ACCOUNTING, PURCHASING & COST

CONTROL
Remote Assessment September 2020
Candidate Instructions
 The word limit for each of the 4 questions is 750 words, giving a total assignment
word limit of 3000 words.
 Write your total word count after each response.
 Responses must be your own work, based on your personal study and/or research.
 You must acknowledge all material and sources used in the preparation of your
responses (books, articles, reports, lecture notes, and any other kind of material) in
a list at the end of each response. A formal referencing system such as Harvard is
advised but is not an essential requirement to gain all the marks available under
communication and originality.
 Plagiarism is a serious offence. Do not copy in part or whole the work of other
students and/or persons.
 You must include the following Candidate Declaration at the end of your
submission:
“I declare that this work is entirely my own with the sources of information I have
used clearly identified and acknowledged”.

Instructions for typewritten responses

 At the top of each page include your full name, Student ID Number, Centre Name
and the title of the ICM Unit for which you are submitting.
 Submit your response in Arial font, black, minimum size 12, single-spaced with
normal margins.
 Clearly indicate the question number for all of your responses.
 Number each page of your work.

Instructions for handwritten responses

 At the top of each page include your full name, Student ID Number, Centre Name
and the title of the ICM Unit for which you are submitting.
 Submit your work in blue or black ink, in legible handwriting on lined paper.
 Clearly indicate the question number for all of your responses.
 Number each page of your work.

Advice
 Read each question several times before you answer it.
 Plan your answers before you start writing the full responses.
 Up to 5 marks are available per question for communication and originality.
 Check all your answers for content and plagiarism before submitting your work.
 Prepare your responses using the resources provided by ICM, the ICM Remote
Assessment guidance and any material provided by your ICM Approved Teaching
Centre.

© INSTITUTE OF COMMERCIAL MANAGEMENT

 Omar’s Hotels

Omar has been running a successful mid-range hotel for a number of years and would
like to open another hotel. Omar has seen two hotels for sale and also a plot of land that
he could purchase to build a new hotel on.

Omar’s accounting knowledge is limited but he does have a thorough understanding of

the hotel business and despite the recent pandemic, believes now is the right time to
invest as he has built up cash reserves in excess of £1m. The latest market research
predicts that the UK hotel market is likely to see substantial growth in the next 2 years,
followed by 3 years of moderate growth. This is mainly due to an increasing number of
UK residents not wanting to travel abroad for their vacation.

Omar has identified 3 hotel options:

Hotel 1

This hotel is currently run as a budget hotel and is being sold so the current owner can
pursue other interests. If Omar purchased this hotel, he would invest money in upgrading
the rooms and would be able to increase prices slightly. Due to its location, and the
amount of investment required to upgrade the hotel, he would keep it as a budget hotel.

Hotel 2

This is a mid-range hotel and has seen its client base fall over the last 2 years. Omar
believes this is due to the current owners letting the property deteriorate by not
investing enough to maintain the current pricing structure due to their imminent
retirement. Omar has years of experience running a very similar sized mid-range hotel.
Omar would need to invest substantially in refurbishing each room to a good standard
and would initially offer lower price rooms to regain reputation. These prices could rise
quickly as reputation returns.

Hotel 3

This is a plot of land close to a very expensive golf course and Omar would like to build a
relatively small, but luxurious, hotel and spa with the aim of attracting visitors to the golf
course. The plot of land for sale is very close to a nature reserve and there have been a
number of concerns from local residents that building on this plot would have a
detrimental effect on the wildlife.

Omar’s cost of capital is 8%; his overall aim is to maximise his wealth over 5 years and
would like to recover his initial investment within 4 years.

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APCC04 REMOTE ASSESSMENT SEPTEMBER 2020 Continue Overleaf 
 As the newly appointed management accountant for Omar’s hotel business Omar has
provided you with the following information in relation to the hotel options:

Hotel 1 Hotel 2 Hotel 3

Initial Cost £675,000 £650,000 £350,000
Initial Build £600,000
Initial Refurbishment £50,000 £150,000

Number of rooms 55 40 30

Occupancy rates (based on 365 nights available)

Year 1 70% 55% 50%
Year 2 75% 60% 50%
Year 3 80% 65% 60%
Year 4 82% 65% 70%
Year 5 82% 70% 75%

Average room rate per night

Year 1 £38 £65 £115
Year 2 £42 £70 £125
Year 3 £46 £75 £135
Year 4 £50 £80 £140
Year 5 £52 £85 £140

Variable cost per room per night occupied £10 £12 £32
Fixed costs (excluding service agreement) £160,000 £205,000 £220,000
depreciation pa £30,000 £42,000 £48,000

Capital expenditure
Year 1 £15,000 £15,000 £10,000
Year 2 £15,000 £15,000 £10,000
Year 3 £20,000 £15,000 £20,000
Year 4 £25,000 £30,000 £30,000
Year 5 £20,000 £15,000 £30,000

Present value factors at 8% are:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

1 0.923 0.858 0.794 0.735 0.680

Omar has a provisional contract with a company that will provide a fixed cost service
agreement for both his current hotel and the new hotel; this will be £200,000 per annum.
This cost must be apportioned between the two hotels based on the number of rooms.
Omar's current hotel has 40 rooms. Ignore taxation, inflation and possible impacts on
Omar’s current hotel.

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APCC04 REMOTE ASSESSMENT SEPTEMBER 2020 Continue Overleaf 
 ANSWER ALL QUESTIONS

1. As Omar’s Management Accountant, you must prepare a forecast profit

and loss account for each of the hotel options. In your forecast you must
include the following.
 Calculate the Gross Profit and the Net Profit for each hotel for the
next 5 years.
 Calculate the average Gross profit and Net Profit ratios for each
hotel option over the 5 years.
 Calculate the occupancy rates required for each option to break even
in Year 1.
 Evaluate the profitability of each of the 3 hotel options given that
Omar’s existing hotel has a gross profit margin of 80% and net profit
margin of 40% and industry data for similar hotels gives an average
gross profit margin of 75% and net profit of 45%.
 State two practical ways Omar can increase profits and identify any
risks associated in him doing so.

(Word limit 750) [25 marks]

2. As Omar’s management accountant, you have been asked to write a report

evaluating each of the hotel investment options based on the 5 years forecast
data provided. The initial investment will be Year 0, assume all other cash flows
are at the end of the year. In your report you must include the following.
 Use the Payback and Discounted Cash Flow (DCF) methods of investment
appraisal in the report
 Include a table summarising the results
 Explain the principles of using the DCF and why this is an appropriate
investment appraisal method

(Word limit 750) [25 marks]

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APCC04 REMOTE ASSESSMENT SEPTEMBER 2020 Continue Overleaf 
3. To: Jane Richards
From: Tom Davies
Subject: Help!

Hi Jane

Omar has asked me a number of questions on last month’s accounts and that I don’t feel
confident answering, please could you help me? He’s insisting on detailed explanations
for each. It would be helpful to me as well to understand the accounting entries and any
relevant accounting concepts that apply.

 Last month I bought a mini bus for £22,000 but I can’t see this in the profit and
loss account under motoring expenses, can you explain where this is in the
accounts? The money has definitely come out of the business account!
 I’ve just found out that a corporate customer has gone into liquidation, they
owed me £3,500. Can you tell me how this will impact profit and when?
 The hotel’s business insurance is due for renewal next month. I’ve been paying
this monthly however they have offered me a good rate if I pay for the year
upfront. Our financial year end is next month so it will look like I would have two
years’ worth of insurance in one year. Is that correct?
 As we were closed for 10 weeks, I have a large amount of bottled beers that
have a short sell by date. The bar will not be able to sell all this before the use by
date without selling at a heavily discounted price. My estimate for year end is
that I will have beer with a retail value of £9,000 that cost £4,500. To get rid of
the stock I will have to sell at 20% of the retail price. Will this impact the year
end stock valuation?

You have received the above email from Tom who is the new accounting trainee
working for you. In your response you must provide him with a detailed
explanation for each issue.

(Word limit 750) [25 marks]

4. Omar has been discussing the new hotel options with a wealthy friend who is
interested in investing in his new business. Although Omar has significant cash
reserves, he is interested in having an additional investor as it means he would
not use all his cash in the business. As his management accountant, you are
required to give a verbal presentation to Omar and his potential investor entitled
‘Options in multiple ownership business’. Prepare the speech you would give as
part of the presentation in which you explain the differences between the
options available. You must include the advantages and disadvantages of each
option, using examples to support your explanation.

(Word limit 750) [25 marks]

END OF QUESTIONS

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APCC04 REMOTE ASSESSMENT SEPTEMBER 2020