no need to suffer this kind of thing as we will only
buy British from this date so that means that companies like this “Piccol” will not be getting any of our
business ever again,” JP continued, to rapturous applause from fellow visitors to the market.
167
Mock Exam 5
EXHIBIT 16

£000
Revenue 1 41,501
Taxation (279)

£000
Current assets
Cash at bank and in hand (19)
Total assets 18,998
13,597
Current liabilities
168
Mock Exam 5

£000

Adjust for:
Depreciation 183
Proceeds on disposal of property, plant and equipment -

Cash and cash equivalents at the end of the year (19)

2017
£000
Revenue
Hospitality 9,592
Retail 31,909
41,501
Gross profit
Hospitality 4,825
Retail 10,718
15,543
Note 2: Other costs

2017
£000

14,151
169
Mock Exam 5

equipment
£000 £000 £000 £000
Cost
At 1 June 2014 139 1,208 237 1,584
Additions - 15 - 15
Disposals - (140) (59) (199)
At 1 June 2015 139 1,083 178 1,400
Disposals - - (54) (54)
At 1 June 2016 168 1,128 135 1,431
Additions 107 136 50 293
Disposals - (22) (10) (32)
At 31 May 2017 275 1,242 175 1,692
Depreciation
At 1 June 2014 114 907 145 1,166
Disposals - (128) (46) (174)
At 1 June 2015 138 869 117 1,124
Disposals - - (31) (31)
At 1 June 2016 142 961 105 1,208
Disposals - (3) (1) (4)
At 31 May 2017 185 1,072 130 1,387
Carrying amount
At 31 May 2014 25 301 92 418
At 31 May 2015 1 214 61 276
At 31 May 2016 26 167 30 223
At 31 May 2017 90 170 45 305
2017
£000

9,786

2017
£000

5,401
170
Mock Exam 5

£000
Dougal Hotels 1,121
Ringford 1,438
3,365
Other 6,227
9,592
Retail customers

£000
Longfield 4,979
Kaster 4,031
Gullen 3,094
12,104
Other 19,805
31,909
171
Mock Exam 5
EXHIBIT 17
CONFIDENTIAL – Hospitality opportunities Memo received from Piccolo Board
The Board would be grateful for your assistance in analysing the revenue, gross profit and net profit
that we should expect to earn from the following opportunities to replace the Tableware used by
Dougal Hotels and Ringford through to 31 December 2022.
We will assume that the first replacement occurs sometime in the calendar year 2018. Further
replacements will then take place as explained below. For simplicity, please calculate the model on an
annual basis – in other words, do not worry about exactly when during the year the replacements will
be ordered.
The Board considers that as a result of the uncertainty caused by Brexit, many business customers
are likely to be cutting costs significantly. We are aware, for example, that the Lodge of Travel chain
has seen a boom in business customers, with an increase of around 10% in the last year or so.
RDN, our current logistics provider, have quoted a logistics cost of £1,000 per £25,000 of Piccolo
revenue delivered. RDN will offer its usual target delivery rate and related penalty, should RDN fail to
meet its commitments to Piccolo.
Here are some hopefully helpful notes that explain a bit more about each potential client offer.
Dougal Hotels
Dougal Hotels will order replacements for 20% of their hotels each year, working through their hotels
in turn (i.e. once a hotel has received its batch of replacements then that hotel will not receive another
batch of replacements until all other hotels in the chain have first received their own batch).
Based on this, we would expect to earn revenue of £15,000 per hotel at a margin of 40%.
Dougal were very unhappy to recently receive a faulty batch of plates and have threatened to sue
Piccolo for breach of contract. We have looked into the matter and it seems that Ravino are at fault so
we will terminate the Ravino contract immediately if we proceed with the Dougal opportunity, in order
to placate the Dougal Board.
We have estimated that Dougal Hotels will have 325 hotels in 2018 so use this for all years of your
calculation.
To save costs on this project, we will not apply any logo to the items.
Ringford
Ringford will order Piccolo-branded items for 50% of their hotels each year, working through their
hotels in turn (i.e. once a hotel has received its batch of replacements then that hotel will not receive
another batch of replacements until all other hotels in the chain have first received their own batch).
Based on this, we would expect to earn revenue of £10,000 per hotel at a margin of 60%.
Ringford is confident that it can achieve the demand needed to make its replacement proposals
viable, based on a continuation of its “value” offering.
172
Mock Exam 5
We have estimated that Ringford will have 270 hotels plus the 60 properties acquired from Reeve in
place for 2018 so use a figure of 330 for all years of your calculation.
Given the volume of activity required for the Ringford option, it is likely that we would need to work
with Fly By Night (details below) for at least some of the deliveries.
Offer from Fly By Night e-mail received from Larry Logistics, Managing Director
Dear Piccolo Board,
It has come to the attention of Fly By Night, the UK’s leading night-time delivery company, that Piccolo
currently supplies Tableware items to a number of UK hotel chains. Making the most of the latest
advances in technology, Fly By Night is able to offer a fully integrated cloud-optimised solution. We
believe that Fly By Night offers the best all-round service in the market and we have maintained a
100% satisfaction score from our Hospitality deliveries for the last 7 years.
We look forward to hearing from you.
Larry
Workers’ Weekly 3 July 2017
Allegations continue to abound that staff at hotel chains such as Lodge of Travel and Dougal Hotels
are being paid at rates which are effectively below the minimum wage, claims which have been
strenuously denied by the Boards of both companies. However, stories from Ima Grant (a Hungarian-
born cleaner who until recently worked at Dougal Hotels) are sadly typical, with hotels exploiting the
lack of bargaining power amongst low-paid staff. “On my last payslip, deductions were made for time
spent travelling between different hotels during my working day and I also suffer a deduction of my
work time every time that the hotel canteen suffers any machinery breakdowns (which is quite often
as the machinery is pretty old): for example, if the canteen opens 30 minutes late, the company
assumes that I have taken an hour and a half for my lunch break but actually if I see it is going to
open late I just go back to my duties immediately and take lunch later, for my standard allowance of 1
hour. Not that it is really worth the wait – there is hardly ever any cabbage.”
It has even emerged that the solar panels installed on several of the hotels in the Dougal Hotels chain
are fake. Sam Spark, a local electrician, has reported his suspicions to this paper. “Any fool should be
able to see that the use of a 30 amp-rated ES7634 junction box wired to the 2012(b) specification
(75th revision, paragraph 176,281(x)) of the UK wiring regulations is clearly not an arrangement
compatible with solar power,” complained Sam. “The flux capacitor alone would blow in no time.
Looking at that wiring, I thought I was travelling back in time.” This paper has not yet verified the
claims, but they certainly appear concerning.
Violetta Vox, spokeswoman for Dougal Hotels, was unavailable for comment but has promised a
“robust defence” of the company’s actions very soon.
173
Mock Exam 5
EXHIBIT 18
CONFIDENTIAL – WonderWok project Memo received from Piccolo Board
The Piccolo Board is pleased to send on further information regarding the WonderWok, a high-quality
and innovative wok which combines the best of traditional Asian cooking techniques with modern
technology. We think cooks of all levels of ability will be interested in the product.
Although our design team is already at maximum capacity, as a company we know that we must
press on in a competitive and ever-changing market so we are determined to investigate this
opportunity as soon as possible.
We believe that the WonderWok could be retailed in various different ways. One option we are
considering is to sell the item in Harvey Lewis, an exclusive department store. Another option would
be to target LidAld, a leading German “value” supermarket chain with an increasing number of stores
in the UK.
We would run an initial trial for 6 months selling 1,000 units per month if we work with Delite and
2,000 units per month if we work with Rolson through to 31 May 2018. Then, if successful, we will
carry out a huge marketing drive in June 2018 and this would increase production rapidly to 3,000
units or 4,000 units per month, respectively, for 12 months.
If you could ask Charlie to carry out some financial, operational and strategic analysis of our various
options then we would be grateful. We realise that Charlie may be a bit stressed out given her
upcoming final examinations but we heard that she has been studying with some excellent materials
and mock exams so she should be absolutely fine and there will still be plenty of the summer left to
enjoy afterwards!
Please take into account the information newly provided below and also any key matters that we
already know regarding the proposed suppliers.
Thanks for your continuing assistance.
The Piccolo Board
Delite
Delite is interested in helping with the design and production of the WonderWok.
Delite already has some similar ranges available in LidAld. Delite will be using a non-stick surface
similar to the market-leading PE7 pan after recruiting a number of staff involved in development of the
PE7 from a competitor. It is expected that Eliza FitzWilliam would be involved in the design, marketing
and funding of the project.
The Delite opportunity has come about as a result of one of Daniel Lejeune’s regular golfing holidays
with the Delite senior management team. We understand Daniel has now managed to join Delite at
over 70% of the golf courses in the UK and is known to be a favourite partner of Rupert Soup-Bowl,
one of the controlling shareholders in Delite. Other regulars at these events include Katie Knife and
Felicity Fork, joint owners of Knife & Fork Ltd, a leading company in the golf catering market.
Delite believes Piccolo would need to invest £1m into the venture. We would expect to earn a gross
profit margin of 55% based on the WonderWok’s sales price of £120 per unit.
174
Mock Exam 5
Rolson
The Rolson marketing team are known to enjoy a good working relationship with Harvey Lewis
following the success of a top-end range of utensils which have sold well in recent years. Rolson are
understood to be interested in a joint marketing initiative involving celebrity chefs Lucy Tyler and Eric
Franks. Rolson have suggested a product development cost of £10,000 should be sufficient as it
believes it already has some of the technologies required (including an understanding of the use of
PFOA on non-stick surfaces).
Rolson has asked for co-branding of the product so that the Rolson logo is displayed prominently on
the handle of the WonderWok.
We would expect to earn a gross profit margin of 65% based on the WonderWok’s sales price of £150
per unit.
Pandemik
We have an exciting opportunity to work with Pandemik, a fast-growing supplier of woks and other
cookware based in Guangdong, China. The company already supplies a large share of both the Retail
and Hospitality markets in China. Its utensils line is believed to be very innovative and affordable: the
line was recently placed first in a durability test carried out by Wizard magazine (the UK’s leading
independent customer testing publication). PanOply is understood to have found the quality of
Pandemik’s products to be in line with its own ranges. We think that the size of our order could also
influence Pandemik to reduce (or even cancel) their work for PanOply, especially if we offer payment
in Chinese Yuan.
Another advantage of working with Pandemik could be their IT skills as their subsidiary undertaking,
Endemik, is responsible for the programming on a range of Kitchenware companies’ websites.
Endemik even offers to provide comparator information (including on PanOply), subject to payment of
a modest fee.
After speaking briefly with RDN, we understand that the company would be happy to assist us with
operations in China and the company has proposed an Annual Delivery Rate target in relation to all
RDN work for Piccolo of 75%, if the opportunity with Pandemik is taken up by Piccolo.
May Be Not the Right Decision The Daily Herald, 9 June 2017
The recent election of a “hung parliament” has further weakened the value of the pound in
international markets. The VIX-GBP (a variation of the VIX volatility index which is commonly known
as the “fear index”) has risen by 22 percentage points following the spectacular failure of the UK
Prime Minister’s attempt to secure a “strong and stable majority” in support of Brexit negotiations.
With analysts suggesting that the UK’s bargaining position has been substantially weakened, the IBC
(a leading confederation of the British industries) has demanded greater input from businesses into
the negotiation process to avoid any further negative impact from uncertainty.
175
Mock Exam 5 Answers
Piccolo Limited –
176
Mock Exam 5 Answers
Appendix 1

Revenue £000 £000
Hospitality 9,592 8,837 755 8.5%
Retail 31,909 32,876 (967) -2.9%
Total 41,501 41,713 (212) -0.5%
2017 2016
Revenue mix % %
Retail 76.9% 78.8%

Hospitality 4,825 4,345 480 11.0%
Retail 10,718 11,974 (1,256) -10.5%
Total 15,543 16,319 (776) -4.8%
2017 2016 Change

Hospitality 50.3% 49.2% 1.1
Retail 33.6% 36.4% -2.8
Total 37.5% 39.1% -1.6

£000 £000
2017 2016 Change

% %

Longfield 4,979 4,889 90 1.8%
Kaster 4,031 4,720 (689) -14.6%
Gullen 3,094 2,872 222 7.7%
Other 19,805 20,395 (590) -2.9%
Total 31,909 32,876 (967) -2.9%
£000 £000
Revenue
High 41,501 45,000 (3,499) -7.8%
Low 38,000 3,501 9.2%
Gross profit
High 15,543 18,000 (2,457) -13.7%
Low 12,500 3,043 24.3%
Other costs
High 14,151 14,000 151 1.1%
Low 12,000 2,151 17.9%
Revenue - Retail
High 31,909 35,000 (3,091) -8.8%
Low 31,000 909 2.9%

High 10,718 13,000 (2,282) -17.6%
Low 9,500 1,218 12.8%
Note – we have included reference to some figures in our answer which are not in Appendix 1 (e.g. the change in
all Other costs). You do not have to have every figure proved in Appendix 1 and you can instead drop in additional
figures as required in your main report, with workings in brackets. This can help you avoid wasting time on the
preparation of a very detailed Appendix 1.
Exam Tip
177
Mock Exam 5 Answers
Lost sales per month 1,000

x months 8
Total lost sales 8,000
Lost Impact
sales (£)
Criminal price (£) 60
Gross up by 0.5 = true price 120 x 8,000 960,000
Gross down by 100/150 = cost before mark-up 80 x 8,000 640,000
Lost gross profit 320,000
an error.
178
Mock Exam 5 Answers
Appendix 2 (All inputs taken from Exhibit 17)
Dougal
Hotels 325
x 20% receiving replacements each year 65
Total annual revenue (£000) 975 [65 x 15k]
Total annual gross profit (£000) 390 [975k x 40%]
RDN delivery costs (£000) (39) [975k / 25k x 1k]
Total annual net profit (£000) 351 [390k - £39k]
x 5 years = total net profit (£000) 1,755
Ringford
Hotels 330
x 50% receiving replacements each year 165
Total annual revenue (£000) 1,650 [165 x 10k]
Total annual gross profit (£000) 990 [1,650k x 60%]
RDN delivery costs (£000) (66) [1,650k / 25k x 1k]
Total annual net profit (£000) 924 [990k - 66k]
x 5 years = total net profit (£000) 4,620
an error.
Note – not for inclusion in your answer
The Dougal calculation can be completed more quickly using a shortcut by recognising that the 5 year
project period cancels against the 20% replacement rate. Therefore you can simply complete the
calculation based on a total of 325 hotels throughout, rather than by finding the 20% figure and then
multiplying upwards by 5 at the end of the process (since this will amount to the same thing).
179
Mock Exam 5 Answers
Appendix 3 (All inputs taken from Exhibit 18)
Delite
Trial Full
period production Total
Sales price 120 120

x units per month (thousands) 1 3
x months 6 12
Total revenue (£000) 720 4,320 5,040
Gross profit at 55% margin 396 2,376 2,772
Other costs (1,000)
Net profit 1,772
Rolson
Trial Full
period production
Sales price 150 150

x units per month (thousands) 2 4
x months 6 12
Total revenue (£000) 1,800 7,200 9,000
Gross profit at 65% margin 1,170 4,680 5,850
Other costs (10)
Net profit 5,840
an error.
introduce errors.
180
Mock Exam 5 Answers

♦ PL revenue & GP comment with figures ♦ Calculations for Dougal Hotels with figures
♦ Retail revenue comment with figures ♦ Calculations for Ringford with figures
♦ Retail GP comment with figures ♦ Professional scepticism regarding model inputs
♦ Loss of profits comment with figure ♦ Evaluates significance versus Hospitality per R1
♦ Overdraft due to weak working capital control ♦ Concludes on way forward
♦ Explains Retail revenue change ♦ Concludes on ethics
♦ Explains Retail GP change ♦ Concludes on wider impact (RDN/Ravino)
♦ Makes commercial recommendations ♦ Other commercial recommendations

E.5 Description
♦ Concludes on Delite (benefits and risks)
♦ Concludes on Rolson (benefits and risks)
♦ Concludes on Pandemik (benefits and risks)
♦ No financial information available on Pandemik
181
Mock Exam 5 Answers

♦ Total revenue: down £212k AND down 0.5%
♦ Total GP: down £776k AND down 4.8%
♦ Total GPM: from 39.1% to 37.5% AND down 1.6 percentage points

♦ Press expectations of 10% growth at best and 5% decline at worst (p39)
♦ PL internal expectations 7.5% market growth at best and 2.5% decline at worst (p38)
♦ PL has experienced ongoing problems with Kaster (p20, p30)
♦ Fake products increasingly being sold (p40)
♦ PanOply aiming to take Kaster revenue – lower quality competitor (p30)

1.3 Movements and basic narrative on issue 1 (Retail revenue)
♦ Revenue: down marginally £967k AND down 2.9%
♦ Revenue mix: down significantly from 78.8% to 76.9%
♦ Kaster: down significantly £689k AND down 14.6%
♦ Gullen: up significantly £222k AND up 7.7%
♦ “Others”: down marginally £590k AND down 2.9%
1.4 Movements and basic narrative on issues 2 and 3 (Retail GP and PL OP)
♦ GP: down significantly £1,256k AND down 10.5%
♦ GPM: from 36.4% to 33.6%
♦ GPM: weak versus Hospitality movement from 49.2% to 50.3%
♦ GP decline significantly outpaces revenue decline
♦ Retail GP: £2,282k AND 17.6% below High Budget
1.5 Loss of profits – figures

♦ Total lost sales 8,000 units
♦ Normal price £120
♦ Cost before mark-up £80
♦ Loss of revenue of £960k AND costs £640k so GP lost £320k
♦ Comparison to Retail revenue and GP for the year
♦ Notes that no information on other costs such as distribution, payment processing etc
Note – the names PESeven, Rakitt & Inn, Gary Eezer, Robert Ozzer, Hyacinth Bouquet and JP (as
well as the fake names used by criminals) have been invented for the purposes of this Mock and are
not contained in the Advance Information. Do not use these names in your answer to the real
182
Mock Exam 5 Answers
Applying Judgement
1.6 Evaluation of Retail revenue
♦ PL revenue flat so avoids recent pessimistic forecasts in press (p39)
♦ Hospitality increase almost offsets Retail decline in absolute terms
♦ PL affected by negative press in relation to fake products
♦ Retail revenue only just above Low Budget estimate – disappointing
♦ Reduction in “Others” reduces diversification
♦ Observes that Hospitality was below High Budget for revenue
1.7 Evaluation of Retail GP and PL OP

♦ PL price-matching to PanOply fails – revenue and margin down
♦ Kaster terms increase receivables and help push cash into overdraft
♦ Growth in Gullen revenue hits margin – Gullen receiving increasing discount (p30)
♦ OP down significantly by £1,771k AND 56.0% outpacing GP decline – overheads high
♦ All “other costs” increased – concerning
♦ Observes that Hospitality was below High Budget for GP
1.8 Loss of profits – evaluation

♦ Calculation only states direct impact OR most inputs are PL “beliefs” (Exh 15)
♦ Unlikely that all customers would have purchased correctly priced PE7
♦ Could be ongoing impact on Piccolo reputation and goodwill
♦ May be other Piccolo products affected – PE7 is just “one product of interest”
♦ Press report indicates matter emerged before Christmas – significant impact
♦ Scepticism of position of Rakitt & Inn LLP

♦ Results for the year: contrasting performance between streams offsets each other
♦ PL Revenue and GP: comments AND comparative figure
♦ Retail Revenue and GP: comments AND comparative figure
♦ Loss of profits: comment on impact AND figure

♦ PR campaign regarding fake pans/be proactive
♦ Speak to other Cookware companies affected by fake products
♦ Cease attempt to defeat PanOply on price
♦ Discuss position with Gullen
♦ Investigate reasons for poor performance in “Other” category/try to diversify
Note – the names PESeven, Rakitt & Inn, Gary Eezer, Robert Ozzer, Hyacinth Bouquet and JP (as
well as the fake names used by criminals) have been invented for the purposes of this Mock and are
not contained in the Advance Information. Do not use these names in your answer to the real
183
Mock Exam 5 Answers
Requirement 2 markscheme – financial evaluation (Dougal Hotels and Ringford)

♦ Number of hotels 325 and 330
♦ Replacement rate of 20% and 50% correctly applied
♦ Gross margin of 40% and 60%
♦ RDN costs at £1,000 per £25,000 of revenue

♦ Hospitality market has variability driven by replacement cycle (p22)
♦ Hospitality clients tendency to add hotels (p26) versus no change (Exh 17)
♦ Contract terms: start date/replacement cycle/number of properties
♦ Brexit uncertainty: companies looking to cut costs OR comparison to relevant R1 figures
♦ Initial deal with Dougal Hotels was for £2.6m with comparison to own figure

2.3 Calculation results – Dougal
♦ Annual revenue £975k
♦ Annual GP £390k
♦ Annual RDN delivery costs £39k
2.4 Calculation results – Ringford

♦ Annual revenue £1,650k
♦ Annual GP £990k
♦ Annual RDN delivery costs £66k
2.5 Evaluates assumptions

♦ Dougal Hotels – margin appears low as normal gross margin is 60% (p26)
♦ Dougal Hotels – number of hotels appears high as was 225 in prior year (p26)
♦ Dougal Hotels – logo costs may not be saved – Dougal normally requires logo (p26)
♦ Ringford – margin appears high as normal gross margin is 40% (p27)
♦ Ringford – 60 properties from Reeve is high – plan was to buy 40 (p27)
♦ Ringford – replacement cycle seems too frequent
♦ Notes that no allowance made for interim replacements for breakages
Note – the names Lodge of Travel, Fly By Night, Larry Logistics, Ima Grant, Sam Spark and Violetta
Vox have been invented for the purposes of this Mock and are not contained in the Advance
Information. Do not use these names in your answer to the real examination on 19 July 2017.
184
Mock Exam 5 Answers
Requirement 2 markscheme – financial evaluation (Dougal Hotels and Ringford)
Applying Judgement
2.6 Evaluation of Dougal Hotels opportunity
♦ Second largest PL Hospitality client – must keep happy
♦ Terms offered disappointing compared to usual margin
♦ Replacement rate appears normal (p25) – operationally possible for PL?
♦ Wider impact of cancelling Ravino contract (primary Tableware (p32))
♦ Successful loyalty scheme (p26) benefit given Brexit uncertainty (Exh 17)
2.7 Evaluation of Ringford opportunity

♦ Opportunities in the business market if cutting costs
♦ Benefit from use of Piccolo branding on products
♦ Impact of being associated with a “value” brand (Exh 17, p26)
♦ High operational demand/high demand on management time
♦ Possible impact on RDN logistics relationship
♦ Information is from MD – could be “upselling”
2.8 Evaluation of ethical issues (including recommendations)

♦ PL requires suppliers to pay above minimum wage in relevant country
♦ Impact on PL reputation AND morale of workforce
♦ Termination of contract after one issue is harsh/PL policy different (p31)
♦ Lacks integrity and openness AND impact on other PL suppliers
♦ PL committed to latest green technologies (p31) so could lack integrity
♦ Press report so confirm facts OR PL commitment is re manufacturers (p31)

♦ Concludes on calculation with figures
♦ Concludes on strategic AND operational issues

♦ Ensure other Hospitality clients not neglected
♦ Review all model inputs for reasonableness
♦ Consider alternative projects
♦ Market research on forecast demand in Hospitality sector
♦ Due diligence on Fly By Night
Note – the names Lodge of Travel, Fly By Night, Larry Logistics, Ima Grant, Sam Spark and Violetta
Vox have been invented for the purposes of this Mock and are not contained in the Advance
Information. Do not use these names in your answer to the real examination on 19 July 2017.
185
Mock Exam 5 Answers
Requirement 3 markscheme – strategic evaluation (WonderWok)

♦ Total revenue £5,040k AND £9,000k
♦ Total gross profit £2,772k AND £5,850k
♦ Deducts other costs of £1m AND £10k
♦ Notes that could be other costs or revenues with examples
♦ Valid comparison to R1 figures
♦ Notes that no financial information available for Pandemik

♦ Supermarkets and department stores sales differ (p8)
♦ Growth in online sales expected in future years (p8)
♦ Cross-selling encouraged/promoted at PL (p37, p38)
♦ PL 25th anniversary is year beginning 1 June 2018 (p37)
♦ Entirely new product can take up to 2 years to develop (p23)

3.3 Issue 1 – Delite (strategic and operational issues)
♦ PL has an existing relationship with Delite
♦ Can perform both long and short product runs (p32)
♦ Allows Piccolo to meet high levels of demand (p32)
♦ Connection to supermarket (Exh 18) – possible high sales volumes
♦ Significant financial outlay required (Exh 18)
♦ PE7 technology belongs to Rolson – possible IP theft?
3.4 Issue 2 – Rolson (strategic and operational issues)

♦ PL has an existing relationship with Rolson
♦ Existing expertise in non-stick surfaces from popular PE7 (p19, p33)
♦ Connection to department store (Exh 18) – possible high margin sales
♦ RDN has existing relationship and works in Canada (p35)
♦ Impact on Lucy Tyler relationship of using another celebrity chef
♦ Use of PFOA considered unsafe in some countries
3.5 Issue 3 – Pandemik (strategic and operational issues)

♦ New supplier to PL – diversifies but unknown
♦ Based in China (Exh 18) – understands the market for woks/Asian food
♦ RDN is an existing supplier and available to help (Exh 18)
♦ Distance from UK – operational challenges
♦ PanOply considers quality to be in line with Pandemik – so not high (p30)
♦ Endemik opportunity attractive but confidentiality concerns
Note – the names WonderWok, Harvey Lewis, LidAld, Rupert Soup-Bowl, Katie Knife, Felicity Fork,
Knify & Fork Limited, Pandemik and Endemik have been invented for the purposes of this Mock and
Guangdong is a genuine province of China, with a significant manufacturing base, but it is not
mentioned in the Advance Information.
186
Mock Exam 5 Answers
Requirement 3 markscheme – strategic evaluation (WonderWok)
Applying Judgement
3.6 Evaluation of Delite option (including ethics)
♦ Based in the UK so unaffected by expected currency fluctuations
♦ Good relationship with Daniel Lejeune at PL (co-ordinates design) (p23, p24)
♦ Possibility of Hospitality connections being made (golfing events Exh 18)?
♦ Relationship with LidAld – “value” chain – strategic fit?
♦ Eliza Fitzwilliam provided poor leadership in the past (p11)
♦ PL must not be involved in IP theft AND impact on Rolson relationship
3.7 Evaluation of Rolson option (including ethics)

♦ Could lead to cross-selling opportunities for Rolson products such as PE7
♦ Good strategic fit with quality via Harvey Lewis (Exh 18)
♦ Rolson is a provider of high-end products to chefs – strategic fit?
♦ £10,000 investment unlikely to be sufficient (p23)
♦ Eric Franks (p39) recent record poor
♦ PL must not be associated with unsafe products
3.8 Evaluation of Pandemik option (including ethics)

♦ PL has a plan to expand internationally via global hotel chains (p37)
♦ Could help with target of 15% Retail revenue in relation to Utensils (p37)
♦ Could take away a supplier for PanOply, a rival (Exh 18)
♦ Payment in Chinese Yuan departs from PL policy (p37) OR volatility (Exh 18)
♦ RDN Target reduction on all PL work (not just China) (Exh 18 v p35)
♦ Provision of comparator information could break confidentiality

♦ Concludes on strategic AND operational benefits and risks

♦ Field trip to Guangdong to confirm conditions
♦ Market research on demand for woks in the UK
♦ Discuss funding for project with PL’s bank
♦ Assess impact on other PL design work (“at maximum capacity …” – (Exh 18))
♦ Discuss all ethical concerns
Note – the names WonderWok, Harvey Lewis, LidAld, Rupert Soup-Bowl, Katie Knife, Felicity Fork,
Knify & Fork Limited, Pandemik and Endemik have been invented for the purposes of this Mock and
Guangdong is a genuine province of China, with a significant manufacturing base, but it is not
mentioned in the Advance Information.
187
Mock Exam 5 Answers
♦ Figures are as required by question – loss of profits ♦ Correctly numbered pages
188
the examination.
Ingleby Grant
19 July 2017
189
Executive Summary
Revenue fell marginally by £212k (0.5%) from £41,713k to £41,501k, significantly missing the High
budget figure by £3,499k (7.8%) and falling far short of best case press expectations of 10% growth
but beating more recent fears of a 5% decline, as a result of a relatively flat performance.
GP fell significantly by £776k (4.8%) from £16,319k to £15,543k, significantly missing the High budget
figure by £2,457k (13.7%). The GPM fell significantly by 1.6 percentage points from 39.1% to 37.5%.
Retail revenue fell marginally by £967k (2.9%) from £32,876k to £31,909k but was almost offset in
absolute terms by an increase in Hospitality revenue. PL has probably been affected by negative
press in relation to fake products mistakenly believed to be PL products.
Retail GP fell significantly by £1,256k (10.5%) from £11,974k to £10,718k, significantly missing the
High budget figure by £2,282k (17.6%) and significantly outpacing the decline in Retail revenue,
indicating poor cost control.
Retail GP will also have been affected by the growth in revenue from Gullen as PL offers an
increasing discount based on the level of trade with Gullen and this policy was unchanged in the year.
PL has been experiencing ongoing problems with Kaster but this year outstanding payments have
increased receivables and pushed PL into an overdraft position of £19k, which is highly unusual and
worrying for the company.
Based on the information provided, PL has lost revenue of £960k and GP of £320k as a result of the
fake items sold. This would amount to 3.0% of both the revenue and GP of the Retail division and so
would be a relatively minor matter, contrary to the Board’s fears.
However, the calculation only considers the direct impact of lost sales on 1 product line: the ongoing
reputational impact could lead to far greater loss of goodwill, particularly if other products have been
affected.
PL should:
• organise a public relations campaign to counter the reputational damage of fake products
• speak to other Cookware companies affected by fake products
The Dougal project would yield annual revenue of £975k, annual GP of £390k and total net profit of
£1,755k. GP of this level would be equivalent to 8.1% of Hospitality’s most recent GP figure and so
would be significant.
The Ringford project would yield annual revenue of £1,650k, annual GP of £990k and total net profit
of £4,620k. GP of this level would be equivalent to 20.5% of Hospitality’s most recent GP figure and
so would be very significant.
The Ringford GPM appears high as the normal GPM on Ringford work is 40% so the Ringford profit
may be overestimated.
190
Dougal is PL’s second largest Hospitality client so it will be important to keep this client happy, despite
the terms offered being disappointing compared to the usual margin.
PL would be able to benefit from having its own logo on its products in the Ringford opportunity.
There could be a negative impact on PL’s premium quality positioning if it works further with a “value”
brand.
Working with Fly By Night might damage the crucial relationship with RDN whilst terminating the
relationship with Ravino would lead to the loss of an important supplier and the important “Classic”
range.
PL should ensure that it only works with partners who reflect its beliefs regarding the minimum wage
and should not terminate supplier relationships immediately if this is contrary to its promises. PL
should ensure that its clients act with integrity in relation to green technologies.
PL should proceed with the Dougal opportunity given Dougal’s premium market positioning19.
PL should:
• ensure that other Hospitality clients are not neglected

Section 3 WonderWok
The Delite opportunity would yield net profit of £1,772k in the first 18 months of operations. At
approximately £1,200k of GP per year, this would be equivalent to more than 10% of Retail revenue
in the latest management accounts so the project appears significant.
The Rolson opportunity would yield GP of £5,840 in the first 18 months of operations. At
approximately £4m per year, this would be equivalent to approximately 40% of Retail GP in the latest
management accounts, meaning that the project could fundamentally shift the size and profitability of
PL’s operations.
There is no financial information available on the Pandemik opportunity, making it impossible to

evaluate the comparative profitability of this project.
PL has an existing relationship with Delite so it could use its experience to run the project effectively.
The opportunity would require a significant outlay of £1m, increasing risk and straining cash flows.
Rolson could use its existing expertise in non-stick surfaces (such as the popular PE7) as part of the
WonderWok project.
The £10,000 proposed investment is unlikely to be sufficient as PL would normally budget this amount
in relation to a minor product upgrade and not to the creation of an entirely new product type.
Pandemik would be a new supplier for PL which would diversify PL’s supplier base but Pandemik’s
reliability is not known.
19
191
PL must avoid any theft of IP as this would be illegal and could damage the relationship with Rolson.
PL must not be associated with any chemicals which are considered unsafe in the relevant country.
PL should not use Endemik’s beneficial expertise in online shopping to obtain confidential information
on competitors.
PL should proceed with the Rolson opportunity, given the high level of profits possible20.
TT should:
• perform market research on demand for woks in the UK

• discuss the funding of the project with its bank, given PL’s weak cash position
As noted, this example answer is longer than is required to pass the exam as we wanted to illustrate
all available markscheme points.
20
192
[Note (not for inclusion in your answer) – in this model answer we have dropped the Market
Background section to give you an example of some students’ preferences to “mix” or “weave” in their
background points – provided that you do not forget to adopt a background perspective, we do not
care how you format your answer: our suggestion to include a separate section is merely based on
our observation that many students forget this perspective once they start their company-specific
analysis. Please do not forget to include your own research (with a brief source in brackets)
somewhere in your answer.]
1.A Revenue
Performance was closer to PL’s worst case Budget expectation of a 2.5% decline than to the best
case figure of growth of 7.5%.
absolute terms by an increase in Hospitality revenue. PL has probably been affected by negative
press in relation to fake products mistakenly believed to be PL products.
Retail’s revenue mix share fell significantly from 78.8% to 76.9%.
Retail revenue from Kaster fell significantly by £689k (14.6%) from £4,720k to £4,031k despite PL’s
efforts to take on PanOply, a lower quality competitor which has offered significant financial incentives
to Kaster. PL’s price-based competition appears to have failed.
Retail revenue from Gullen increased significantly by £222k (7.7%) from £2,872k to £3,094k as a
result of the roll-out of a successful data system.
Retail revenue from the “Other” category declined marginally by £590k (2.9%) from £20,395k to
£19,805k, reducing the diversification amongst PL’s Retail clients.
Retail revenue finished the year only just above the Low Budget estimate, representing disappointing
performance, especially considering that Hospitality was close to achieving its High Budget estimate.
1.B Gross profit and operating profit
indicating poor cost control. However, Hospitality also missed its High Budget figure for GP,
suggesting cost control problems are widespread.
Retail GPM declined significantly from 36.4% to 33.6%, representing very poor performance relative
to the significant increase in Hospitality GPM from 49.2% to 50.3%. Price-matching to PanOply
therefore also failed in GP terms as poor margins are being achieved.
The Retail GPM will also have been affected by the growth in revenue from Gullen as PL offers an
increasing discount based on the level of trade with Gullen and this policy was unchanged in the year.
193
PL has been experiencing ongoing problems with Kaster but this year outstanding payments have
increased receivables and pushed PL into an overdraft position of £19k, which is highly unusual and
worrying for the company.
OP declined significantly by £1,771k (56.0%) from £3,163k to £1,392k, outpacing the decline in GP
and indicating poor control of overheads as all such costs increased during the year, which is
concerning.
1.C Loss of profits
Press articles have previously reported an increase in sales of fake items and PL appears to have
fallen victim to this trend in the most recent year.
affected.
The model assumes that all customers who purchased an item at £60 would still have paid £120,
which is implausible, overstating the lost GP. The inputs are based on PL’s beliefs, rather than
independent evidence.
There may be other costs saved such as distribution and payment processing expenses not needed
which have not been considered, overstating the loss of GP.
The press report indicates that the problems arose before Christmas 2016: Christmas is a vital sales
period for Retail so there could have been a significant impact.
The position of Rakitt & Inn LLP should be queried as there appears to be an attempt to rake in a high
level of fees by encouraging PL to pursue a matter which requires the time of 2 partners.
1.D Conclusions
PL has had a mixed year, with contrasting performance between its streams in revenue and GP terms
offsetting each other, leading the company’s overall results to be relatively flat.
absolute terms by an increase in Hospitality. PL has probably been affected by negative press in
relation to fake products mistakenly believed to be PL products.
indicating poor cost control. However, Hospitality also missed its High Budget figure for GP,
suggesting cost control problems are widespread.
194
affected.
1.E Commercial Recommendations
PL should:
• organise a public relations campaign to counter the reputational damage of fake products
• speak to other Cookware companies affected by fake products
• cease the price-based competition with PanOply
• discuss and review the terms of its discount with Gullen
• investigate the reasons for the poor performance of the “Other” category to diversify revenues
• [further idea]
195
PL’s activities in Hospitality are affected by the replacement cycle so the model used is subject to
volatility. PL’s clients have been tending to add to their hotel portfolios, casting doubt on the no
change assumption in the model.
With companies looking to cut costs to achieve savings in the context of an uncertain outlook for
demand as a result of Brexit, the Ringford opportunity looks appealing for PL.
The projects will not start until 2018, by which time the market could have moved on, meaning that
PL’s estimates may be incorrect.
Dougal’s replacement cycle of 5 years is in line with the market and is more likely to be achievable for
PL in relation to Dougal’s 325 hotels than Ringford’s accelerated 2 year cycle for 330 properties.
£1,755k. This significantly exceeds the £2.6m which PL earned on its original deal with Dougal, for a
far lower number of hotels, suggesting that the model may overstate the revenue possible.
of £4,620k. This would be a significant increase but as it exceeds the already apparently optimistic
Dougal estimate, such amounts may not in fact be achieved.
The Dougal GPM appears low as the normal GPM on Dougal work is 60% so the Dougal profit will be
underestimated.
The number of Dougal hotels appears high as the figure was 225 in the prior year so the Dougal profit
will be overestimated.
PL may not in fact be able to save logo costs as Dougal does normally require a Dougal logo to be
included.
Ringford planned to buy 40 properties from Reeve so the inclusion of 60 properties would be too high,
overestimating the profit.
The Ringford replacement cycle of a full replacement every 2 years appears too frequent as a typical
rate would involve a 5 year cycle.
There has been no allowance for any revenue and costs in relation to breakages despite these being
expected in Hospitality work.
The information regarding Fly By Night may not be reliable as the company’s Managing Director may
be upselling the company.
196
2.D Evaluation of opportunities and ethics
Cancelling the contract with Ravino could have further impact on the Tableware product line as
Ravino is the primary Tableware producer. Production of the “Classic” range would be severely
affected.
Dougal has experienced success with a loyalty scheme already, helping to boost demand after the
Brexit vote dampened demand so PL would be working with a growing client.
If businesses are trying to cut costs, Ringford may benefit from its “value” positioning so PL would be
working with a growing client.
brand.
There would be a high demand on management and operational staff under the Ringford opportunity,
given the 2 year replacement cycle.
There might be a negative impact on PL’s crucial relationship with RDN if it is necessary to work with
a competitor to RDN to deal with the high workload.
Ethics
PL has asked its suppliers to pay more than the minimum wage so it could be inconsistent and lack
integrity to work with a client who does not do the same. This could have an impact on PL’s reputation
and the morale of its workforce.
PL has a policy of open discussion with suppliers when things go wrong so terminating a contract
after one incident would be very harsh and lack integrity. This could have an impact on PL’s
relationships with its other suppliers.
PL has a policy of using the latest green technologies so it would lack integrity to work with a client
that has falsely claimed that it uses solar power. However, the allegation is contained in a press report
and should be confirmed.
Strictly, PL’s ethical promises relate to its suppliers, rather than its clients, but these are matters of
principle and PL cannot use this as an excuse.
2.E Conclusions
£1,755k. This significantly exceeds the £2.6m which PL earned on its original deal with Dougal, for a
far lower number of hotels, suggesting that the model may overstate the revenue possible.
of £4,620k.
197
brand.
PL should ensure that it only works with partners who reflect its beliefs regarding the minimum wage
and should not terminate supplier relationships immediately if this is contrary to its promises. PL
should ensure that its clients act with integrity in relation to green technologies.
PL should proceed with the Dougal opportunity given Dougal’s premium market positioning21.
PL should:
• ensure that other Hospitality clients are not neglected

• consider alternative projects
• perform market research on expected demand in the Hospitality sector
• perform due diligence on Fly By Night
• [further idea]
21
198
Section 3 WonderWok
The nature and extent of sales differs considerably between supermarkets and department stores so
PL will need to choose wisely.
PL wishes to implement a major new initiative in time for its 25th anniversary in June 2018 so the
major marketing drive after the initial trial could be well timed. However, entirely new products can
take up to 2 years to develop so the suggestion of a launch in 2017 may not be feasible.
3.B Delite
Delite is able to scale its production runs, providing flexibility on a new project with uncertain demand.
If the project is successful, Delite should have the capacity required for high output levels.
Delite has a good relationship with a supermarket chain, providing access to high sales volumes.
However, if LidAld is a “value” chain then this may not be a strategic fit with PL’s quality ethos.
Delite is based in the UK so would be unaffected by the currency volality forecast by the VIX-GBP
index.
Delite has a good relationship with Daniel Lejeune, who co-ordinates design work for PL, enhancing
the working relationship with PL on this critical aspect of kitchenware products.
Further valuable connections with Hospitality clients could be possible via the golfing events involved
in working with Delite.
Eliza FitzWilliam has provided poor leadership in the past so may increase the risks of the new
project.
3.C Rolson
approximately £4m per year, this would be equivalent to approximately 40% of Retail GP in the latest
management accounts, meaning that the project could fundamentally shift the size and profitability of
PL’s operations.
PL has an existing relationship with Rolson so it could use its experience to run the project effectively.
WonderWok project.
Rolson has a good relationship with a department store, providing access to high margin sales.
Working with a department store would be a good strategic fit for PL’s quality emphasis.
199
RDN already works in Canada transporting goods to and from Rolson so this experience could be
used for distribution purposes.
Using joint marketing with Eric Franks could harm the relationship with Lucy Tyler, particularly if it
were to reduce Lucy Tyler’s level of remuneration. The reputation of Eric Franks has suffered in
recent years so he may not be an appropriate advertising partner.
The opportunity could lead to cross-selling of related Rolson products such as the popular PE7. PL’s
Board Briefing emphasises the need to boost cross-selling so the Rolson project could be a good
strategic fit.
Rolson supplies high end products to chefs so could be a strategic fit with work involving celebrity
chefs.
3.D Pandemik
Pandemik is based in China so should understand the market for woks and the specifics of Asian
food. As Pandemik works with many Hospitality clients in China, the opportunity may allow PL to
realise its aim of expanding via work with a global hotel chain.
PL could use its existing supplier RDN to handle logistics, reducing risk and improving operational
efficiency. However, RDN appears to be using the China opportunity as an opportunity to reduce its
operational standards by suggesting a lower delivery rate target in relation to all PL’s activities (and
not just in relation to Pandemik).
China is a distant market from the UK, which could lead to operational challenges.
PanOply considers Pandemik’s quality to be in line with its own quality, but this means a low quality,
risking PL’s reputation for quality.
The chance to sell utensils could help PL to achieve its 15% target in relation to utensils.
Working with Pandemik could take away demand from a rival (PanOply).
Payment in a currency other than sterling would depart from PL’s normal policy and could lead to
exchange rate risk as a result of volatility.
3.E Ethics
Delite may be involved in IP theft if staff recruited have used confidential information relating to the
PE7. IP theft would be illegal so PL must not be associated with any such activity, particularly given
the importance of the relationship with Rolson, which is based on the licensing of IP.
PFOA is considered unsafe in some countries so using Rolson’s methods might be illegal, leading to
fines and legal penalties and damaging PL’s reputation for health and safety. PL must not be
associated with any unsafe products.
Online shopping is becoming increasingly important with growth expected in future years so there
may be benefits in working with Endemik (via Pandemik) but regulatory and legal risks arise if
confidential competitor information is shared, particularly if this is in return for what might be
considered a bribe.
200
3.F Evaluation of assumptions
There is no financial information available for the Pandemik opportunity, severely limiting the
comparability of the appraisal.
There could be other costs such as marketing and legal expenses and revenues such as cross-selling
opportunities which have not been included in the model.
3.G Conclusions
approximately £4m per year, this would be equivalent to 40% of Retail GP in the latest management
accounts, meaning that the project could fundamentally shift the profitability of PL’s operations.
WonderWok project.
PL must avoid any theft of IP as this would be illegal and could damage the relationship with Rolson.
PL must not be associated with any chemicals which are considered unsafe in the relevant country.
PL should not use Endemik’s beneficial expertise in online shopping to obtain confidential information
on competitors.
PL should proceed with the Rolson opportunity, given the high level of profits possible22.
PL should:
• undertake a field trip to Guangdong to confirm operational conditions

• perform market research on demand for woks in the UK
• discuss the funding of the project with its bank, given PL’s weak cash position
• assess the impact on PL’s other design work, given that the design team is at capacity
• discuss its ethical concerns transparently with the potential partners
• [further idea]
all available markscheme points
22
201

Piccolo Limited - SAMPLE Mock Pack

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Piccolo Limited - SAMPLE Mock Pack

Загружено:

Авторское право:

Доступные форматы

Piccolo Limited –

July 2017 ACA Case Study Mock Exam Pack

Instructions – please read in full before starting Mock 1!

All the best,

Exam Room Pack (ERP)

The 2 aims of the ERP are:

Piccolo Limited – Case Study Mock Exams

Question starts Answer starts

Mock 1 Model Answer 32

July 2017 ACA Case Study Mock Exam Pack

[Exhibits 1 to 13, per Advance Information]

The following items are newly provided:

14 E-mail from Olivia Harrington explaining tasks required

15 Request for analysis of management accounts

16 Management accounts for the year ended 31 May 2017

17 Request regarding financial modelling

18 Request regarding strategic opportunities

From: Olivia Harrington

1. A review of the results of PL for the year ended 31 May 2017.

2. A financial assessment of the Board’s proposals in relation to Piccolo’s logistics arrangement

We look forward to receiving your analysis.

Summary of events affecting Piccolo’s profitability (supplied by Piccolo Board)

Piccolo: Management accounts for the year ended 31 May 2017

Statement of profit or loss

Statement of financial position

Non-current assets: Property, plant and equipment 3 128

Total assets 19,595

Total equity and liabilities 19,595

Statement of cash flows

Profit before taxation 1,608

Change in cash and cash equivalents (2,175)

Notes to the management accounts

Note 1: Segmental analysis

Note 2: Other costs

Sales and distribution 3,786

Note 3: Property, plant and equipment

Leasehold Fixtures, Motor TOTAL

Note 4: Trade and other receivables

Trade receivables 8,614

Note 5: Trade and other payables

Trade payables 4,135

Year ended 31 May 2017

Year ended 31 May 2017

RDN Contract copy of email sent by Piccolo Board to Ingleby Grant

To the Board of Piccolo Limited – RDN Contract Renewal

We look forward to hearing from you soon.

Managing Director, RDN

Draft contract terms

Payment terms shall be agreed at a later date.

Year 1 Year 2 Year 3 Year 4 Year 5

Hospitality expansion (Ringford and Quincy Restaurants) email to Charlie Sims

Ringford update e-mail sent by Fred Fork, Managing Director, Ringford

Ringford proposal notes provided by Piccolo Board

Quincy Restaurants email from Chuck Steak, CEO, Quincy Restaurants

Quincy Restaurants proposal notes provided by Piccolo Board

Trump Threatens Canadian Export Industry Strange Times, July 2017

July 2017 ACA Case Study Mock Exam Pack

Mock Exam 1 Answers and markscheme

2017 2016 Change Change %

2017 2016 Change Change %

2017 2016 Change

2017 2016 Change Change %

2017 2016 Change