Note:

This report is far more comprehensive than would be expected from a candidate in exam conditions.
It is more detailed for teaching purposes.

T4- Part B – Case Study

BVS – Fleet maintenance case – March 2013

REPORT
To: BVS Board

From: Management Accountant

Date: 26 February 2013

Review of issues facing BVS

Contents

1.0 Introduction
2.0 Terms of reference
3.0 Prioritisation of the issues facing BVS
4.0 Discussion of the issues facing BVS
5.0 Ethical issues and recommendations on ethical issues
6.0 Recommendations
7.0 Conclusions

Appendices

Appendix 1 SWOT analysis

Appendix 2 PEST analysis
Appendix 3 Evaluation of under-performing workshops
Appendix 4 Evaluation of electric vehicle proposal
Appendix 5 Evaluation of apprentice scheme proposal
Appendix 6 Part (b) – Presentation on the 10 under-performing workshops and graph
showing utilisation levels

1.0 Introduction

BVS is an unlisted company, which was formed following an MBO on 1 April 2010. The
company has grown considerably since its formation and is currently responsible for servicing
and maintaining its customers’ fleet vehicles, totalling over 82,000 vehicles. Its sales revenue
has grown from €84.0 million in BVS’s first year of operation, following the MBO, to a forecast of
€122.9 million in the current year ended 31 March 2013, growth of almost 45%.

BVS follows the generic strategy of differentiation according to Porter. BVS is trying and
succeeding to grow its business as well as meeting the demands of its customers in respect of
the quality and range of services it offers.

In the real world there are many fleet maintenance companies including BT plc, the UK’s main
telecommunications provider. BT plc’s fleet maintenance subsidiary company has many large
fleet maintenance contracts including one with the AA to service all of its roadside breakdown
and recovery vehicles.

©The Chartered Institute of Management Accountants Page 1

There are two main issues facing BVS, which are to resolve the problem being caused by the 10
under-performing workshops and to make a decision on whether, or not, to widen the provision
of servicing for electric vehicles. If both of these issues are not satisfactorily resolved, then this
could severely impact on the achievement of the company’s 5-year plan.

The nature of the fleet maintenance industry is constantly evolving. For example, by 2015
vehicle manufacturers will need to abide by the Euro V1 emissions standards and BVS cannot
afford to stand still and needs to be pro-active towards change.

2.0 Terms of reference

I am the Management Accountant appointed to write a report to the BVS Board which prioritises,
analyses and evaluates the issues facing BVS and makes appropriate recommendations.

I have also been asked to prepare a presentation on the 10 under-performing workshops. This
is included in Appendix 6 to this report.

3.0 Prioritisation of the issues facing BVS

3.1 Top priority – Under-performing workshops

The top priority is the under-performing workshops due to the poor quality of work and the
impact this is having on BVS’s reputation together with the extra cost of outsourced workshops
to service the vehicles which could, and should, be serviced by BVS’s owned workshops.

The forecast utilisation in these 10 workshops is only 62% and they have received negative
customer feedback which could impact on BVS’s overall reputation. This problem needs to be
urgently addressed so as to save money being spent on outsourced workshop space for
customers’ vehicles which could be serviced by BVS’s managed workshops. Alternatively these
under-performing workshops could be closed.

3.2 Second priority – Electric vehicles

This is considered to be the second priority as one of BVS’s customers, FAST, has indicated
that it will terminate its contract with BVS unless the geographic coverage for servicing of
electric vehicles is extended to cover all 3 countries.

BVS has also received a proposal from E-car, to undertake electric vehicle servicing and to
install re-charging points. Furthermore, BVS needs to be pro-active in the provision of services.
Electric vehicles are becoming more widely used in fleets and it needs to be responsive to its
customers’ needs. It would also give BVS an opportunity to become an industry leader in this
field of vehicle servicing and a tie up with the electric vehicle manufacturer E-car would also add
to BVS’s reputation and credibility with future potential customers which operate electric vehicles
in their fleets.

3.3 Third priority – Apprentice scheme proposal

The third priority is considered to be the apprentice scheme proposal as over 50 employees are
within 5 years of retirement age and urgent action and budgets need to be agreed if this scheme
is to be approved and established.

BVS has direct fixed costs for managing its 120 workshops and these direct fixed costs will still
be incurred even if there were to be a shortage of trained vehicle mechanics. Urgent action is
required if an apprentices scheme is to be approved so that BVS does not find itself with a
shortage of skilled mechanics. BVS has a growing business and should not allow itself to have a
shortage of skilled mechanics. It either needs to run an apprentice scheme or recruit already
trained mechanics, assuming sufficient availability of trained mechanics in the areas required in
BVS’s home country.

©The Chartered Institute of Management Accountants Page 2

3.4 Fourth priority – Inventory valuation

The answers to the questions raised by workshop managers concerning the inventory valuation
is considered to be the fourth priority issue as it is less urgent than the other issues prioritised
above.

A SWOT analysis summarising the strengths, weaknesses, opportunities and threats facing
BVS is shown in Appendix 1.

A PEST analysis is shown in Appendix 2.

4.0 Discussion of the issues facing BVS

4.1 Overview

BVS has grown considerably since it was formed following the MBO in April 2010. It is clearly
meeting the needs of its fleet customers as it has not lost any customers to date and has grown
the number of vehicles it maintains from 47,500 to a forecast figure of 82,100 at end March
2013.

However, it is necessary for businesses to be innovative to survive, such as the opportunity to

expand the servicing of electric vehicles as well as to tackle underlying problems with workshop
quality and utilisation levels.

BVS’s management have perhaps been too focussed on growth and now is the time to
consolidate its position to ensure that the company’s good reputation for quality and range of
services is maintained or enhanced.

4.2 Under-performing workshops

There are 10 under-performing workshops, out of BVS’s 120 managed workshops. These 10
under-performing workshops are only achieving a 62% utilisation level and furthermore are
producing vehicle maintenance work of a poor quality with delays to customers’ vehicles. The
impact of this problem is huge. It goes far beyond the extra outsourcing costs as this could have
a significant impact on BVS’s reputation and could even lead to a loss of customers.

Customer satisfaction is critical in the fleet maintenance industry with customers being able to
move between servicing companies (using Porter’s 5 forces analysis, customers are a major
force in the industry). If BVS wishes to achieve its ambitious 5-year growth plan then it cannot
risk any more adverse publicity, and certainly not be seen to cause accidents through faulty
workmanship. This problem must be addressed immediately.

A real life company, Fleet Support Group Ltd in the UK, had been able to grow at around 18%
for several years and it is currently achieving high utilisation levels at its managed workshops.

The 3 alternatives that BVS is considering are:

(A) Closing down some, or all, of these 10 managed workshops and moving the work to
outsourced workshops. All 10 workshops are leased at a cost of €48,000 per workshop
each year, with a 2 month notice period. The lease costs are included in the direct fixed
costs for each workshop. Employee termination costs are forecast at €30,000 per workshop.

(B) Replacing the managers and some of the employees at these 10 managed workshops.

(C) Promotional discounts for customers to try to persuade them to book their vehicles into
these 10 BVS managed workshops.

These alternative actions will be discussed below.

©The Chartered Institute of Management Accountants Page 3

Appendix 3 shows the financial impact on the operating profit for 2013/14 and utilisation levels
of 3 different alternatives scenarios which are:

 Alternative 1. If all 10 workshops were to achieve the planned utilisation level of 91.0%.

 Alternative 2. If all 10 workshops were to be closed immediately.

 Alternative 3. If an additional 2,000 hours of work were to be carried out at each

workshop, in addition to the forecast level of 6,882 hours and the effect of this utilisation
levels.

Alternative 1

Alternative 1, which is taking action to achieve a 91.0% utilisation level in each of these 10
workshops, shows that under-performing workshops are currently resulting in an extra 3,219
hours of extra outsourced workshop time, compared to the planned utilisation level of 91%.
These 3,219 hours are costing BVS an extra €0.103 million per workshop. For 10 workshops,
this is resulting in an extra annual cost, or reduced profit, due to extra outsourcing, of €1.030
million.

An improvement in utilisation levels will therefore have a huge impact on both profitability and
cash flows. However, is an average utilisation level of 91.0% realistic for 2013/14? Will this high
utilisation level target de-motivate employees further as they may see it as unattainable?

Alternative 2

If all 10 workshops were to be closed, then BVS would save the direct fixed costs for the 10
workshops, which would be €2.9 million (€290,000 x 10 workshops) but would incur higher costs
for increased volumes of outsourced work.

This also assumes that its outsourced workshops could cope with this sudden increase in
demand. It is unlikely that the 5 outsourced partners could cope with this sudden increase of
6,882 hours for each of the 10 workshops, which totals almost 69,000 man hours of work within
the next year. The outsourced partners would need time to be able to expand their manpower
and facilities to take on this extra volume of work. Therefore immediate closure of the 10
workshops is commercially unrealistic.

BVS would also incur the penalty of 2 months lease costs and employee termination costs. The
increased cost if these 10 workshops were to be closed would be:

 €2.2 million for additional outsourced work (6,882 hours x €32 x 10 workshops)
 Lease costs of €80,000 (2 months at €48,000 per year per workshop)
 Employee termination cost of €0.3 million (€30,000 per workshop x 10 workshops).

Therefore overall, if the 10 workshops were to be closed, the net saving would be fairly small at
only €0.318 million in 2013/14. See Appendix 3.

If these 10 workshops were to be closed then on-going savings (after 2013/14) would be a net
figure of €698,000 each year, as shown in Appendix 3. Whilst closing these workshops makes
BVS more flexible, it also makes it more dependent on its outsourced partners.

Alternative 3

If action is taken to achieve Alternative 3, which is an extra 2,000 hours work being undertaken
at each of these 10 workshops, then utilisation levels would increase from 62.0% to 80.0%. This
is a more realistic and perhaps achievable utilisation level for 2013/14 rather than 91.0%.

©The Chartered Institute of Management Accountants Page 4

However, the problem of how this 18% improvement in utilisation levels (i.e. 62% to 80%) can
be achieved needs to be addressed as well as the quality of work.

Whilst utilisation at 80% is still a lot lower than 91.0% in the plan, if this level of utilisation could
be achieved it would generate savings in outsourcing of €0.640 million (based on 2,000 hours x
€32 x 10 workshops). See Appendix 3.

So now that the financial implications on the operating profit for 2013/14 have been considered,
it is necessary to consider what actions could be taken to achieve Alternatives 1 or 3.

At a time where BVS is expanding the serious question to be asked is why should it close
workshops? BVS should take urgent management action to change the working practices,
management style and employee culture at these 10 workshops in order to make the workshops
attractive for BVS’s customers to use for the vehicle maintenance. Increased use of these
workshops will result in higher utilisation levels, reduced level of outsourcing, higher operating
profits and most importantly satisfied customers.

It is suggested that BVS should immediately identify 10 workshop managers from other well
performing workshops who would be willing to be seconded to these 10 under-performing
workshops in order to make changes and improvements and to better manage the operations at
these workshops. These managers should be incentivised with a bonus payable after 6 months,
or perhaps a year, based on the improved utilisation levels that they are able to achieve at each
workshop.

None of the employees at these 10 workshops should have their contracts of employment
terminated until the new seconded workshop managers have had a chance to identify where the
fault lies and which individual employees are to blame. Is it a lack of good management, general
poor levels of skills or perhaps a lack of confidence by BVS’s customers who have chosen not to
book their vehicle servicing at these workshops. The reasons for the low utilisation levels need
to be investigated and the employees at all of these 10 workshops trained and supervised better
in order to establish the cause, or most like the many causes, for the lower utilisation levels.

With the expanding number of vehicles that BVS maintains and the planned expansion of work,
it would seem to be a dangerous move to close workshops and rely more heavily on outsourced
workshops. In the long run outsourcing is a higher cost. As shown in Appendix 3. Therefore BVS
needs to take actions to improve the quality of work and also utilisation levels.

However, as customers choose which workshop to have their vehicles serviced in, it is unlikely
that they will choose these poorly performing workshops, especially if BVS’s customers have
had a poor experience before with a badly maintained vehicle or a poor level of customer
service.

Therefore, it is necessary to improve the quality of the work before promotional offers are given
to customers to entice them back to use these workshops. If BVS were to offer customers’
discounts or incentives to use the workshops immediately and they then experienced poor
quality of work, then the promotion would be wasted and customers would be even more
unlikely to choose to use these workshops. Therefore it is necessary for new workshop
managers to be appointed on a temporary basis and additional training put in place before
customers are contacted.

Existing workshop managers should be asked to work alongside the seconded managers on a
trial basis to establish if the problems lie in poor management or a lack of training or a range of
different problems. Therefore it is suggested that no employees are sacked at present but that
all managers and employees at all 10 workshops are advised of the seriousness of the problems
and that within 12 months, jobs will be lost if no improvements are made.

This report will now consider each of the alternative proposals for change:

©The Chartered Institute of Management Accountants Page 5

Alternative (A)

Alternative (A) of closing down the workshops should be considered only as a last resort due to
BVS’s large volume of vehicles to be serviced. It should not be contemplating closing 10 out of
120 workshops, when the fleet of vehicles that it maintains has grown from under 50,000
vehicles in April 2010 to over 82,000 by March 2013.

Alternative (B)

Alternative (B) of replacing the managers seems a sensible initial decision, as the manager at
each workshop should be closely monitoring the employees, the level of customer service as
well as the quality of work and the speed of all repair work. It is suggested that 10 managers
from well managed workshops are offered 6 month secondments to these workshops. They
should be incentivised to improve quality and utilisation levels.

Additionally all employees should be provided with additional training and the importance of
quality explained to them. They should also be advised that each workshop has a limited period
to improve and that their jobs depend on a major change in employee behaviour.

Alternative (C)

Alternative (C) should only be approved and put in place only when the new managers are in
these workshops and training has been completed. Offering incentives would not cure the core
problem of the delays and poor quality work.

These under-performing workshops should have new seconded managers appointed and all
employees should be given more training, especially on quality issues and the importance of
customer service. Only when this process has been undertaken, and the new managers are
satisfied with the better quality of service being provided, should BVS contact the customers
who have been using outsourced workshops in the local area. These customers should be
contacted and offered incentives and discounts to their fleet maintenance contract if they would
be prepared to try using the previous under-performing workshops on a regular basis, rather
than the outsourced workshops.

Customer surveys should be conducted and close monitoring of customer feedback to ensure
performance improves or to identify which workshops, and indeed which employees, are still not
delivering the standard of care and workmanship expected.

Another real world example concerns Fleet Efficiency Ltd which offers its customers vehicle
maintenance over a 3 year contract period for a fixed monthly fee. It also provides management
information on all of the services it provides. There are a large number of outsourced companies
supporting the main fleet maintenance companies and BVS needs to improve the quality of work
at these 10 workshops urgently in order not to lose any of its customers to competitors.

It should be noted that the current cost per hour for these 10 under-performing workshops is
€42.14 (€290,000 / 6,882 hours) which is significantly higher than outsourcing the work at the
outsourced rate of €32.00 per hour. At the planned utilisation level of 91% the cost per hour
would reduce to €28.71.

There is the additional problem that Jonas Kral has convinced the BVS management team to
immediately close 2 of the 10 workshops. However it is apparent that the information on which
particular workshops should be chosen may not be reliable. It is essential that before any
closure decisions are taken that the closure of 2 workshops can be fully justified, otherwise BVS
would leave itself open to unfair dismissal claims and it risks damaging its reputation in the
industry.

©The Chartered Institute of Management Accountants Page 6

The BVS Board may wish to re-visit its decision on closing 2 workshops in light of the potential
savings in alternatives 1 to 3 discussed above. The ethical aspects concerning making an
example of closing 2 workshops is discussed later in this report in Section 5 on Ethics.

4.3 - Electric vehicles

Currently BVS offers servicing of electric vehicles only at 60 of its 120 managed workshops and
at none of its outsourced workshops at 320 locations. Therefore electric vehicle servicing is only
offered at 60 of the total of 440 locations i.e. at less than 14% of its total servicing locations.
With the growth in electric vehicles due to lower running costs and carbon emission factors, it is
necessary for BVS to continue to innovate and expand the coverage for the servicing of electric
vehicles. If BVS does not expand its range of locations, it could be left behind its competitors
and also lose customers which plan to change some of their fleet vehicles to electric vehicles.

There are 2 further impacts that affect this proposal. Firstly, one of its customers, FAST, which
has a fleet of 4,500 vehicles is planning to expand its fleet of electric vehicles to 1,000 vehicles
and has stated that it will terminate its contract with BVS if BVS does not expand its
geographical coverage of workshops equipped to service electric vehicles. FAST’s fleet of 4,500
represents over 5% of BVS’s forecast fleet of 82,100 vehicles at the end of March 2013. FAST
could be classified as a “keep satisfied” stakeholder, according to Mendelow’s stakeholder
analysis and BVS should be trying to retain FAST as a customer. To date, BVS has not lost any
customers, and the loss of FAST would affect BVS’s reputation in the industry and may lead to
the loss of other customers.

Secondly, BVS currently has received a proposal from E-car, an electric car manufacturer to be
appointed as one of its appointed servicing providers and also to provide locations where
electric vehicles could be re-charged. This could provide BVS with an opportunity to raise its
profile as a major provider of locations for electric vehicle re-charging points. Drivers and fleet
managers of electric vehicles which use BVS for re-charging points may well decide to choose
BVS for the servicing of these electric vehicles. Therefore this could provide BVS with an
opportunity to attract new customers and establish an early market share in this new and
growing market for electric vehicles. According to Ansoff, this is a type of market development.

The principle of this proposal is whether BVS should expand the geographical coverage for the
servicing of electric vehicles. This will cost money in investment and training for BVS’s
remaining 60 workshops as well as 320 outsourced workshops.

Furthermore, it is questioned whether BVS should be responsible for the investment in the
outsourced workshops without any contribution or commitment from the 5 outsourced
companies? BVS has generated a huge volume of new business for outsourced workshops and
if BVS were to not proceed and subsequently lose customers, then this will impact on the
volume of work generated for outsourced workshops. It is considered that all 5 outsourced
companies should contribute towards the investment cost and also the capital cost of installing
re-charging points.

The proposal for re-charging points and the link to be E-car’s appointed electric car servicing
provider is a great proposal and could generate much positive publicity. The number of electric
vehicles in city centres will increase significantly over the next 5 years, as the price of fuel
increases and as fleet managers appreciate the operational savings that can be achieved
through the greater usage of electric vehicles for short distances.

With the current technology of electric vehicles, the biggest problems are the distance that can
be covered on a fully charged vehicle together with the time taken to recharge the vehicles (as it
often takes hours to re-charge compared to minutes to re-fill with usual fuel) and there is a lack
of re-charging points available. The E-car proposal would give BVS much prominence and add
credibility to the purchase and operations of electric vehicles for many fleet managers,
especially for city centre distribution and courier companies. Therefore from a business
viewpoint, as well as an ethical stance, the promotion to offer a wider geographical service as
well as re-charging points for electric vehicles makes good business sense.

©The Chartered Institute of Management Accountants Page 7

The issue can be analysed using Johnson, Scholes and Whittington’s framework, as follows:

Suitability: as stated above this would be a suitable initiative for BVS to undertake. It would
increase the range of services that BVS currently provides across all its owned and outsourced
workshops. There would appear to be an increasing demand for electric vehicle provision from
customers, and in particular unless BVS moves ahead on this issue it will lose FAST as a
customer.

Feasibility: BVS appears to have the financial resources to undertake this investment. It is noted
that the €1.1 million cost to BVS of installing electricity charging points across all workshops is
matched by E-car’s own contribution. The investment in electric vehicles facilities would be of
benefit to BVS because it enables the company to provide not only another service to
customers, but also builds links with a specialist car manufacturer. It is feasible to ask BVS’s
outsourced workshops to contribute to the capital costs.

Acceptability: The proposed investment is evaluated in Appendix 4 of this report. It can be seen
that as an investment in its own right it only pays back in discounted terms within Year 4 with an
NPV at 12% over the 4-year period of only €17,000 without taking account of the margin
generated by FAST or a contribution towards the capital costs by BVS’s outsourced companies.
These figures are also based on what may be a fairly ambitious growth rate of 30% per annum.
Is the proposal financially viable and acceptable to BVS’s shareholders, especially PIE? Jonas
Kral, PIE’s representative on the BVS Board, has stated that the proposal needs to generate a
positive NPV in 3 years. It does not do this without taking into account the lost margin on FAST’s
4,500 vehicles. Without taking account of FAST, the discounted payback time is 4 years.

The NPV at the end of year 4 is €17,000 positive but at the end of year 3 is a negative €0.796
million. So this negative NPV at end year 3 does not meet PIE’s investment criterion.

However, this NPV does not take account of the probable loss of customer FAST, which over
the 3 year period would generate a positive NPV of €2.774 million. This is the opportunity cost of
retaining FAST as a customer. See Appendix 4 for NPV calculations. This is based on losing
customer FAST if the geographical expansion of electric vehicle servicing is not undertaken.
This is based on losing the gross margin for normal vehicles of €310 per year and the lower
margin of €70 for electric vehicles.

Therefore, if the “bigger picture” is taken into account then, the proposal would be acceptable to
both the BVS Board and to PIE, with a net positive NPV at the end of year 3 of €1.978 million
(based on negative NPV of €0.796 million plus €2.774 million for the effect of the gross margin
for customer FAST that would be retained and not terminated).

Furthermore, the outsourced workshops are stating that they would not contribute towards the
investment costs of €4,000 per workshop for electric vehicle servicing costs. If they were to
contribute something towards these costs, then the payback period would be earlier. Perhaps a
halfway point could be agreed with the outsourced workshops contributing €2,000 towards these
set-up costs. This would increase BVS’s NPV by €0.640 million. If the outsourced workshops
were to pay the whole cost of €4,000 per workshop, then the NPV would increase by €1.280
million.

This would make the proposal positive, at €484 K, without considering the margin on FAST’s
vehicles.

In respect of the proposal for re-charging points, it is also unreasonable for the outsourced
workshops to gain the profit from the re-charging points without contributing to the capital costs
for the installation for them. Therefore, it is suggested that either the profit from the re-charging
points should be shared or alternatively that the outsourced workshops should contribute some,
or all, of the installation costs at €2,000 per workshop.

©The Chartered Institute of Management Accountants Page 8

If the outsourced workshops were to pay for all of these installation costs, then the NPV would
increase by €0.640 million (€2,000 x 320 workshops).

Therefore, if the outsourced workshops were to contribute towards the capital costs for their 320
workshops in total the NPV for the proposal for BVS would be improved as follows:

€’000

NPV at end year 3 (as per Appendix 4) - 796

Plus contribution from outsourced workshops:

- for equipment and training at €4,000 per workshop +1,280

- for capital cost of installation of re-charging points at + 640

€2,000 per workshop

Total revised NPV at end Year 3 +1,124

Add in the NPV for FAST +2,774

Possible revised NPV for the proposal at end Year 3 +3,898

The above table demonstrates how the NPV could be improved to make a total of €3.898 million
by end of Year 3.

This would obviously be acceptable to PIE. However, much would depend on how much could
be negotiated with the 5 outsourced companies concerning their contribution to the capital
expenditure for this proposal.

4.4 – Apprentice scheme proposal

With an ageing employee profile, BVS needs to ensure that it has adequate manpower for its
120 workshops in its home country. BVS has the choice of 3 alternative actions:

 Training its future employees itself through the proposed apprentice scheme

 Recruiting skilled employees and training them to BVS standards. This may incur
recruitment costs and probably higher employee pay and the case material states that there
is a shortage of skilled vehicle mechanics in BVS’s home country.

 Outsourcing more work and having lower levels of utilisation at BVS managed workshops.

With 50 of BVS’s employees in the over 60 age range, there is a danger of become short of staff
as the retirement age is 65 in BVS’s home country. If the apprentice scheme is to be agreed,
then a minimum of 10 apprentices would need to be trained each year for 5 years, assuming an
even profile of the 50 employees retiring at the rate of 10 each year. An alternative is to
undertake the apprentice scheme for a lower number of apprentices and to also recruit some
already trained vehicle mechanics.

The cost of the apprentice scheme is shown in Appendix 5. It is forecast to cost €36,440 per
apprentice for the 1 year of training. This includes salary costs and training net of the
government subsidy as well as the additional cost of outsourcing for the lost hours as current
workshop employees spend time training the apprentices.

The proposed annual budget of €150,000 would only be adequate for training 4 apprentices
each year. This would leave a shortfall of 6 workshop mechanics, assuming 10 retire each year
over a 5 year period. Therefore 6 trained vehicle mechanics would need to be recruited if this
budget were not to be increased.

©The Chartered Institute of Management Accountants Page 9

The concept of an apprentice scheme has a number of benefits including the social one of
providing employment for young people when in many European countries youth unemployment
is often around 25%, and even over 50% in Spain and Greece.

It would also enable BVS to mould the apprentices into the culture of the company, rather than
having to change the mindset of an already qualified mechanic. Again, the use of apprentices
would help provide a seamless transition to replace employees who are retiring, and should also
improve some flexibility in workshops for sickness and holiday cover for other employees.

Carmen Kemp should prepare an analysis by retirement age of the 50 employees, as it may not
be equal per year. It is possible that more than 10 may be due to retire in some of the next 5
years.

Additionally these older mechanics have a vast amount of experience which will be lost to BVS.
In order to maintain its quality service to its customers, BVS must address this problem urgently.
Although achieving high quality service is critical in the industry, BVS also needs to maintain its
competitive position, to be amongst the cost leaders in any industry is a major source of
competitive advantage (and is one of Porter’s competitive strategies).

Perhaps these older employees could be asked if they wish to continue to work past their official
retirement age. This is allowed by law in the UK. It is suggested that Carmen Kemp be asked to
discuss with these 50 employees what their wishes are likely to be and whether any of them
would be willing to work beyond retirement age. Perhaps their skills could be used to train the
new apprentices.

BVS must not take a short-term view concerning its employee base. The BVS business has
grown considerably over the last 3 years and much of the company’s success is down to the
quality of its employees. With 50 employees due to retire, this is a key area where costs should
not be cut. A longer-term view needs to be taken.

4.5 – Inventory valuation

It is the Management Accountant’s role in an organisation to help line managers understand the
importance of accurate financial data and to assist with their understanding of all aspects of
inventory valuation.

Inventory valuation is important to ensure that the Statement of Comprehensive Income

accurately reflects the items used to generate the revenues i.e. the matching concept. It is also
important that the inventory figure in the Statement of Financial Position reflects a realistic value
at the financial year end.

In answer to the 4 specific questions raised by the managers, the comments are as follows:

Point 1 - Date of the inventory count

Inventory valuation should take place on the last working day of the accounting period. At year
end, due to preparing published accounts, it is important that the value should reflect the last
day.

In principle, inventory could be counted earlier in the week, as suggested by the workshop
managers, but deliveries and parts used would also have to be counted so that the net figure
reflects the true year end figure. Additionally care would have to be taken to also adjust the
count for any subsequent damaged parts, or any inventory items returned to suppliers.

Would the company feel confident that this process had been done accurately at the
workshops? What if the company’s auditors wished to attend the inventory count – how could
this be facilitated? The workshop managers’ request to count inventory during the week is an
understandable one, since it is a time consuming and disruptive process.

©The Chartered Institute of Management Accountants Page 10

However, it would seem that the more reliable route would be to count inventory on Sunday 31
March 2013.

Point 2 - How to value parts

Parts should be valued at the lower of cost or net realisable value. If the parts are rarely used or
are obsolete, then they should be valued at zero and the inventory value should be reduced. If
parts are bought in bulk and the cost has gone down, then all parts, irrespective of when they
were purchased should reflect the lowest cost. If the cost of the parts has increased, then the
older parts should NOT be increased in value, but should be valued at their original cost price
and more recent purchases should be valued at their current higher cost value. However, a
further question is why additional newer parts were ordered if there is already an inventory of
this item.

Point 3 – Slow moving items

If some parts are hardly ever used, then they should not be valued in inventory at all, and a
provision should be established to offset their cost.

Assuming the value is small, it would be acceptable for these specific items not to be counted at
all and instead a provision set up to write-down the value held in BVS’s accounts for these
items. Additionally, controls should be established so that no further orders are placed by any
workshop for these parts, and any demand should be satisfied by moving these parts from a
workshop which holds them.

BVS should really look to dispose of them since they will be taking up valuable storage space. In
this case their realistic sales value may well be below the cost price paid, and the inventory
would have to be down valued accordingly.

Point 4 – Specialised tyres

These 140 specialised tyres that are still in inventory, as the customer whose vehicles needed
these specialised tyres has disposed of the vehicles, should be written down to a zero value as
BVS has no use for them. BVS should attempt to offer them at a discounted price to other BVS
workshops or outsourced workshops. If they are not required at all then BVS should attempt to
sell them at a discounted price. However, in the interim the full inventory value should be written
off.

Additionally, tighter controls on parts purchase should occur to ensure that high volumes of
specialised parts or tyres are not purchased when the demand is not known for certainty.

5.0 Ethical issues and recommendations on ethical issues

5.1 Range of ethical issues facing BVS

There are a range of ethical issues that will be discussed and recommendations made, including
the following:

1. Immediate closure of two of the under-performing workshops

2. BVS management know that poor quality work is being undertaken resulting in a vehicle
accident

3. Replacement of vehicle parts before the end of useful life to generate revenues

©The Chartered Institute of Management Accountants Page 11

5.2 – Immediate closure of two of the under-performing workshops

5.2.1 Why this is an ethical issue

This is an ethical issue because, as BVS’s Management Accountant, I have been asked to
name which 2 workshops should be closed. This should not be a decision that is taken lightly to
“show the power” of the BVS management team. It is unethical not to consult, or warn the
manager and the employees, at these under-performing workshops before a decision to close
the workshops is taken. I have been put in a difficult situation where employees’ jobs rest on
data which I have, which may not be up to date or incorrect, and this could result in an unfair
decision being made.

It is not good practice to “make an example” by closing 2 under-performing workshops without

taking management action to improve them.

Whilst BVS is having some operational problems with the ten workshops, in the first instance
BVS should try and resolve both the utilisation and customer satisfaction issues.

5.2.2 Recommendations for this ethical issue

It is unfair to close any workshops immediately and this management decision to make an
example of 2 workshops should be reversed.

It is recommended that the 2 under-performing workshops are not closed at the moment but that
the management and employees at all 10 workshops are informed that unless the quality of the
work improves, and customers are giving good feedback over an agreed time period (say, 3 to 6
months) then closure will occur. It is unfair to close any workshops immediately.

It is also recommended that as BVS’s Management Accountant, I must act with fairness and
objectivity, which are within CIMA’s fundamental principles under its code of ethics. The
Management Accountant cannot allow Jonas Kral’s demand for information to influence this
decision.

Therefore it is recommended that as BVS’s Management Accountant, I must discuss the lack of
reliable information with Annika Larsen, the Finance Director, with a view to having a meeting
with Jonas Kral to persuade him to defer the closure of any workshops until management action
has been taken.

5.3 – BVS management know that poor quality work is being undertaken resulting in a vehicle
accident

5.3.1 Why this is an ethical issue

The managers at the under-performing workshops as well as the senior BVS management team
know that the quality of work is not up to the standard expected and indeed may even be illegal.
It is known that one vehicle was involved in an accident due to faulty workmanship. This is not
acceptable and demonstrates that BVS is not offering its customers the professional care that
they expect.

The TV programme “Watchdog” investigated Kwik-Fit for charging for un-necessary work, and
this caused widespread damage to the company’s reputation, as it was seen to be deceiving
customers into paying for products and services that were not required.

5.3.2 Recommendations for this ethical issue

©The Chartered Institute of Management Accountants Page 12

It is recommended that the manager and employee who had worked on the vehicle involved in
the accident are disciplined. It is recommended that additional training is provided to ensure that
the importance of vehicle safety is fully understood.

It is recommended that the Operations Director contacts all workshops and all employees and
additionally outsourced workshops, to explain the importance of safety and quality of work and
that any further incidents resulting in a vehicle accident will result in disciplinary action or even
the termination of the contract with the specific outsourced workshop.

5.4 – Replacement of vehicle parts before the end of useful life to generate revenues

5.4.1 Why this is an ethical issue

It is unfair to BVS’s customers, who trust BVS to undertake a professional job with vehicle
maintenance and to act with integrity. It is unacceptable for individual workshop managers to
allow and even boast about that additional revenues could be generated by un-necessary
vehicle repairs.

Whilst of course BVS workshops need to be profitable, they must never be seen by customers
to be creating income by doing work unnecessarily. In this respect BVS has an ethical duty to
behave with professional competence and due care to its customers (one of CIMA’s
fundamental principles). The workshop manager dealing with JP has failed to understand this
ethical point.

5.4.2 Recommendations for this ethical issue

It is recommended that the Operations Director contacts all workshops, owned and outsourced,
to further emphasise the company’s policy on maintenance and replacement of parts. Parts
should only be replaced as necessary for safety or preventative maintenance purposes and
should not be replaced to simply generate more work or additional revenues.

BVS’s reputation could be severely damaged by the poor attitude demonstrated by the
workshop manager when questioned about the early replacement of these parts.

Additionally, it is recommended that both Leo Willems and Carmen Kemp have a meeting with
the workshop manager in order to explain the company’s expectations as to how customers
should be treated when balancing the needs for profitability with high customer care.

It is further recommended that guidance be provided to all workshop managers, for both BVS
managed and outsourced workshops, on the need to act in a professional manner with
customers at all times. The rationale is that having the right culture in the company will help to
achieve the longer term growth goals of the company.

6.0 Recommendations

6.1 – Under-performing workshops

6.1.1 Recommendation

It is recommended that the 10 under-performing workshops are NOT closed.

It is recommended that BVS should give the managers and all employees at these 10
workshops notice that BVS’s management team will be closely monitoring them for 6 months.
This notification should state that unless the quality of work significantly improves, then
employees will be dismissed. Clear and reasonable targets of quality of work must be set,
monitored and communicated to all employees at these 10 workshops.

©The Chartered Institute of Management Accountants Page 13

It is also recommended that new workshop managers are appointed to each of these 10
workshops, by seconding existing high quality managers from other workshops. BVS should
offer these new temporary managers a financial incentive to improve both the quality of work
and utilisation levels.

It is further recommended to provide training for all existing employees at all 10 workshops. Any
employees that are not delivering the required quality of work or level of customer service
should be disciplined and given formal written warnings. The newly appointed workshop
managers will need to work closely with Human Resources to ensure that the correct
procedures are followed in any disciplinary actions.

Only after new managers are in place and training has been undertaken by all employees, is it
recommended to contact BVS’s customers who book their vehicles into outsourced workshops
which are located near to each of the 10 under-performing workshops and to incentivise them to
get their vehicles serviced at these 10 workshops.

It is also recommended to work closely with these customers and to monitor their feedback so
that the customers are happy to use these 10 workshops again.

It is recommended that Alternative 3 is accepted, i.e. a target to gain an extra 2,000 hours of
work for each workshop in the next year is set, so as to achieve an 80% utilisation level for each
workshop in 2013/14.

6.1.2 Justification

BVS’s business is growing and the problem at these workshops needs to be addressed rather
than simply closing the workshops. It is probable that the outsourced workshops in the local
areas to the 10 managed workshops, may not be able to cope with the extra 68,820 hours of
work (6,882 x 10 workshops) if they were to be suddenly closed.

Long-term, the closure of the 10 workshops will reduce BVS’s costs by €698,000 each year, but
make BVS much more dependent on its outsourced partners. With growing volumes of business
this is not a commercially sensible move. This on-going saving is shown in Appendix 3.

The rationale for recommending Alternative 3, targeting an extra 2,000 hours of work at each
workshop, is that this option seems to be the most feasible in the short term, and if this can be
achieved utilisation would improve to 80% saving €640,000 in outsourcing costs over the
coming year.

It is fairer to employees for them to be trained and better managed so that they can better
deliver the required quality of workmanship which BVS customers require.

With the appointment of temporary new managers at these 10 workshops, it will be possible for
the new managers to identify whether the problems have occurred due to poor management,
poor procedures at these workshops or inadequate training. If individual mechanics are at fault
then disciplinary action can be taken against these individuals rather than close the entire
workshop.

6.1.3 Actions to be taken

1. In order to satisfactorily implement the recommendation to achieve an extra 2,000 hours

work at each workshop, it is essential that service quality is quickly improved.

2. As an interim measure existing successful workshop managers should be seconded to

these 10 under-performing workshops to review their operations, and to report back to Leo
Willems within 30 days with their provisional findings.

©The Chartered Institute of Management Accountants Page 14

3. It is very likely that some of the existing 10 workshop managers and their employees may
need to be replaced. Therefore, Carmen Kemp (HR Manager) and Leo Willems would then
need to work through this in a fair and professional manner.

4. BVS’s account mangers will also need to appraise customer fleet managers of the reasons
why the changes are being made and to encourage them to start using these 10 workshops
again for their vehicle maintenance.

6.2 – Electric vehicles

6.2.1 Recommendation

It is recommended that the proposal to extend electric vehicle servicing is accepted for all 440
workshops (owned and outsourced) covering the 3 countries in which BVS operates, subject to
negotiations with outsourced companies on their contribution to capital expenditure costs.

It is also recommended that BVS accepts the proposal from E-car to be a recommended service
company for fleets of electric vehicles and also to provide electric vehicle re-charging points at
all 440 workshops.

It is also recommended that BVS tries to convince the outsourced workshop companies to either
contribute to the cost of installing the re-charging points or alternatively for them to share the
profits generated from these re-charging points. It is unfair for BVS to pay the capital investment
costs and the outsourced companies to gain all of the on-going benefits.

When the proposal has formally been approved by the BVS Board it is recommended that FAST
is informed of the decision and that BVS tries to retain it as a customer.

6.2.2 Justification

Electric vehicles will become an increasingly important vehicle type in company fleets and BVS
must continue to innovate and accept new opportunities if it is to grow. If it does not accept the
proposal it will lose customer FAST and possibly other customers.

The proposal from E-car will generate good publicity for BVS and may help BVS to attract new
customers which operate electric vehicles as well as normal fuel vehicles.

If BVS is able to negotiate with the 5 outsourced companies for them to contribute some or all of
the capital expenditure costs, the NPV becomes positive by end Year 3 even if the operating
profit on FAST is not considered.

The proposal, including the opportunity cost of retaining FAST, generates a positive NPV and
should be acceptable to the BVS Board as well as to PIE.

6.2.3 Actions to be taken

1. Accept E-car proposal.

2. Negotiate investment costs with outsourced workshop companies to get them to contribute
all or some of the €4,000 per workshop equipment and training costs and the €2,000 per
workshop capital cost of installing re-charging points.

3. It is suggested that Annika Larsen, Finance Director, has a pre-Board meeting with Jonas
Kral to discuss the financial consequences of losing FAST as a customer.

©The Chartered Institute of Management Accountants Page 15

4. Prepare updated NPV to help Jonas Kral understand the acceptability of the proposal
following negotiations with the outsourced companies and what contribution they will make
towards capital expenditure costs.

5. Contact FAST to re-assure it that BVS will be expanding its coverage of electric vehicles.

6. Arrange site planning meetings regarding the siting of the installation of electric re-charging
points.

6.3 – Apprentice scheme proposal

6.3.1 Recommendation

It is recommended that the apprentice scheme is accepted.

It is also recommended that an age profile of the 50 employees over 60 years old is established
to identify exactly the age profile of how many employees are expected to retire over each of the
next 5 years.

It is also recommended that a higher budget of €218,640 is approved, which is based on training
6 apprentices each year. The remaining shortfall of employees due to retire should be filled
where possible with already trained vehicle mechanics. The proposed budget of €218,640 is
46% higher than proposed but this does utilise the government training subsidy that is available.

6.3.2 Justification

BVS has a high volume of vehicle work to undertake and if it loses some employees due to
retirement, this will result in higher levels of outsourcing and lower utilisation levels unless
additional employees are either recruited or trained through an apprentice scheme.

It is the responsible action of a growing company to invest in its workforce.

6.3.3 Actions to be taken

1. The location of which workshops apprentices are required for should be established.

2. A budget should be agreed for each workshop to cover apprentice training costs.

3. The external subsidy of €4,000 for each apprentice should be applied for to cover external
training costs.

4. To discuss with employees over 60 whether they were considering retiring at 65 or whether
they would wish to work full-time or even part-time beyond the retirement age.

5. Suitable apprentices should be recruited.

6.4 – Inventory valuation

6.4.1 Recommendations on the 4 points are as follows:

Point 1 - Date of the inventory count - it is recommended that workshops count their inventory
on Sunday 31 March 2013.

©The Chartered Institute of Management Accountants Page 16

Point 2 - How to value parts – it is a requirement that parts must be valued at the lower of cost
or net realisable value. If the parts are rarely used or are obsolete, then they should be valued at
zero and the inventory value should be reduced.

Point 3 – Slow moving items – it is recommended that they are written down to zero. Additionally
it is recommended that controls should be established so that no further orders are placed by
any workshop for these parts, and any demand should be satisfied by moving these parts from a
workshop which holds them. It is also recommended that BVS should dispose of them.

Point 4 – Specialised tyres – it is recommended that the value is written off entirely in the
2012/13 accounts and that BVS should attempt to sell them at a discounted price. Additionally, it
is recommended that tighter controls on parts purchase should occur to ensure that high
volumes of specialised parts or tyres are not purchased in future.

6.4.2 Justification

Point 1 - Date of the inventory count - It is recommended that workshops count their inventory
on Sunday 31 March 2013. The rationale is that the company requires an accurate physical
count for its statutory accounts, and that the company’s external auditors are likely to want to
attend the inventory count at some of the workshops in order to ensure the accuracy of the
company’s records. The company should explain to its workshop managers the reason and
importance for this timing.

Point 2 - How to value parts – it is important that parts are not over-valued in the Statement of
Financial Position.

Point 3 – Slow moving items – it is recommended that they are written down to zero so the
inventory for these slow moving items is not included in the Statement of Financial Position at
the end of March 2013. It is also recommended that BVS should dispose of them to try to gain
some revenue and to have them removed from workshop premises.

Point 4 – Specialised tyres – these should be written off and disposed of as they have no further
value for the BVS business.

6.4.3 Actions to be taken

1. Inform workshop managers to conduct the inventory count on Sunday 31 March 2013.

2. Parts should be values at the lower of cost or net realisable value and therefore each part
should have the value reviewed.

3. Slow moving items should be written down. No further orders for these items should be
placed and any demand should be satisfied from the inventory held by whichever BVS
workshop holds the specific item required.

4. Specialised tyres to be sold or disposed of.

©The Chartered Institute of Management Accountants Page 17

7.0 Conclusions

BVS is a growing business and needs to continue to meet or exceed the agreed 5-year
business plan to keep the private equity investor, PIE, satisfied.

It needs to take tough, but fair, action on the under-performing workshops and to manage the
problem better than it has in the past.

It is important that BVS continues to innovate and meet its customers’ expectations and
therefore the electric vehicle proposal should be approved in order to expand the geographical
coverage of this growing number of customers’ electric vehicles.

The future looks promising for BVS but improved management information and management
action is required to ensure that all managed workshops perform better and meet required
quality standards.

©The Chartered Institute of Management Accountants Page 18

 Appendix 1
SWOT analysis

Strengths Weaknesses

 Experienced and motivated senior  10 under-performing workshops with

management team following the MBO
 High growth experienced
 No loss of customers to date
 Profitable company
 Reputation for high quality of work
 Use of PRP to incentivise employees
 PIE equity investor and experience it
brings to BVS
 5-year maintenance agreement for
JAR’s fleet
 Good support from BVS’s 5
outsourced suppliers
low utilisation levels
 Poor quality of work at these under-
performing workshops
 Limited geographical coverage at
present for electric vehicles
 Employees nearing retirement and
loss of their experience
 Workshop managers replacing parts
un-necessarily demonstrates poor
control
 Inventory control with slow moving
items still held in inventory at
workshops
 No dividends paid to date

Opportunities Threats

 Increased profitability if utilisation  Possible closure of under-performing

levels at 10 under-performing
workshops can be improved
 Expansion of electric vehicle servicing
 E-Car proposal for re-charging points
 Apprentice scheme proposal
workshops
 Loss of customers if BVS do not
expand the geographical coverage for
electric vehicle servicing
 Competitors action and loss of
customers
 Dependent on outsourced workshops
– they could “steal” BVS’s customers
 Outsourced workshops' quality of work
could affect BVS’s reputation

Note:
The above SWOT analysis is detailed for teaching purposes. However, in exam conditions a
SWOT containing fewer bullet points, which cover the main issues from the case and the
unseen material, is expected.

©The Chartered Institute of Management Accountants Page 19

 Appendix 2
PEST analysis

Political/Legal

 Increased government legislation on vehicle safety features

 Increased pressure on BVS’s customers to reduce carbon emissions for their fleets
 Increased political pressure or possible government subsides to increase the use of
electric vehicles

Economic

 Current economic environment putting all companies under pressure to reduce costs
 BVS’s customers try to lower their fleet operating costs
 Need to control wage rates with pressure to keep fixed price servicing costs down
 Increased cost of fuel requiring vehicles to perform their best to maximise fuel
consumption
 Need to gain greater utilisation levels in BVS’s workshops to improve profitability.

Social

 Increased awareness of environmental damage by vehicles and pressure on fleet

mangers to reduce carbon emissions
 Employees managing to cope with the expansion of BVS and the number of vehicles
that it maintains

Technological

 Use of new technology to help BVS’s customers manage their fleet operating costs
(FLIS IT system)
 Use of telematic devices to improve driving performance and reduce fleet running costs
 Use of new technology for fault diagnosis

©The Chartered Institute of Management Accountants Page 20

 Appendix 3

Evaluation of under-performing workshops

Alternative 1:
Effect on forecast operating profit for 2013/14 if utilisation level were to be 91%:

Per Utilisation Outsourced

workshop cost saving
Hours % €’000

Forecast hours chargeable to customers 6,882 62.0%

Hours not charged to customers 4,218 38.0%
Total hours available 11,100 100.0%

If 91.0% utilisation level achieved 10,101 91.0%

Difference in hours 3,219

Saving in outsourced cost at €32.00 / hour 3,219 103

Total saving for 10 workshops 32,190 1,030

Alternative 2:
Effect on operating profit for 2013/14 if all 10 workshops were to be closed:

Per Number of Total saving

workshop Workshops in 2013/14
€’000 €’000

Saving from closure:

Direct fixed costs of workshops 290.0 10 2,900

Less additional costs:

Extra cost of outsourced work: 6,882 hours per (220.2) 10 (2,202)
workshop @ €32 per hour

Cost of 2 months lease based on €48,000 per (8.0) 10 (80)

year

Employee termination costs at €30,000 per (30.0) 10 (300)

workshop

Total net saving in 2013/14 31.8 318

Alternative 3:
Effect on operating profit if an extra 2,000 hours were carried out at these 10 workshops:

If an extra 2,000 hours completed by workshops the utilisation =

6,882 11,100 62.0%

2,000 11,100 18.0%
8,882 11,100 80.0%

€’000

Saving in outsourced costs for 2,000 hours at €32 / hour 64.0

Total net savings in 2013/14 for 10 workshops 640

©The Chartered Institute of Management Accountants Page No: 21

 Appendix 3 continued
Evaluation of under-performing workshops

Alternative 2:

On-going full year effect on operating profit (for years after 2013/14)
if all 10 workshops were to be closed:

Per Number of Total on-

On-going full year effect of closing workshops workshop Workshops going
€’000 saving
€’000

Saving from closure:

Direct fixed costs of workshops (including lease 290.0 10 2,900
costs – per page 21 of unseen material)

Less additional costs:

Extra cost of outsourced work: 6,882 hours per (220.2) 10 (2,202)
workshop @ €32 per hour

Total on-going full year net saving 69.8 698

©The Chartered Institute of Management Accountants Page No: 22

 Appendix 4
Evaluation of electric vehicle proposal

Year 0 Year 1 Year 2 Year 3 Year 4

Number of electric vehicles – average
(based on 30% growth) 1,800 2,340 3,042 3,955
NPV for proposal Number of Per Per
Workshops workshop vehicle € '000 € '000 € '000 € '000 € '000
Investment cost for equipment and training 380 4,000 -1,520
Capital cost of re-charging points 440 2,500 -1,100
Revenue 450 810 1,053 1,369 1,780
Operating profit from re-charging points 120 2,000 240 312 406 527
Variable operating costs (BVS manpower
and charges from outsourced workshops) 260 -468 -608 -791 -1,028
Total cash flows -2,620 582 757 984 1,279

Cost of capital at 12.0% 1.000 0.893 0.797 0.712 0.636

Discounted cash flows -2,620 520 603 701 813
End Year 3 End Year 4
NPV -796 +17
Payback period 4 years

Number of Margin per

Forecast NPV for FAST vehicles vehicle € € '000 € '000 € '000
If FAST contract with BVS is retained Non-electric vehicles 3,500 310 1,085 1,085 1,085
Electric vehicles 1,000 70* 70 70 70
Net cash flows 1,155 1,155 1,155

DCF 1,031 921 822

NPV end Year 3 +2,774

Net benefit of electric vehicle proposal at end Year 3 including the margin from Fast +1,978

*Note: Margin for FAST’s electric vehicles is €70 per vehicle is based on current margin of €120 less the planned revenue reduction of €50 per vehicle.

©The Chartered Institute of Management Accountants Page No: 23

 Appendix 5

Evaluation of apprentice scheme proposal

Hours €
Per apprentice cost of outsourcing 32.0 420 13,440
Salary & associated costs 22,000 22,000
Training costs (net of subsidy) 5,000 – 4,000 1,000
Total cost per apprentice 36,440

But 50 employees are due to retire within 5 years 50 5 years 10 Apprentices per year

Budget required for 10 apprentices each year = €36,440 10 364,400

Proposed budget 150,000 = Only 4 apprentices each year

Recommended budget for the apprentice scheme: €

6 apprentices per year 218,640

Remaining shortfall should be filled by recruiting already trained vehicle mechanics.

©The Chartered Institute of Management Accountants Page No: 24

 Appendix 6

Part (b) – Presentation on the 10 under-performing workshops

and graph showing utilisation levels

 The additional annual cost of each under-performing workshop at 62% rather than the
planned level of 91% is €103 K, resulting in an additional cost for all 10 under-
performing workshops of €1.030 million (based on 3,219 extra outsourced hours at the
outsourced cost of €32 per hour for each workshop)

 The saving if these workshops were to be closed would be €0.318 million (based on
saving 10 workshops at €290,000 each less additional outsourced work based on 6,882
extra hours at €32 for 10 workshops and lease and employee termination costs).

 If 2,000 extra hours of work were to be undertaken at each of the under-performing

workshops, then utilisation levels would increase to 80%, saving €0.640 million (based
on 2,000 hours of outsourced at €32 x 10 workshops)

 The current cost per hour of the under-performing workshops is €42.14 (€290,000 /
6,882 hours) which is significantly higher than outsourcing the work. At the planned
utilisation level of 91% the cost per hour would reduce to €28.71, which is lower than
outsourcing.

 Recommendation: Appointment of seconded workshop managers to each of the 10

under-performing workshops, additional training for employees to improve the quality of
work and when quality levels are considered to be acceptable, then BVS should run
promotions with customers to try to convince them to book their vehicles into these
workshops.

Utilisation levels for 10 underperforming

workshops
91.0% 80.0%
100.0%
64.0% 62.0%
80.0%
Utilisation
levels

60.0%
40.0%
20.0%
0.0%
2012/13 2013/14 2013/14 2013/14
Actual Forecast Plan With extra
2,000
hours

End of answer

©The Chartered Institute of Management Accountants Page No: 25