Professional Documents
Culture Documents
SBL - Further Question and Practice 2022
SBL - Further Question and Practice 2022
practice
1 Bonar Paint
ACCA Professional skills focus
Communication
It is early 20X7. You work as a consultant advising organisations undergoing significant strategic
change. The senior management team of Bonar Paint has asked for your advice in evaluating the
current position of the organisation and its attractiveness for a management buyout.
Bonar Paint is a medium-sized paint manufacturer set up by two brothers, Jim and Bill Bonar. The
company is based in Gaulle, a developed country. Bonar Paint’s turnover has been static for some
years and both brothers now want to retire from the business. The brothers have created a loyal
workforce and feel that this loyalty will be strengthened if they sell the business to the three senior
managers: Roy Crawford, production manager; Tony Edmunds, sales and marketing manager;
and Vernon Smith, chief accountant.
The three managers recognise that this is a major opportunity for them, but one that will involve
the raising of significant loan and equity finance to buy the business. Equally significant are the
equity stakes of $100,000 from each of them, which the banks require to show their personal
commitment.
Required
Explain the advantages and disadvantages of developing a formal mission statement to guide
Bonar Paint’s future direction after the buyout and briefly explain the role the mission statement
could play in the strategic planning process (10 marks)
Note. Professional skills marks are available for demonstrating communication skills in explaining
the advantages and disadvantages of mission statements. (2 marks)
20X7 20X8
20X4 20X5 20X6 (estimate) (forecast)
Sales 10,500 10,250 10,000 10,500 11,000
Cost of sales 5,250 5,400 5,500 5,460 5,500
Gross profit 5,250 4,850 4,500 5,040 5,500
Marketing 100 100 100 150 150
Distribution 1,575 1,650 1,700 1,785 1,650
Administration 2,100 2,150 2,200 2,250 2,200
Research and
development 105 100 100 105 110
Net profit 1,370 850 400 750 1,390
Customer analysis:
Sales to large industrial companies 75%
Sales to small industrial companies 25%
3 Caius
ACCA Professional skills focus
Commercial acumen
You work as a freelance consultant advising companies on governance issues, specialising in
companies that are keen to become listed. One such company, Caius, has contacted you for
help. The company’s main business is manufacturing domestic electrical appliances, but it is keen
to expand into telecommunications, particularly focusing on the opportunity to embrace the
‘internet of things’ and connect a number of its products to the web.
In order to support this growth and development, Caius is seeking a listing on the Stock Exchange
of a developed country. The directors of the company are aware that certain listed companies
have attracted considerable criticism in recent years over directors’ pay and conditions. There
have been claims in the media that the pay and conditions of some directors have been far too
generous and that the remuneration policies adopted by some companies have been far from
transparent.
The directors of Caius are keen to ensure that, if the bid for a listing is successful, all aspects
relating to their pay and conditions must be in line with best practice. Consequently, they have
asked for your help in advising them about their remuneration policy for all directors.
Exhibit:
The logistics marketplace in Ambion is mature and extremely competitive, and Swift has become
market leader through a combination of economies of scale, cost efficiencies, innovative IT
solutions and clever branding.
However, the profitability of the sector is under increased pressure from a recently elected
government that is committed to heavily taxing fuel and reducing expenditure on roads in favour
of alternative forms of transport. The government has also announced a number of taxes on
vehicles which have high carbon emission levels, as well as reducing the maximum working hours
and increasing the national minimum wage for employees.
Ecuria
Ten years ago, following a period of political change, a number of new independent states were
formed. One of these states was Ecuria. The people of Ecuria (known as Ecurians) traditionally
have a strong work ethic and a passion for precision and promptness. Since the formation of the
state, their hard work has been rewarded by strong economic growth, a higher standard of living
and an increased demand for goods which were once perceived as unobtainable luxuries. Since
the formation of the state, the government of Ecuria has pursued a policy of privatisation. It has
also invested heavily in infrastructure, particularly the road transport system, required to support
the increased economic activity in the country.
5 Chelsea Co
ACCA Professional skills focus
Analysis: Consider
You are Ross Clark, a management consultant heading up a small team of business advisors
which is undertaking an assignment at Chelsea Co (Chelsea). The board at Chelsea have
appointed the firm for which you work, as they are keen to gain a better understanding of the
company’s strategic position. Chelsea Co is a large civil engineering company, which carries out
various building contracts within both its home and in a number of overseas markets. Its main
area of work, particularly overseas, is in road construction. The company has a strong financial
track record and successfully survived a major recession within its home market about ten years
ago.
You and your team have collected and analysed the following information about the group to help
you prepare the consultancy report.
• Exhibit 1: A review of the economic circumstances facing Chelsea in its overseas markets by
your colleague Katie Parry.
• Exhibit 2: An email received from Chelsea’s Head of Construction, Andrew Hussain, which
outlines the company’s current work in progress.
• Exhibit 3: A note detailing Chelsea’s market share prepared by your colleague Klem Speck.
• Exhibit 4: An extract from a recent article which appeared in the construction industry journal
Building for Tomorrow.
Having reviewed your team’s findings you are now required to putting together a presentation
which is to be presented to the Chelsea board of directors. The presentation will summarise your
key findings to date.
Required
Prepare information for TWO presentation slides to be presented to the Chelsea board of
directors, including relevant points and brief supporting notes which consider the main strengths,
weaknesses, opportunities and threats facing the company.
The first slide should consider Chelsea’s THREE main strengths and THREE main weaknesses.
The second slide should consider the THREE main opportunities and THREE main threats facing
Chelsea.
Note. Professional skills marks are available for demonstrating analysis skills in considering the
position of Chelsea. (2 marks)
Exhibit 4: Extract from the construction industry journal, Building for Tomorrow.
Building for Tomorrow
Chelsea Co proposes strategic alliance
Yesterday it was announced that the Eastlandian government had invited well renowned
construction firm, Chelsea Co, to tender for further civil engineering work. We learned late last
night that Chelsea Co’s directors have taken up the invitation to tender. If the company is
successful in all of its tenders, then this would bring the company’s commitment in Eastlandia up
to about 40% of its total order book.
In the last edition of Building for Tomorrow we reported that a number of Chelsea Co’s directors
had grown increasingly concerned at the dangers posed by the insolvency of customers in
Eastlandia. To overcome these concerns we have subsequently learned that the Chelsea Co
board have proposed that a strategic alliance be formed with an Eastlandian civil engineering
contractor who, it is hoped, will have an insight into the financial integrity of potential customers.
The alliance partner would be able to give clear advice as to which of these Eastlandian
customers would be suitable for the establishment of contractual arrangements.
Exhibit:
Background
EMS employs a full-time chief examiner who is responsible for setting the certificate examinations
which take place monthly in training centres throughout Ambion. No examinations are currently
held in other countries. If candidates pass all four papers they can undertake an oral Diploma
examination. If they pass this oral they are eligible to become members. All examinations are
open-book one-hour examinations, preceded by 15 minutes reading time. At a recent meeting,
EMS Council rejected the concept of computer-based assessment. They felt that competence in
this area was best assessed by written examination answers.
Decline
Candidate numbers for the qualification have fallen dramatically in the last two years. The Board
of EMS has concluded that this drop reflects the maturing marketplace in the country. Many
people who were practitioners in environmental management and audit when the qualification
was introduced have now gained their Diploma. The stream of new candidates and hence
members is relatively small.
Response
Consequently, the EMS Board has suggested that they should now look to attract international
candidates and they have targeted a number of developing countries where environmental
management and audit is becoming more important. They are now formulating a strategy to
launch the qualification in four large, developing nations. However, any strategy has to recognise
that both the EMS Board and the Council are very cautious and notably risk averse. EMS is only
confident about its technical capability within a restricted definition of environmental
management and audit. Attempts to look at complementary qualification areas (such as soil and
water conservation) have been swiftly rejected by Council as being non-core areas and therefore
outside the scope of their expertise. The Board are keen to explore the potential opportunities
offered by three different methods of development: internal development, acquisition and
strategic alliance.
7 Azure Airline
ACCA Professional skills focus
Evaluation
You work as a risk consultant supporting organisations in a variety of industries. You have just
been contacted by the Managing Director of Azure Airline (‘Azure’) for help in managing the
organisation’s risks.
Azure, a limited liability company, was incorporated in Sepiana on 1 April 20X6. In May, the
company exercised an exclusive right granted by the government of Pewta to provide twice-
weekly direct flights between Lyme, the capital of Pewta, and Darke, the capital of Sepiana. The
introduction of this service has been well advertised as ‘efficient and timely’ in national
newspapers. The journey time between Sepiana and Pewta is expected to be significantly
reduced, so encouraging tourism and business development opportunities in Sepiana.
Azure operates a refurbished 35-year-old aircraft which is leased from an international airline and
registered with the Pewtan Aviation Administration (the PAA). The PAA requires that engines be
overhauled every two years, putting the aircraft out of commission for several weeks.
The aircraft is configured to carry 15 first class, 50 business class and 76 economy class
passengers. The aircraft has a generous hold capacity for Sepiana’s numerous horticultural
products (eg cocoa, tea and fruit) and general cargo.
The six-hour journey offers an in-flight movie, a meal, hot and cold drinks and tax-free shopping.
All meals are prepared in Lyme under a contract with an airport catering company. Passengers
8 LMN
(a) ACCA Professional skills focus
Communication
You work as a senior advisor for a government department which provides support for
organisations with varying governance needs. You have been asked to contact LMN, which is a
charity that provides low-cost housing for people on low incomes.
The government has privatised much of the home building, maintenance and management in this
sector. The sector is heavily regulated and receives some government money but there are
significant funds borrowed from banks to invest in new housing developments, on the security of
future rent receipts. Government agencies subsidise much of the rental cost for low-income
residents.
The board and senior management of LMN have identified what they perceive to be their major
risks, which are shown in the exhibit below. As a result of this process, they have been able to
produce a risk register as part of the organisation’s risk management process. For each of more
than 200 individual risks, the risk register identifies a description of the risk and the (high, medium
or low) likelihood of the risk eventuating and the (high, medium or low) consequences for the
organisation if the risk does eventuate.
The management of LMN is carried out by professionally qualified housing executives with wide
experience in property development, housing management and maintenance, and financial
management. The board of LMN is composed of volunteers with wide experience and an interest in
social welfare. The board is representative of the community, tenants and the local authority, any
of whom may be shareholders (shareholdings are nominal and the company pays no dividends).
The local authority has overall responsibility for housing and social welfare in the area.
The audit committee of the board of LMN, which has responsibility for risk management as well as
internal control, wants to move towards a system of internal controls that are more closely related
(b) A discussion of the principles of good corporate governance as they apply to the board’s role
in conducting a review of these internal controls. (6 marks)
(a) Note. Professional skills marks are available for demonstrating communication skills when
advising the audit committee about their next steps. (2 marks)
(Total = 12 marks)
Exhibit:
Risks for LMN:
• Insufficient housing stock of a suitable type to meet the needs of local people on low incomes
• Making poor property investment decisions
• Having dissatisfied tenants due to inadequate property maintenance
• Failing to comply with the requirements of the regulator
• Having a poor credit rating with lenders
• Poor cost control
• Incurring bad debts for rental
• Having vacant properties that are not earning income
9 Pogles
ACCA Professional skills focus
Analysis
You work as a freelance ethical consultant and have been approached by the chief executive of
Pogles plc to help him understand a problem that has just emerged.
Pogles is a clothing manufacturer, based in an EU member state, with an international market for
its designs. The company’s regular monthly board meeting will take place in a couple of days’
time. It seems likely that most of the meeting will be taken up with discussing one particular issue.
One of the company’s directors has recently returned from visiting a factory located in another
European Union member state. Over the last few years this factory has performed better than any
other in comparison with cost budgets, and has been particularly good at keeping its labour costs
under control. However, on his return from his visit, the director reported some worrying facts to
the chief executive.
The factory had suffered a significant number of losses of experienced part-time female staff.
Although none had been dismissed, other employees still working at the factory made serious
accusations that some had been ‘forced’ to resign by the actions of the factory manager. Among
other accusations, it was suggested that they had been pressurised to take on work outside their
contractual hours, or at times when they had never in the past had to work, such as during school
holidays, weekends or on late shifts.
Some had taken on the extra work in fear of losing their jobs and in the knowledge that other
clothing factories locally had closed down in recent months. However, many of the other staff had
found the new working arrangements impossible to fit in with their domestic situations and had
reluctantly handed in their notice. To replace the staff who had left, the factory manager
recruited full-time staff on flexible contracts, which required them to accept shift changes
provided two weeks’ notice was given to them.
10 Hammond Shoes
ACCA Professional skills focus
Evaluation: Appraise
You are a consultant who has been asked to advise the management of Hammond Shoes about
its financial position and investment opportunity.
Required
Analyse the financial position of Hammond Shoes and evaluate the proposed investment of
$37.5m in upgrading its production facilities. (17 marks)
Note. Professional skills marks are available for demonstrating analysis skills in considering the
information from different sources to identify the causes of problems and opportunities. (3 marks)
In 20X5, Hammond Shoes paid, on average, their supplier invoices 28 days after the date of
invoice. In 20X7 this had risen to 43 days and in 20X9, the average time to pay a supplier invoice
stood at 63 days.
Jayne Cox Direct products are advertised in most quality lifestyle magazines. The company was
started ten years ago. It grew out of a desire to provide customers with the chance to specify their
own bespoke furniture at a cost that compared favourably with standard products available from
high street retailers. It sells furniture directly to the end customer. Its website allows customers to
select the style of furniture, the wood it is to be made from, the type of upholstery used in cushion
and seat fillings and the textile composition and pattern of the covering. The current website has
over 60 textile patterns which can be selected by the customer. Once the customer has finished
specifying the kind of furniture they want, a price is given. If this price is acceptable to the
customer, then an order is placed and an estimated delivery date is given. Most delivery dates are
ten weeks after the order has been placed. This relatively long delivery time is unacceptable to
some customers and so they cancel the order immediately, citing the quoted long delivery time as
their reason for cancellation.
Jayne Cox Direct orders wood, upholstery and textiles from long-established suppliers. About 95%
of its wood is currently supplied by three timber suppliers, all of whom supplied the company in its
first year of operation. Purchase orders with suppliers are placed by the procurement section.
Until last year, they faxed purchase orders through to suppliers. They now email these orders.
Recently, an expected order was not delivered because the supplier claimed that no email was
received. This caused production delays. Although suppliers like working with Jayne Cox Direct,
they are often critical of payment processing. On a number of occasions the accounts section at
Jayne Cox Direct has been unable to match supplier invoices with purchase orders, leading to
long delays in the payment of suppliers.
The sofas and chairs are built in Jayne Cox Direct’s factory. Relatively high inventory levels and a
relaxed production process means that production is rarely disrupted. Despite this, the company
is unable to meet 45% of the estimated delivery dates given when the order was placed, due to
the required goods not being finished in time. Consequently, a member of the sales team has to
telephone the customer and discuss an alternative delivery date.
Telephoning the customer to change the delivery date presents a number of problems. Firstly,
contacting the customer by telephone can be difficult and costly. Secondly, many customers are
disappointed that the original, promised delivery date can no longer be met. Finally, customers
often have to agree a delivery date much later than the new delivery date suggested by Jayne
Cox Direct. This is because customers often get less than one week’s notice of the new date and
so they have to defer delivery to much later. This means that the goods have to remain in the
warehouse for longer.
A separate delivery problem arises because of the bulky and high value nature of the product.
Jayne Cox Direct requires someone to be available at the delivery address to sign for its safe
receipt and to put the goods somewhere secure and dry. About 30% of intended deliveries do not
take place because there is no-one at the address to accept delivery. Consequently, furniture has
to be returned and stored at the factory. A member of the sales staff will subsequently telephone
13 8-Hats
ACCA Professional skills focus
Evaluation: Assess
You are Karen Bardsley, a management consultant working for the firm Business Matters. You and
your team are currently undertaking an assignment at 8-Hats Promotions. 8-Hats Promotions was
formed 20 years ago by Barry Gorkov to plan, organise and run folk festivals in Arcadia. It soon
established itself as a major events organiser and diversified into running events for the staff and
customers of major companies. For example, for many years it has organised launch events, staff
reward days and customer experiences for Kuizan, the car manufacturer. 8-Hats has grown
through a combination of organic growth and acquiring similar and complementary companies.
Recently, it purchased a travel agent (now operated as the travel department of 8-Hats) to
provide travel to and from the events that it organised.
Barry is keen to explore changing the company’s organisational structure and has asked your
team to provide him with some thoughts on the prospect of introducing a matrix structure at 8-
Hats. One of your colleagues has prepared some notes (Exhibit 1) on 8-Hats’ current set up.
Required
Using the information provided in Exhibit 1, discuss the principles, benefits and problems of
introducing a matrix management structure at 8-Hats.
Note. Professional skills marks are available for demonstrating evaluation skills in assessing the
current situation at 8-Hats and suggesting relevant benefits and problems associated with the
introduction of a matrix management structure. (2 marks)
Exhibit: 8-Hats
Barry Gorkov is himself a flamboyant figure who, in the early years of the company, changed his
name to Barry Blunt to reflect his image and approach. He calls all the events ‘jobs’, a terminology
used throughout the company. A distinction is made between external jobs (for customers) and
internal jobs (within 8-Hats itself). The company is organised on functional lines. The sales and
marketing department tenders for external jobs and negotiates contracts. Sales managers receive
14 Hooper University
ACCA Professional skills focus
Analysis: Consider
You are Sadiq Patel, a management consultant. Your firm is currently engaged to provide
consultancy advice to Hooper University which is situated in your home country of Mowria. There
are currently over 300 universities operating in Mowria. University tuition fees have increased in
the last few years and students are expecting a better level of service as a consequence of this.
Results of student satisfaction surveys are published by the Mowrian government, and can
greatly influence the student’s choice of university. At Hooper University, students are assessed in
two ways: by examinations and coursework. Both types of assessment contribute towards the
degree classification awarded to students. In a recent, internally commissioned, student
experience report, Hooper University received some negative feedback from students on the
coursework organisation, submission and feedback process. Consequently, the university is keen
to rectify problems in this process and the Vice-Chancellor’s office contacted your firm for
assistance.
You and your team have been asked to review the coursework organisation, submission and
feedback process, and to suggest potential improvements to address any issues you identify. To
help you with your work your colleagues have prepared some background information on the
current process (Exhibit 1), and extracts from the student experience report which details student
feedback relating to the process (Exhibit 2).
Required
Identify and explain four problems in the current coursework, organisation, submission and
feedback process and suggest appropriate solutions to address each of these problems.
(18 marks)
Note. Professional skills marks are available for demonstrating analysis skills in identifying
problems with the current process at Hooper University and for suggesting appropriate solutions.
(2 marks)
15 LDB Bank
ACCA Professional skills focus
Analysis: Investigate
You are a senior finance manager working for LDB Bank, and report to the finance director. Part
of your role involves assisting the work of the bank’s project management office (PMO). You have
been approached by the Head of the PMO to help her team identify the elements which
contributed to the successful delivery of a major project at the bank. The PMO conducted a post-
project review following the completion of the project but are now carrying out a cold review of the
project documentation to see if any additional lessons can be learned which can be incorporated
into future projects at LDB. The Head of the PMO has provided you with some background
information on the branch rationalisation project (Exhibit 1), and some detail on the issues
experienced during the execution of the project (Exhibit 2).
Required
Using the information provided by the Head of the PMO, identify and analyse the elements of
good project management that helped make the branch rationalisation project successful.
(12 marks)
Note. Professional skills marks are available for demonstrating analysis skills in investigating the
key elements of good project management. (2 marks)
3 Caius
Tackling the question
A good guideline for this type of question would be to start with the key points relating to
directors’ remuneration that you know from your studies so far, regardless of the jurisdiction. This
will give you an overview of the key areas that are usually to be discussed in such debates around
the world. You can then move on to discuss shares and share options as a viable source of
remuneration for NEDs.
You also need to ensure that your answer is set in the context of the case – the key elements of
strategy for this organisation are growth, technology, risk from research and development and
competition, so build these into your answer to score well.
How to earn the professional marks
You have been asked to demonstrate commercial acumen, meaning that you need to know what
is commercially viable for directors’ remuneration and what would work well in this industry sector.
In order to ensure that directors’ pay and conditions are fair and transparent, Caius should adopt
the following policies and frameworks.
Level and make-up of remuneration
The level of remuneration offered to directors should be sufficient to attract, retain and motivate
directors of the quality required to run the company successfully, especially given the need to
recruit directors who can support the aim of growth into telecommunications. However, Caius
should avoid paying more than is strictly necessary for this purpose, especially as it is likely to
attract attention which may erode any competitive advantage within this fledgling industry. The
levels of pay offered by other similar companies can be considered, but such comparisons should
be used with caution.
A significant proportion of executive directors’ remuneration should be structured so as to link
their interests with those of the shareholders and give the directors keen incentives to perform to
the highest levels. This will require a ‘leap of faith’ from shareholders, given the extra risk that
Caius is looking to embrace. Therefore, incentive schemes are acceptable but they must always
be related to performance and they must be geared to the long term rather than the short term.
Where incentive schemes are used the amount paid to the directors should be based upon them
meeting or exceeding clearly defined targets.
Service contracts and compensation
Service contracts for directors are necessary but there must be a balance between the directors’
needs and the interests of the shareholders. In general terms notice periods under contracts
should be set at one year or less. The board must be prepared to dismiss a director for poor
performance and much thought should be given to compensation commitments, although this is
obviously going to need to consider the longer timeframes required for research and development.
The aim should be to avoid being seen to reward poor performance by excessive compensation
payments and the board should take a robust line on reducing compensation to reflect a
departing director’s obligations to mitigate loss.
Remuneration committee
The board should appoint a remuneration committee made up entirely of independent non-
executive directors (NEDs). The aim of this is to ensure that there is a formal and transparent
procedure for developing policy on executive remuneration and for the remuneration packages of
individual directors. Most importantly, no director should be involved in deciding their own
remuneration.
Communication with shareholders
The remuneration committee should enter into communication with major shareholders about
directors’ remuneration. Shareholders should be invited specifically to approve all new long-term
incentive schemes and significant changes to existing schemes. In your annual report there should
be a report on the remuneration policy and details of the remuneration of each director. The chair
of the remuneration committee should also attend the AGM and be prepared to answer any
questions from shareholders relating to directors’ remuneration. Such transparency will be crucial
in cementing the trust required to support shareholders along the first few years of listing to
reward their faith.
Share payments for NEDs?
In many companies, NEDs receive a fixed cash payment for their services, without any incentives.
However, some companies pay their NEDs in shares.
5 Chelsea Co
Tackling the question
The requirement doesn’t specify the use of a particular model, however it should be clear that you
are, in essence, being asked to perform a SWOT analysis. It is important to remember that
strengths and weaknesses are internal considerations, whereas opportunities and threats arise
from the external environment. It is very easy to muddle weaknesses and threats, however,
remembering that one is focused on internal matters and the other on external factors should help
you to avoid any such confusion.
As the requirement asks you to produce two slides it is important that you give consideration to
the amount of detail to include. Providing lots of detail on the slides ultimately undermines the
prompt in the requirement to include supporting notes. As the solution below illustrates it is the
supporting notes in which the real explanation of the SWOT items is considered.
How to earn professional skills marks
The ‘consider’ skill requires you to make use of the information in the scenario in order to reflect
upon the implications that this brings for the organisation featured in the question. As the
requirement asks you to consider three main SWOT items, the inclusion of the word ‘main’ is a clue
that discussing every single SWOT item that you could possibly identify from the exhibits was not
required. The inclusion of lots of additional points only wastes time and would earn you no
additional marks.
Determining what constitutes a ‘main’ point should be driven by the content of the exhibits. As a
result, careful reading of each exhibit with a view to picking out the key themes is essential. The
suggested solution below is indicative of the points that you could have made when answering the
Notes. Chelsea’s core strengths are evident as the company has built a strong financial track
record which has helped it come through ‘a major recession’ in its home market. This is impressive
given that the construction industry is renowned for being particularly volatile. It is likely that this
strength will prove central to Chelsea’s ability to survive should the economic situation in
Eastlandia worsen. Chelsea’s financial record is closely linked to its strong reputation. It would
appear that the company’s reputation for using good quality materials and applying high
standards of workmanship have helped it to increase its overall market share. This is particularly
impressive given that there has been general decline in market opportunities. As a result of
Chelsea’s reputation it would appear that the company has been able to build a good
relationship with the Eastlandian government. This is evident as it has recently received an offer
from the government to tender for further civil engineering work.
Chelsea faces an inherent weakness in that it operates in a highly volatile industry in which
construction firms such as Derby Co can easily become insolvent. The nature of construction
projects require significant financial commitments are made upfront (ie buying building supplies
and paying workers), all of which increases risk. There would appear to be a weakness in the
process Chelsea uses when determining which projects to undertake. This is evident given the
amount of remedial work needed to complete the road development contract in Eastlandia
appears to have been significantly misjudged and has resulted in the project’s contingency fund
having been used well before the completion of the project. Chelsea’s growing dependence on
getting work in Eastlandia can also be viewed as a weakness as it is increasing its exposure to the
unpredictability of the economy there. If the report by Building for Tomorrow is correct then the
amount of work which may potentially be undertaken by Chelsea in Eastlandia would represent
about 40% of its total orders.
Slide 2: Three main opportunities and three main threats facing Chelsea Co
Opportunities
• Win new contracts from new customers
• Win new contracts with the Eastlandian government
• Exploit the knowledge of alliance partner
Threats
• Currency devaluation
• Insolvency of customers
• Recession in Eastlandia
7 Azure Airline
Tackling the question
When asked to identify, you should aim to be brief and not copy out chunks of the scenario.
Instead concentrate on explaining the risks well. In (a) you would probably need to identify and
explain five risks to gain full marks. The answer below contains more than this for illustration. Most
Conditions of The PAA requires Azure’s aircraft Azure must ensure that all staff are
exclusive right engines be overhauled biannually. aware of any conditions and the
There is a risk that Azure will be importance of meeting them.
unable to meet this condition, if However, this risk must simply be
the lessor company does not agree accepted, as there is little Azure
to regular overhaul, or if it will be can do about conditions imposed
too expensive for Azure to meet this on them by the governing body of
requirement. It could then lose the their industry.
right to operate, or its exclusivity,
opening it up to competition. There
may be other conditions which
Azure has to meet, such as the two
weekly flights being a minimum.
Necessary service As Azure is required to overhaul its Azure must have contingency plans
suspension engines every two years, there will for service suspension, such as
be a significant period every two ensuring its contract with the
years where Azure will either have international airline ensures
to incur the cost of leasing other alternative aircraft will be made
planes (assuming this is possible) or available in the event of
will have to suspend services. The maintenance or damage to the
cost of leasing other planes might aircraft, or by making
be prohibitively expensive or the arrangements to lease from a
disruption to service might mean different airline in the event of
that conditions relating to the right emergency. As a minimum, Azure
to operate might not be met. As must ensure that the airline it leases
Azure only has one plane, service from would give it financial
would also be interrupted if there compensation in the event of
was an emergency relating to the aircraft or staff not being available,
plane, such as fire or a crash. so that Azure’s customers could be
Age of aircraft The aircraft being leased is old. This Azure should have plans in place to
raises operational risks (it may not be able to lease/afford newer
always be able to fly due to planes if required to by law. Again,
necessary maintenance), finance this could be written into its
risks (it may require regular repair) contract with the airline. Azure
and compliance risks (it may not should manage cash flow and
meet environmental or safety borrowing facilities so as to be able
standards, now or in the future). to afford ongoing maintenance
when required.
High proportion of The plane leased by Azure has a Azure should negotiate a
expensive seats high proportion of empty reconfiguration of the plane with
expensive seats and therefore the lessor so that business and first
insufficient (overbooked) cheaper class seating could be reduced and
seats. Although Azure can appease more economy seats made
customers by upgrading them, this available. If this is not possible with
means the airline is operating well the current lessor, Azure should
below capacity. investigate leasing differently
configured planes from a different
company. If it is not feasible to
adjust the plane seating, Azure
should consider its pricing and on-
board facilities policies to make
business and first class seats more
attractive to customers. As the
seats are not being sold anyway, it
is probable that a reduction in
prices would increase overall
revenue.
Cargo The flight route results in the airline Azure should publish a cargo policy
carrying a large amount of to ensure that customers are aware
horticultural produce. This raises of their legal obligations. They
various risks. Azure might be liable should ensure that staff are
to passengers if their cargo sufficiently trained to discuss the
deteriorates in transit. The airline contents of baggage with
might be liable for any breaches of customers and are aware what
law by its passengers (for example, items Azure should not carry. They
if prohibited items are transferred should insure against lost and
into Pewta or Sepiana. Many damaged cargo.
countries prohibit the importation
of animals or meat products or
plants).
Safety The airline industry has stringent The company should appoint a
safety conditions and Azure may member of staff to be specifically
face customer boycotts or responsible for safety operations
difficulty in recruiting staff if safety (such as training, updating for legal
requirements are not met, as well requirements, educating
as the threat of not being allowed passengers) and should ensure that
to fly. staff are regularly appraised about
safety issues.
Fuel The aircraft cannot fly without The company could take out
fuel, which can be a scarce or hedging contracts against the cost
high-cost resource. If fuel prices of fuel. Other than this, there is
escalate due to world conditions, little it can do about this matter,
the company might not be able to and it is another risk that has to be
meet the costs of operating. accepted.
8 LMN
Tackling the question
This question illustrates that questions won’t always be about companies!
It’s necessary to read both parts quite carefully to see what the requirement really wants – an
assessment of how much a review by the professional managers contributes to the work of the
audit committee, and therefore why the review should be carried out. You should start off by
defining what the work of the audit committee is, then consider how much managers’ review
contributes compared with other sources of information that they can use.
In the second part, again you can’t be too theoretical. Any discussion of principles has to be
related to how they impact on the audit committee and board’s reviews. Selected examples from
the scenario information are also needed here to boost the discussion. If you can remember that
the board needs to carry out a regular and annual review and the main elements you would have
scored well here and gone a long way towards passing this question.
9 Pogles
Tackling the question
You are not asked to use any specific ethical decision-making model as in the real exam so
consider a broad range of issues and stakeholders as well as thinking about breaches of the IESBA
fundamental principles.
There are 10 marks on offer so try to explore 5 different issues in your answer.
How to earn the professional marks
The skill of analysis requires investigation, enquiry and consideration. You are only given the facts
in the case, but you should display the ability to consider information in such a way that their
implications are clear from your answer.
Suggested solution
Slide contents
• Shareholder wealth maximisation
- Fines or penalties for illegal action may erode profits and shareholder wealth
•
-
• Professional competence and due care
- Best practice employment practices have not been followed and laws may have been
contravened
• Lack of integrity
- Employees have been pressurised to accept new working terms and conditions
• Objectivity
- Employee rights and welfare are being ignored in an effort to deliver higher returns to
shareholders
10 Hammond Shoes
Tackling the question
As with all analysis of financial statements, the starting point is to calculate relevant ratios. Focus
on the ones that seem most critical, or that can be linked to other information provided.
Profitability ratios are always important, but the company’s shareholders are averse to risk and
borrowing, so it would be helpful to understand the trend in gearing also. The delays in paying
creditors suggest some cashflow issues, so we should look at the trend in receivables days as well.
The second part of the question requires application of expected value, which is one of the
techniques you are expected to be familiar with. However, beyond the calculations, you should be
able to draw out the implications of the analysis, which is not simply the resulting number.
How to earn the professional skills marks.
The ‘consider’ skill requires you to reflect carefully on the evidence and analysis. This would be
demonstrated by not simply performing calculations but linking them to other pieces of evidence
The company has failed to keep costs under control and, while sales have fallen by $150m over
the four years (approximately 18% decrease), cost of sales has only decreased by $75m
(approximately 11.5%). It is likely that this has been caused by reacting to reduced demand by
reducing labour. Given the large redundancy payments required by law in Arnland and HS’s
heavy use of local labour it is likely that this was a costly exercise.
The Return on Capital Employed (ROCE) has also plummeted from 24.14% in 20X5 to just 6.45% in
20X9.
Gearing
The capital structure of HS has changed significantly over the last few years, no doubt causing
concern to this generally risk-averse organisation. In particular:
• Long-term borrowings have dramatically increased.
• Retained earnings are declining, reflecting the higher dividends taken by the family.
• Traditionally the social values of the family have been reflected in the company’s very low level
of gearing, which was only 6.9% in 20X5.
• By 20X9 the company was much higher geared, having risen to 22.5%.
• While this gearing level is still relatively low, the speed with which these changes have occurred
should be of concern to the senior management of HS.
A further concern linked to gearing arises by considering the way the company manages its trade
receivables and trade payables.
Goods in Arnland are normally supplied on 30 days’ credit and back in 20X5 HS had no problem
in meeting this; however, the time taken on average to pay their suppliers has more than doubled.
Over the same period, trade receivables have slightly reduced, as shown below:
This would indicate that HS appear to be using their suppliers as a source of free credit, on top of
the bank loans they have taken out in the last few years.
Financing costs have also risen over the last few years. This has directly affected profits and has
also caused the interest cover ratio to plummet from 14 to 1.33.
Scenario 1:
Probability of continued low demand 0.7
Net benefits per year $5m
Total benefit for Years 4–6 ($5 × 3) $15m
Expected value of benefits ($15 × 0.7) $10.5m
Scenario 2:
Probability of higher demand 0.3
Net benefits per year $10m
Total benefit for Years 4–6 ($10 × 3) $30m
Expected value of benefits ($30 × 0.3) $9m
Total expected benefits ($15m + 10.5m + 9m) $34.5m
The total expected benefits of $34.5 is below the cost of the proposed investment $37.5. This
suggests that this investment would not be financial viable unless the second scenario actually
materialises, in which case the total benefits would be $45m ($15m + $30m).
It must be noted, however, that the projection covers only the first six years and, given that the
last upgrade was carried out 20 years ago, it is likely that net profits would continue for many
years beyond these six. However, it becomes increasingly difficult to predict net benefits beyond
that six-year timescale.
Cumbersome ordering The occasional failure of the payment system to correctly match
process leading to the purchase orders to supplier invoices has led to payment delays
occasional failure to receive and criticism from suppliers.
deliveries JCD could implement a linked procurement and payment
system which connects via electronic data interchange to their
suppliers. This would allow orders to be automatically entered
into the supplier’s system and all invoicing and payments would
occur electronically.
This system may not be compatible with the above suggestion as
it may be necessary to retain a smaller supplier base in order to
implement such a system. However it would reduce
administrative costs, improve the relationship with suppliers and
solve the non-delivery problem the company has experienced.
Poor inventory JCD currently stock high levels of inventory. This could be
management addressed via integration between the stock system, the
ordering system and the suppliers’ systems. This would allow
suppliers to produce to order (rather than to stock) and JCD
could move towards a just-in-time system so that stock is only
ordered just before it is needed. This would also enhance the
suppliers’ understanding of demand, allowing them to improve
their own inventory management. This could create cost savings
which may be reflected in the prices charged to JCD and
therefore lowering input costs. JCD should also be able to
implement systems that optimise the quantities of products
ordered as a result of the improved understanding of demand
and the costs of ordering and storing inventory.
Failure to update customers Following the initial delivery estimate provided at the time of
on order status ordering, customers receive no more updates or communication
13 8-Hats
Tackling the question
This requirement effectively consists of three parts, as you are firstly asked to discuss the
principles of matrix management, and to then consider the benefits and the problems that this
presents in relation to 8-Hats. When faced with such requirements you might find it helpful to
present your answer using these three terms as headings around which you can build your
response. Adopting this approach helps to ensure that you have addressed each part of the
requirement. The suggested solution has largely adopted this approach as it begins with a
discussion of the current structure in place at 8-Hats, before moving onto discuss the features of
matrix management and the benefits and issues that this brings.
How to earn the professional skills marks
‘Assess’ is one of the evaluation professional skills. When you are asked to assess a situation this
requires you to use your professional judgement to consider organisational issues, in this case 8-
Hats’ current structure, and to determine the advantages (benefits) and disadvantages (problems)
of a proposed course of action, in this case the introduction of a matrix management structure at
8-Hats. The trick to producing a good answer was to ensure that you picked up on the clue under
the requirement which asked for ‘relevant’ benefits and problems; this means that you need to
ensure that any points you make relate the detail provided about 8-Hats’ current situation in the
exhibit. Simply listing all the generic benefits and issues associated with matrix structures would
not be sufficient to earn the professional skills marks on offer.
Suggested solution
8-Hats is currently structured on a functional basis. There is a department for each activity of the
company and each job is passed between functions. Each function is focused on optimising its
part of the transaction, and has defined objectives sometimes reflecting the reward system in
place. However, these objectives are not always aligned with those in other areas of the business
and therefore objectives clash. For example the sales department are rewarded based on turnover
(not profit) and so will try to win sales by heavily discounting the price, whereas the events
department focus on providing the best client experience. This will cause problems for the
14 Hooper University
Tackling the question
To stand a reasonable chance of answering the question it is important that you read the
requirement carefully. You are only expected to focus on four problems in the current process.
Failing to pick up on this increases the risk that you may produce a considerably longer answer
than is required, especially given the number of problems outlined in the exhibits.
A good way of structuring your answer is to follow the layout of the three requirement verbs, ie
identify the problem, explain why it is a problem and then suggest a solution to address the
problem. Adopting such an approach should ensure that you address each part of the
requirement. You may also find it useful to include headings above each of the issues you identify;
this should help to ensure that you have considered at least four issues as required.
How to earn professional skills marks
‘Consider’ is one of the ‘analysis’ professional skills; to demonstrate these skills you need to be
able to use information from a variety of sources and to logically process it with a view to
recommending appropriate action. In this case, you are provided with two different exhibits which
provide an insight into Hooper University’s coursework organisation, submission and feedback
process. As a result it is important that you use the detail from both exhibits to construct your
answer. Making generic points with limited use of the detail provided will restrict your ability to
earn the two professional skills marks on offer.
Suggested solution
The current process has a number of problems which may be causing the student comments in
the student experience report.
Timing of coursework deadlines
The course appears to be badly co-ordinated in that similar deadlines are set for different
subjects. This causes periods of high activity for students, followed by periods of low activity. It
Tutorial note. There are more than four problem areas to discuss, and for tutorial purposes we
have included a range of the areas you could have discussed. However, as the question
requirement specifically only asked for the identification and explanation of four problem
areas, this is all you should have included in your answer.
15 LDB Bank
Tackling the question
The requirement was formed of two closely connected parts as you were asked to ‘identify’ and
then ‘analyse’ the elements of good project management. In this case the need to ‘identify’
effectively meant that you needed to state the elements of good project management detailed in
the scenario. The requirement to ‘analyse’ in essence is asking you to explain why the point that
you stated represents good project management practice. As you were only asked to consider the
‘elements of good project management’ any discussion of poor practice would only have served to
waste your time and would earn no marks.
How to earn the professional skills marks
The ‘investigate’ skill requires you to pick out the relevant information from different sources in
order to construct an answer. In this case you were provided with two exhibits. These required you