MAF 2019 CTA LEVEL 1 EOY EXAM PAPER 1: SCENARIO

Tile and Carpet Centre [100 Marks]

Company Background
Hortative Investments (Pvt) Ltd, T/A Tile and Carpet Centre (TCC) was established in 2009. It
has become one of Zimbabwe’s leading suppliers of premium carpets, porcelain and ceramic
tiles. The company supplies only the finest range of products from Italy, Spain, South Africa
and China. Tile and Carpet Centre has proven to be an innovative market leader delivering
unsurpassed levels of personalised service and products of only the highest quality for big
project market.

Patronized by Architects, Designers, Builders, Contractors, Retailers and discerning

individuals, Tile and Carpet Centre offers high-quality products of the greatest variety and
selection, extensive inventories, fair prices and exceptional service. The nationwide branch
network has showrooms with a vast display of the most comprehensive array of products.
The well-established worldwide links with some of the world’s leading manufacturers
provides clients with access to the latest products in keeping up with modern trends from
around the world.

Trading Environment

The following report was extracted from the Board report at the beginning of the year. “At
the end of the prior year, we noted that for our industry to grow, we would need the economy
to be boosted sustainably, household prosperity to improve materially, and consumer
confidence to be rebuilt to translate into positive investment sentiment. We cautioned that
for the foreseeable future, factors such as high unemployment, escalating living costs, foreign
currency shortages, endemic corruption, uncertainty regarding land ownership and unstable
power supply would weigh on homeowners, causing them to defer discretionary spend on
their properties.

In addition, we anticipated that a general wait-and-see attitude would prevail following the
contested national election, which would further delay investment decisions. Disappointingly,
the weak trading conditions and negative consumer sentiment persisted over the year under
review and deteriorated notably in the last quarter. Furthermore, while the local economic
climate continued to decline, unfavourable trading conditions were also experienced in some
of our export markets, specifically South Africa and Zambia. While consumers are facing
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greater economic hardship than before, they simultaneously have a far wider choice and
better access to our industry than previously. This is facilitated by the increased use of
technology and range of omnichannel purchasing options available, the globalisation of
international fashion trends, and the proliferation of social and digital media; aligned with the
role of influencers on consumers.

The review period also witnessed an increasingly competitive landscape as higher numbers of
opportunistic importers entered the market. In line with trends over the past several years,
the new build market was virtually stagnant, with activity in the industry confined largely to
commercial projects and residential renovations. While the commercial projects segment has
remained reasonably buoyant over the past two years, it started to show signs of strain in the
latter half of the review period, with projects either being re-specified to achieve cost savings
or temporarily deferred.”

Group Structure

For the purpose of monitoring company performance and reporting, operations are split into
three main segments which are independently managed.

TCC

Tile
Tile Retail Carpets
manufacturing

Tiles Retail Segment

This company supplies tiles in two main broad range of tiles:

• Ceramic tiles - Ceramic tiles have quickly become one of the most popular types of
materials used in homes. Ceramic tile is made up of sand, natural products, and clays
and once it has been moulded into shape they are then fired in a kiln. When making
ceramic tiles they can either be glazed or unglazed, with hundreds of different designs

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of ceramic tiles. Most of the tiles are imported while a portion of unglazed tiles is
manufactured by the company’s plant in Msasa industrial area.

• Porcelain tiles – Porcelain tiles are composed of highly refined and purified clay that
is shaped through a dry pressing process, which is then fired at extremely high
temperatures. Porcelain has also become a favourite for home and business with its
smooth, shiny surface, minimal grout lines, comparatively large format and elegant
colour palette – polished porcelain tiles represent the top-end of wall and floor
coverings that are minimalist, luxurious, sophisticated and sensuous.

Performance of the Tile Segment – 31 December 2018

Notes Budget Actual

Tile sales revenue 1 8,955,000 9,125,078
Other revenue 2 366,000 398,000
Total revenue 9,321,000 9,523,078
Direct operating expenses -7,018,729 -7,346,204
Purchase of tiles 3 -4,852,543 -4,976,098
Salaries and wages 4 -1,462,555 -1,500,128
Fuel Costs 5 -636,048 -785,400
Other transport costs -67,583 -84,578
Indirect operating expenses -1,133,241 -1,153,995
Lease costs 6 -564,432 -575,432
Communication and IT costs 7 -145,324 -156,455
Other allocated overheads 8 -423,485 -422,108
Operating profit for the period 1,169,030 1,022,879

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1. The Budget was based on the following key assumption

Square metres per box Porcelain Ceramic
Square metres per box 2.4 3
Sales quantities in square metres 315 000 470 000
Prices per box 36 27

Porcelain tiles are expected to contribute two-fifths towards payment of fixed costs.
An evaluation of the actual results revealed the following:
• A total number of 108 560 porcelain boxes where sold and 155 430 ceramic
boxes where sold at average price 10% and 15% respectively higher than the
budgeted prices.
• It was also noted that the average square meters in a porcelain box is 2.6m 2
and not the square metres on the budget.
2. Revenue relates to the sale of tile cement and a total 34 000 bags had been budgeted.
Due improved customer loyalty, the actual quantity was 5% more that the budget
quantity.
3. Relates to the costs incurred in the purchase of tiles. A special type of Porcelain tiles
is imported from South Africa and the following details are provided. 12 000m2 of this
tile was budgeted and 10 950 m2 was purchased during the period. The budgeted price
was $9/m2. The actual price was R135. The rate at the beginning of the year was $1:
R11. The rand depreciated by 20% over the period.
4. Relates to shop floor and administration workers at the different branches
5. TCC has two trucks that are used in the delivery of tiles and other merchandise from
the warehouse to the different branches. The average fuel consumption of the trucks
is 7km/litre of diesel. Diesel was budgeted at $1.2/litre. Actual fuel consumed was
523 600 litres and the average cost of diesel was $1.5/litre.
6. TCC has 8 branches and two warehouses. All these are leased from third parties.
7. This is the allocated portion of the information and communication costs of TCC. A
review of the allocation indicates that the correct allocation rates have been used in
respect of the budgeted and actual allocations.

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8. This represents the portion of the overheads TCC incurred at corporate level and
apportioned to the different business segments and business units.

Tile Manufacturing Segment

TCC runs a small ceramics manufacturing plant that employs twenty operational staff. The
plant manufactures the unglazed ceramic type tiles. Unglazed ceramic tiles are very hard and
dense. They come in various surface treatments and textures. Typically, these are installed
outside your home as they do not offer much protection against stains compared to glazed
ceramic tile. Unglazed tiles do have good slip resistance; however, they do require sealing to
help prevent staining.

The plant supplies some of the ceramic requirements to the main TCC tile retail outlets and
the company allows them to supply to outside customers whenever they have excess
capacity. The employees work a basic 40-hour week for 48 weeks a year and are paid on an
hourly basis. The average wage per hour is $10.42. The fixed costs for the plant total
$300 000 per annum.

Tiles sell for $60 per m2 tiles and the costs per m2 are:
$
Direct materials 10
Direct labour 15
Variable overheads 18
NB: Assume 1 tile is equal to 0.03335m2
In most years the plant operated close to normal capacity, but at present the business is
operating at 60 per cent of capacity. Because of this, Derek the general manager has assigned
two operational staff to refurbish the plant showroom, which should take them 8 weeks to
complete. He has also recently agreed to redecorate and tile the changing rooms and
surround of the local swimming pool. This is a charitable work and should take three
employees half a year to complete. However, the plant has since been offered two large
contracts, which was bid for a few months ago.

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Fish-and-chip shops contract

The first contract is from a company that owns a chain of upmarket fish-and-chip shops. The
company needs tiles for five new fish-and-chip shops that it is about to open. Derek has
heard from a reliable source that the company plans to open a further 30 new shops over
the next 2 or 3 years. The tiles for the five shops are required in 6 months’ time, and each
shop will require 20 000 tiles at the normal selling price less 5 per cent.

Z plc contract
The second potential contract is from a department store, Z plc, which requires 40 000
sets of pastel coloured tiles in one year’s time. This may lead to further annual orders from Z
plc. The general manager has already produced designs for the product, which the company
has agreed; Dereck reckons that this took $12 500 worth of time. The price agreed per set is
the normal price less 15 per cent quantity discount. If the contract is accepted, moulds will
have to be made, which will cost $55 000. In order to complete this contract a considerable
amount of production space is required to store and dry the moulds and to store the
completed goods ready for despatch in 1 years’ time.

The plant owns a warehouse adjacent to the plant. This warehouse is leased to another
business on an annual basis at a rental of $100 000 per annum. Fortunately, the lease is due
for renewal this month and the plant could use the warehouse to complete the large contract
for Z plc. Derek estimates that its use would cost $13 000 in extra fixed operating costs per
annum.

Staffing and capacity information

Derek has no difficulty in recruiting staff as required, but he feels that he could not absorb
more than eight new employees in the coming year. Recruitment costs are $1 500 per
employee.

He also has little difficulty in getting staff to work 6 hours’ overtime per week at 150 per
cent of their normal rate of pay. However, they could only work at this level for half of the
48 weeks worked per annum.

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If Derek accepted either job, he could stop the two members of staff decorating the
showroom and hire a contractor, which would cost $12 500. If he brought the three staff back
from the work on the swimming pool, he would feel obliged to donate $55 000 which would
pay for a contractor to finish the work. Twenty-five per cent of the plant’s output each year
is made up of new one-off orders from small outlets.

Carpets Segment

The carpet segment was introduced in 2012 as a specialist carpet supplier. It only specialises in
Frieze carpets also referred to as twist, which is a very popular style of carpet today. Frieze is
essentially the modern version of the old shag carpet from the 1960s and 1970s. Frieze is
characterized by long fibres that have a high twist. In many frieze styles, the fibres have been
twisted so much that they begin to curl back upon themselves, in the same way, that string or
hair twisted in your hand would. The strategy to specialise proved to be excellent in the early
years as the frieze carpets increased popularity among a lot of middle-income homeowners.
However, in 2016, the sales of frieze drastically declined, and that trend has continued
unabated.

The carpet segment has a capacity to produce up to 600 000m2 of frieze carpet per year. Its
cost structure is $5 950 000 fixed production costs per year plus $38.50 variable production
costs per m2 carpet. The market price is $62.00/m2.
Profit statement for 2017 may be summarised as follows:
Sales 18 600 000.00
Production cost 17 509 000.00
Marketing and advertising 450 950.00
Training 185 234.00
Administration costs 610 450.00
Rental Cost 725 980.00
Net profit - 881 614.00

There was no significant inventory of unsold carpets throughout 2017.

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Towards the end of 2017, the Board was concerned by the loss and the continued
deterioration in performance of the segment. A decision was then made then to engage a
new Chief Executive (CE) at the start of 2018. The new CE was to be paid a salary package
comprised:
• a fixed salary of $80 000 per year. This was a 40% increase from what was paid the
then CE.
• a performance bonus being 15% of Net Profit before deduction of the bonus. The
company’s accounting policies include absorption costing, with inventory valued at
full production cost.
During 2018, the new CE did the following:
• Raised production to 500 000m2,
• Raised sales to 320 000m2,
• Raised Admin costs (including CE salary) to $750 000
• Cut spending on advertising and training by 10% and 15% respectively
• Sold underutilised warehouse which had a cost of $1million and net book value of
$450 000. The warehouse was sold for $750 000.
At the end of 2018 the CE met the directors and made the following statement:
‘Gentlemen, thank you for giving me the opportunity to exercise and develop my
management skills in your business. I am delighted that I have been able to put your business
successfully on track. I have now accepted a new appointment which will involve turning
around another struggling company’

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