Case study july 2010 exam paper ICAEW

List of exhibits The following exhibits were included in the material provided as Advance Information: 1 About you Robin Tyler and your employer Kreem Ltd 2 The cosmetics and toiletries

Wednesday 28 July 2010

(4 hours)

CASE STUDY

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List of exhibits

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

1 About you (Robin Tyler) and your employer (Kreem Ltd)

2 The cosmetics and toiletries industry: Background

3 The cosmetics and toiletries industry: Business models

4 The cosmetics and toiletries industry: Regulation

5 All about Kreem Ltd

6 Memo from Rameet Sharma (Director of Finance and Business Planning) to all members of the board: Business review for the year ended 30 June 2009

7 Kreem Ltd: Management accounts for the year ended 30 June 2009

8 Kreem Ltd: Summary of arrangements with Retail Division customers

9 Kreem Ltd: Summary of arrangements with HCC Division customers

10 Kreem Ltd: Supplier profiles

11 Kreem Ltd: Financial forecasts

12 Email from Henry Johnstone (Product Director) to Rameet Sharma: Packaging arrangements

13 Recent press articles

14 Kreem Ltd: Example product label

The following items are newly provided:

15 Email from Rameet Sharma to you: Review of results and business planning

16 Kreem Ltd: Management accounts for the year ended 30 June 2010

17 Fax from Edwina Michaels (Purchasing Director, Longmore Hotels) to Roddy Ryan (Sales and Distribution Director, Kreem Ltd)

18 Email from Henry Johnstone to Rameet Sharma: Packaging arrangements – update

19 Recent press articles

KREEM LTD

Case Study requirement

You are Robin Tyler, a final-year trainee Chartered Accountant working for Kreem Ltd (Kreem), one of the UK's leading toiletries companies

Requirement

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

28 July 2010 from Rameet Sharma to you (Exhibit 15) Your report should comprise the

following four elements:

• An executive summary

• Your responses to the three detailed requirements set out in Exhibit 15, 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)

95%

Applied to your report as a whole

100%

Approximately 15% of the marks are awarded for the executive summary and 10% for the

appropriate 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

EXHIBIT 15

EMAIL

From: Rameet Sharma, Director of Finance and Business Planning

Date: 28 July 2010

Subject: Review of results and business planning

At our next board meeting, in addition to discussing the annual results, we will be focusing on business planning I have been asked to brief the other directors on two topics: (i) the possible sales contract with a potential new HCC customer, the Longmore chain of hotels; and (ii)

strategic issues in relation to our packaging supply arrangements

I am attaching the following relevant documents:

• Management accounts for the year ended 30 June 2010 (Exhibit 16)

• The proposal from Longmore (Exhibit 17)

• An email from Henry Johnstone about our packaging supply arrangements (Exhibit 18)

• Various recent press articles (Exhibit 19)

I would like you to prepare a draft report to the Kreem board, comprising:

1 An analysis of the company's performance for the year to 30 June 2010

Your analysis should cover (i) revenue, costs and EBITDA compared with actual figures for the year to 30 June 2009 and forecast figures for the year to 30 June 2010; and (ii) changes

in working capital

2 A comparison between (i) the proposal for Kreem to become exclusive toiletries supplier to a new HCC customer, Longmore, and (ii) renewal of the existing contract with Mangold, on the basis that (owing to a conflict of interest) Kreem is not able to undertake both contracts Your comparison should cover the contract period (1 January 2011 – 31 December 2013)

It should include sensitivity analysis on selling price and a discussion of the assumptions affecting the other elements in your calculations You should also set out the risks to Kreem

of each contract and your recommended option

3 A discussion of the proposal to diversify our packaging supplies by transferring a proportion

of our annual requirement from Jugson to Tryphik in 2011

Your discussion should consider the general benefits and risks to Kreem of having multiple sources rather than a single source for its packaging supplies It should also address the specific operational and ethical aspects (including corporate responsibility) of transferring some of the packaging work to this new supplier based outside the UK

I look forward to reading your draft report

Rameet

EXHIBIT 16 Kreem Ltd: Management accounts for the year ended 30 June 2010

Profit on ordinary activities before taxation 5,311

Non-current assets

24,521

Current assets

15,252

Shareholders' equity

18,427

Non-current liabilities: Loan due to KdK 12,000

Cash flow statement £000

Net cash inflow from operating activities 5,917

Note 1: Segmental analysis £000

Revenue (see also Note 2)

37,388

Gross profit

22,393

Sales volumes for Retail Division include 6,757,000 units in respect of Wychdean.

Note 4: Other costs

Note 5: Receivables

Included within trade receivables is £1,577,000 due from Wychdean

Note 6: Current liabilities

EXHIBIT 17

From: Edwina Michaels, Purchasing Director, Longmore Hotels, Richmond, Surrey, UK

To: Roddy Ryan, Sales and Distribution Director, Kreem Ltd

Date: 22 July 2010

BY FAX: STRICTLY CONFIDENTIAL

Dear Mr Ryan,

As you may know, we are a chain of 75 UK hotels, with 3,750 bedrooms in total As part of an

ongoing rebranding exercise, we are looking to change our toiletries supplier and are approaching you to discuss an initial contract for three years from 1 January 2011 to 31 December 2013 The existing supplier will not be re-tendering

We see ourselves as direct competitors of Mangold, Airview and Bullover, and as a result our

proposal is subject to Kreem Ltd not supplying any of these companies while you have a contract with us

We consider ourselves a very attractive proposition, particularly in view of our expansion plans (see below)

The proposal

Our plans (which are not to be disclosed to other parties without our express permission) are as follows:

Average number of bedrooms 3,750 4,500 7,500

The lower occupancy rates for 2011 are due to the fact that all our 75 existing hotels will be

undergoing a rebranding and refurbishment during the year to 31 December 2011, during which all bedrooms will be closed for an average of two months This rebranding and refurbishment

(following which the hotels will be known under the name Longmore Prestige) is a prelude to a major two-part expansion programme:

1 A significant UK expansion, taking place over 2012 and 2013

2 Our first venture into Europe, starting in 2014 We are in initial negotiations with property

developers for sites near Paris and Amsterdam Thus there is potential for an even larger

contract in due course

We envisage your toiletries being supplied in dual-branded bundles of four items, in your standard small sizes (namely: bar of soap, bottle of liquid soap, bottle of bath foam and bottle of shower gel), with one bundle per room irrespective of the number of guests staying in that room We propose a contract price per bundle of £1.00 which, subject to negotiation, would remain in place for the entire duration of the contract

Our environmental policy

According to recent industry surveys, travellers are increasingly choosing to stay at hotels with

sound environmental policies and practices We at Longmore pride ourselves on our

environmental policies Some hotels automatically throw away any unopened bottles and sachets of toiletries as part of the morning room cleaning, or at the end of a guest's stay, but our approach is that any unopened items are left in the room for the next night or next guest Based on our

experience with our existing supplier, we would assume an allowance of 20% for non-replacement when calculating our annual purchase requirements

Other opportunities

All of our hotels have retail shops, which contribute significant amounts of revenue every year As part of our contract, we would be looking to supply regular-sized bottles of your toiletries in these shops, at prices to be negotiated with you We also provide links to our suppliers' websites, where

we take a share of any resulting revenue from sales of suppliers' products: we would be pleased to discuss such an option with you These initiatives could potentially add an average of 10% to your revenue from the contract for each of the three years

Other information

Our latest audited financial statements show that we earned revenues of £210 million and made a profit before tax of £9.2 million in the year to 31 December 2009, both up 7% on the previous year

We believe that Kreem would be an exceptional complement to the changes in progress at

Longmore We have no doubt that the strength of the Kreem brand and superb quality of its

products will resonate well with our guests The Longmore relaunch focuses on what matters most

to guests – modern, contemporary hotels with efficient, friendly service and a great night's sleep Top-quality bathroom products can only add to this overall impression We look forward to

discussing our proposal with you, on a strict 'no obligation' basis

Yours sincerely

Edwina Michaels

For and on behalf of Longmore Hotels

EXHIBIT 18

EMAIL

From: Henry Johnstone, Product Director

Date: 20 July 2010

Subject: Packaging arrangements – update

This is an update on developments since my last email, dated 26 May (Exhibit 12)

Daniella Wood, the Head of Customer Relations at Jugson, was not able to convince me that the service would improve, so I met with several of the Jugson directors on Monday They

assured me that the problems were being actively addressed, as the personnel responsible for providing us with poor service have now left the company Nevertheless, I have been continuing

to explore the option of transferring some of our packaging to other suppliers

My team has produced a shortlist of such companies, and from these I particularly like Tryphik, which is based in France From our research, Tryphik appears to have sufficient capacity and suitable design processes Another benefit is that, with one of the Xanthus cruise liners being moored off the French coast, Tryphik may be able to supply direct to the ship without the need

to use Oloros (our distributor)

The initial intention would be to transfer up to 25% of our business to Tryphik once the exclusive contract with Jugson expires at the end of 2010 The arrangement would be for a one-year 'trial' period, with prices, invoices and payments set in euro

A major point of appeal is Tryphik's understanding of the toiletries business It has contracts

with several large multinationals, some of which have been in place for over 20 years Here are some quotes we have obtained from senior figures at four existing Tryphik customers in the UK:

"They are quite simply the best They understand our needs and we always feel as though

we are their most important customer, if not their only one Once when their software broke down, they worked round the clock to ensure our bath foam order was fulfilled on time."

"They were brilliant when we wanted to redesign our packaging as part of a rebranding for our sauces and other food products We hadn't done this before and they led us through each step of the process A word of warning though: they can be very expensive!"

"Their attention to detail on recycling, biodegradability and safety is superb They even

offered to come in and give us free staff training on ecological sustainability of toiletries!"

"We use Tryphik as one of three companies that do packaging for us Their designers are really creative but they can sometimes misunderstand instructions from our manufacturing department – this may have something to do with language and cultural barriers."

You will appreciate that we need to be certain of our security of packaging supplies and to come

to a decision soon

Henry

EXHIBIT 19 Recent press articles

UK cosmetics company Ellis Ltd, founded and wholly owned by Lucy Ellis, has been severely

criticised for transferring its manufacturing supply contract from its outsourcing partner in Scotland to

a company based in Asia, where production costs are 30% lower, with the loss of 150 jobs

Trade unions reacted angrily at the announcement "Ms Ellis has no commitment to her workforce and

is a very poor example to the rest of the sector," one representative said, "This is confirmation that her motive is making even greater profit at the expense of UK manufacturing and her loyal staff Ellis cosmetics can no longer be said to be UK products." The growth of India as a software and call centre economy has seen British companies transfer thousands of posts overseas while low-cost east

European companies have benefited from the switch of manufacturing capacity

In a brief statement, Ms Ellis claimed that the move to Asia had in fact saved highly-skilled jobs in Scotland A third of the workforce now has a science background: some had contemplated emigrating

to the US, potentially adding to the so-called 'brain drain' – loss of technical expertise from the UK She added that the move would result in a substantial increase in the company's total output; and this,

in conjunction with the planned launch of Ellis cosmetics in Russia, would create new jobs in the UK

EXCLUSIVE! Tryphik denies animal role Daily News, 28 July 2010

Packaging supplier Tryphik, no stranger to controversy, has vigorously denied claims made last night by an unnamed source that it knew of the scandal surrounding

toiletries company Merjoram, for which it designs and makes bath foam bottles Film available on YouTube appears to show Merjoram clearly testing products on animals, although it has insisted for many years that it strongly opposes animal testing

Previous experience has shown that the UK public can react very strongly towards animal testing in the toiletries industry, sometimes boycotting companies known or believed to be involved or implicated (however indirectly) in such activity

Tryphik has issued a statement saying that it is seeking clarification from Merjoram and that, if the testing is confirmed, it would cease supplies immediately and start legal action for damages against Merjoram

Packaging company Jugson could be in trouble over its awarding of contracts Its directors are said to have made misrepresentations over a number of years about the company's capabilities, as well

as providing excessive hospitality to prospective customers and offering bribes in the hope of winning supply contracts

One cynical industry observer has remarked that Jugson may find

it easier to win contracts in those countries where bribery is an accepted part of business She adds that it may be no coincidence that Jugson is currently looking to extend its customer base

overseas

Jugson heavily denies the claims and is taking legal advice over its response