Case study july 2013 exam paper ICAEW

List of exhibits The following exhibits were included in the material provided as Advance Information: 1 About you Phil Roberts and your employer Palate Ltd 2 The UK contract catering i

Wednesday 24 July 2013

(4 hours)

CASE STUDY

CANDIDATE NUMBER

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of your answer

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minutes to assemble your answer in this folder Fasten your complete script inside

this folder using the hole in the back page and the tag provided Do not include your

question paper in the folder

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5 Your answer must be submitted on the paper provided by the ICAEW in the

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exhibits from the case material, included in your answer WILL NOT be marked by

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List of exhibits

The following exhibits were included in the material provided as Advance Information:

1 About you (Phil Roberts) and your employer (Palate Ltd)

2 The UK contract catering industry: Background

3 Contract catering: The business model

4 Palate Ltd: Overview of the business

5 Email dated 19 July 2012 from Samantha James to all Palate directors

6 Palate Ltd: Management accounts for the year ended 31 May 2012

7 Palate Ltd: Overview of business units (July 2012)

8 Palate Ltd: Example client contracts (summary of key terms)

9 The food service supply chain

10 Palate Ltd: The way forward (the board’s strategic overview, May 2013)

11 Letter dated 3 June 2013 from Morgan Catering Advisors to Palate Ltd and to Arno Girls’ Boarding School, together with a note from Oswald King to Samantha James

12 Press articles

The following items are newly provided:

13 Email dated 24 July 2013 from Samantha James to you

14 Palate Ltd: Draft management accounts for the year ended 31 May 2013

15 Email dated 11 July 2013 from Nasir Khan to Samantha James

16 Email dated 23 July 2013 from Oswald King to Samantha James

17 Article dated 23 July 2013 from Catering Now

18 Email dated 22 July 2013 from George Watson to Samantha James

19 Letter dated 17 July 2013 from Ogilvie Catering Consultants to Palate Ltd and to

Humbells Hardware

ICAEW/CS/J13 2 of 15

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PALATE LTD: CASE STUDY REQUIREMENT

You are Phil Roberts, a final-year trainee ICAEW Chartered Accountant working for Palate Ltd, a contract catering company based in St Albans, just outside London Palate has three business units, each operated as a separate division, though they form a single statutory entity You report to the Director of Finance and Business Development, Samantha James

Requirement

You are required to prepare a draft report for the Palate board, as set out in the email dated

24 July 2013 from Samantha James to you (Exhibit 13) Your report should comprise the

following four elements:

 An executive summary

 Your responses to the three detailed requirements set out in Exhibit 13, including financial

appendices (as required)

State clearly any assumptions that you make All workings should be attached to your answer Your report should be balanced across the three detailed requirements, and the following time allocation is suggested:

Marks allocation

All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated broadly as follows:

Applied to the four elements of your report (as described above)

90%

Applied to your report as a whole

 Demonstrating integrative and multidisciplinary skills 5%

100%

Of the total marks available, 15% are awarded for the executive summary and approximately 10% for the relevant discussion of ethical issues within your answer to the requirements

In planning your report, you should be aware that not attempting one of the requirements will have a significantly detrimental effect on your chances of success, as will not submitting an executive summary In addition, as indicated above, all four skills areas will be assessed under each of the four elements of your report Accordingly, not demonstrating your judgement and failing to include appropriate conclusions and/or recommendations in each element of your report will affect your chances of success

ICAEW/CS/J13 4 of 15

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EXHIBIT 13 EMAIL

From: Samantha James

Date: 24 July 2013

Subject: Client issues

A number of significant issues and opportunities have arisen recently in relation to each of our three business units, and these need to be addressed as a matter of urgency I attach the following relevant documents:

 Palate’s draft management accounts for the year ended 31 May 2013 (Exhibit 14)

 Email from Nasir Khan: TN business unit / HLSF (Exhibit 15)

 Email from Oswald King: New business opportunity (Exhibit 16)

 Article from Catering Now (Exhibit 17)

 Email from George Watson: Humbells Hardware (HH) (Exhibit 18)

 Letter from Ogilvie Catering Consultants to Palate and Humbells Hardware (Exhibit 19)

I would like you to prepare a draft report to the board, in which you should:

1 Review the results of TopNotch (TN) business unit, and the results of our client

Hertfordshire Late Spring Fair (HLSF), for the year ended 31 May 2013

You should compare TN’s revenue, cost of sales and gross profit (Exhibit 14) with those for the year ended 31 May 2012, having first adjusted the draft 2013 management

accounts to exclude the results of both HLSF 2012, held in June 2012, and HLSF 2013,

held in May 2013 (see Exhibit 15) You should refer as necessary to the analysis in Note

1 of the accounts You should then review the results of the HLSF 2013 event by

comparison with both the HLSF 2012 and HLSF 2011 events

2 Evaluate whether Palate should tender for the Vynes Independent School (VIS) contract,

as requested in Oswald King’s email dated 23 July 2013 (Exhibit 16)

Your evaluation should comprise a calculation of Palate’s minimum revenue and gross profit to be earned in each of the first three years of the VIS contract, based on the

assumptions and estimates set out in Exhibit 16, together with an assessment of these

assumptions and estimates and of the practical considerations associated with the

contract

3 Discuss the steps that we need to take to address the issues raised in the letter from

Ogilvie Catering Consultants (Exhibit 19), as referred to in George Watson’s email

(Exhibit 18)

Your discussion should be set in the context of both our desire to maintain a strong and

profitable relationship with HH and our recent strategic review (Exhibit 10) Where

appropriate, please also identify any wider implications for Palate as a whole and any ethical concerns that arise for Palate

I look forward to reading your draft report

ICAEW/CS/J13 6 of 15

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EXHIBIT 14 Palate Ltd: Draft management accounts for the year ended 31 May 2013

Cost of sales

ASSETS

Non-current assets

4,393

Equity

STATEMENT OF CASH FLOWS (summary) £000

Cash flows from financing activities – dividends paid (300)

Cash and cash equivalents at beginning of year 1,863

Cash and cash equivalents at end of year 1,688

ICAEW/CS/J13 8 of 15

XX

TN

LA

Note: Visitor numbers were as follows:

2 Administrative expenses

£000

Wages & salaries, pensions and other costs 1,352

Staff training, welfare & recruitment 57

1,935

3 Receivables £000

2,057

2,357

5 Employee numbers

The average number of employees (full-time equivalents) during the year was as follows:

548

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EXHIBIT 15 EMAIL

From: Nasir Khan

Date: 11 July 2013

Subject: TN business unit / HLSF

Although the management accounts appear to show a good result for TN, I am concerned that this is distorted by the timing of the Hertfordshire Late Spring Fair (HLSF) – one of our most prestigious clients – as all revenue and costs from both the “HLSF 2012” and “HLSF 2013” events are recognised in the 2013 accounts

HLSF had always been held over the traditional UK three-day public holiday weekend in late May However, the organisers (local authority) scheduled the 2012 event for early June to coincide with the Queen’s Diamond Jubilee celebrations in the UK and it took place over four days (Saturday 2 – Tuesday 5 June 2012), with longer opening hours than usual As had always been the case, our location fee was payable to the local authority on the first day of the event

This year, HLSF reverted to its regular slot, being held on Saturday 25 – Monday 27 May

2013 Less than a month before the event, the local authority announced its decision to

double its admission prices, mistakenly believing that they had been too low in the past Total HLSF visitor numbers dropped to 58,000, compared with 115,000 in 2012 and 74,000 in

2011 In addition, with a forecast of unseasonally cold weather, we added more hot food to the menu, which entailed more staff and the hire of extra mobile kitchen equipment The weather was in fact fine, so the demand for hot food was lower than expected

A summary of the last three events is set out below Prior to 2012, Palate had always

consistently achieved revenue of between £300,000 and £350,000 on HLSF at a gross

margin of around 25%

Cost of sales

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Subject: New business opportunity

Please find attached (Exhibit 17) an article posted this morning on the Catering Now

website We need to evaluate whether to tender for the VIS contract by calculating Palate’s minimum revenue and gross profit for an initial three-year period, based on the assumptions and estimates set out below, and assessing the related practical considerations This is

especially important since the contract would take effect on 1 September 2013, only just over

a month from now Our competitor Ravenous has already announced its intention to tender for this contract

My initial discussions with VIS have revealed the following

VIS would be required to guarantee in the contract a minimum number of meals for each of the three years, based on agreed estimates of pupil and staff numbers, average take-up of meals and the standard 190 days in a school year The figures below are VIS’s current best

estimates for these Specifically, take-up is less than 100% to reflect VIS’s proposed “liberal” ethos, entitling pupils to leave the premises at lunchtime as long as they sign out It also allows for pupil and staff absences for other reasons (notably illness and exam study leave) Take-up

is assumed to build to a peak in Year 3 as satisfaction levels and the popularity of the meals served by Palate increase

Our tender would be based on this guaranteed minimum number of meals and an agreed average revenue per meal for each year payable by VIS to Palate The £ figures below are my initial estimates of this average revenue, based on our experience at other schools VIS would pay Palate one-third of the total annual minimum guaranteed revenue at the start of each school term (ie, on 1 September, 1 January and 1 May) VIS would have to give a full term’s notice to Palate if it wished to reduce the minimum numbers of meals for the following term

Year 1 (beginning

1 Sept 2013)

Year 2 (beginning

1 Sept 2014)

Year 3 (beginning

1 Sept 2015)

I would anticipate a gross margin of 5% in Year 1, rising to 10% in Year 2 and 15% in Year 3

As well as reflecting likely economies of scale as the volume expands, this assumes that:

 food costs will remain relatively stable, with no large inflationary increases or shortages in any key ingredients;

 menus will not alter significantly from year to year; and

 the ratio of catering staff to meals served, and the number of staffing hours per day, will

be in line with those normally provided for our school clients

EXHIBIT 17

Panic as caterer goes out of business (Catering Now, 23 July 2013)

The brand-new Vynes Independent School (VIS), which is due to welcome its first group of

pupils on 1 September 2013, is in crisis Jordi, the company that was to be the exclusive

provider of catering services to VIS, has gone into administration and will no longer be in a

position to fulfil its contract Jordi owes money to HMRC as well as a number of suppliers and many of its employees Industry sources believe that the company lost control of its working capital cycle

“Emergency” tender

In view of Jordi’s failure, VIS is now expected to go through an “emergency” tender process to identify a replacement caterer able to start straightaway Needless to say, the company chosen will – among other qualitative and quantitative criteria – have to be able to demonstrate its

financial stability before being accepted The original appointment of Jordi was somewhat

controversial: no competitive tender took place at the time and Jordi’s CEO, Reg Ironton, is also one of VIS’s founders

VIS will open as a day school in September 2013 with 400 pupils at new, purpose-built

premises Another 400 pupils are expected to join in September 2014 and then a further 400 in September 2015, resulting in a 100% complement of 1,200 by that date Staff numbers

(teaching and other) will be 50 at the outset and would then be expected to expand in proportion

to pupil numbers The successful bidder will therefore find itself with a contract initially small in size but growing into a substantial one over time This is seen as an attractive proposition since the caterer can gauge VIS’s needs while it is still growing, making changes as necessary and increasing its efficiency before VIS reaches full capacity

State-of-the-art

Jordi was to provide a full service, based on its “signature” meals – and made from local, fresh produce, seasonally chosen and sustainably sourced The new caterer will equally be expected

to offer a menu well matched with VIS’s vision and ethos, consisting of innovative, high-quality and nutritious food (both hot and cold) – and value for money

The new premises comprise state-of-the-art facilities, including language learning zones, music and theatre studios, an art and design wing, a food technology room, plus indoor and outdoor sports venues (Some of these could in due course be hired out for conferences and other

external events, but we understand that there are no immediate plans for such activities.)

Pertinently, they also boast a dining area with capacity for 600 people eating together, as well

as two fully-fitted kitchens, enabling the chosen caterer to prepare all meals on-site The system created by Jordi was designed to allow pupils and staff to select their menu choice from a

handheld device at any time between 07.00 and 09:00 on the same day, which in turn enables the kitchen staff to plan more accurately and minimise wastage

Tendering companies will need to be aware that there is a well-known fast food outlet and a popular sandwich shop around five minutes’ walk away, both with a thriving lunchtime business However, experts say that the VIS contract will attract bidders because it could generate

revenue of up to £650,000 per year once there is a 100% complement of pupils