Mock 1

February 2013
BVS unseen material provided on examination day
Read this information before you answer the question

You are the Management Accountant of BVS.

The Board of Directors has asked you to provide advice and recommendations on the issues facing
BVS.
Question 1 part (a)
Prepare a report that prioritises, analyses and evaluates the issues facing BVS and makes
appropriate recommendations.
(Total marks for Question 1 part (a) = 90 Marks)

Question 1 part (b)

In addition to your analysis in your report for part (a), you should prepare an email to be sent to the
Board members briefing on the situation with the outsourced suppliers. You should present the
possible alternative solutions along with your recommendations. Your email should not exceed 10
short sentences in total.
(Total marks for Question1 part (b) = 10 Marks)

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Your script will be marked against the T4 Part B Case Study Assessment Criteria shown below.
Criterion

Maximum
marks available

Analysis of issues (25 marks)

Technical

Application

15

Diversity

Strategic choices (35 marks)

Focus

Prioritisation

Judgement

20

Ethics

Recommendations (40 marks)

Logic

30

Integration

Ethics

Total

100

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Eric Wells
The private equity investor of BVS, PIE, has decided to replace its representative on BVSs board.
Jonas Kral, the current representative and non-executive director on BVSs board is deemed to be too
flexible with the operational freedom allowed to BVS by PIEs board of directors. PIEs board has cited
that Jonas Kral has not been aggressively pushing BVS to seize opportunities that are outside the 5year Business Plan, and given BVS the opportunity to play it safe. Given the satisfactory leap ahead
in the Business Plan in the current year of operations, PIE Board thinks that Jonas Kral should have
pushed for even better results than what is forecast currently (Appendix 5: Latest forecast for year
ended 31 March 2013). This is mainly due to the fact that the other ventures undertaken by PIE
during last few years have yielded excellent results better than those from BVS, and BVS had not
shown that much promise. PIEs Board is under pressure to show substantial return on its
investments on BVS by its shareholders, as PIE is currently having other high profitable ventures into
which they can invest.
The new representative, Eric Wells, has requested Toby Baum, the Managing Director, that BVS
adjusts its business plan for the year ended 2014 to have a target Profit After Tax of 7.0 million and
increase the year end vehicle service count to 90,000 from the initial target of 69,600. However, Eric
Wells has emphasised that the overriding objective is to increase the vehicle number and the target
Profit After Tax is a secondary concern. This is because Eric Wells and PIEs Board are of the opinion
if BVS were able to increase the vehicle numbers that it serves, the revenue streams will materialise
at latter stages, if not immediately, boosting the overall profitability.
Last week, Eric Wells has announced that if BVS were to fail to reach the new targets by 31 March
2014, PIEs Board would consider a liquidation of its investment via asset sale and invest the
proceedings in a far more lucrative venture that is currently available. On the same day, the
government has confirmed to BVS that it will wish to continue with BVS for the maintenance 20,800
vehicles for the next 2 years. However the government has also stated that it will not procure the
additional 12,000 vehicles, which were to be handed over to BVS for maintenance, within next two
years.
JAR
Last week a review meeting was held between JARs and BVSs Boards, to discuss the schedule of
payments for vehicle maintenance. In the meeting it was revealed that JARs telecoms business is
faced with severe competition and it has lost a considerable market share during the previous
financial year despite the efforts of its management. In order to maintain the profitability and cash flow
JAR has decided to cut back on its support activities. JAR has come to the conclusion that
maintaining its own vehicle fleet for breakdown maintenance support is costing too much and hence
decided to sell off a portion of its own fleet of vehicles and get the services from an outsourced
vehicle provider on the basis of per requirement. With this decision the own vehicle fleet used by JAR
for breakdown maintenance support will be greatly reduced. Even though the initial plan by JAR was
to reduce its fleet size to 26,000 vehicles by 31 March 2015 (Appendix 2: BVSs Business Plan), the
current developments have prompted JAR to reduce its fleet size to 17,000 by the end of current
financial year.
Outsourced Suppliers
BVS is currently working with 5 outsourced suppliers for vehicle maintenance at 320 locations, and
they have been working closely with each other. All 5 suppliers have been very demanding on BVS
on terms of payments during past two years and they have tried to exercise high influence over BVS
because of its dependence on outsourced suppliers workshops for operational flexibility.

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Three of these suppliers, N, R & S have recently expressed their dissatisfaction on the hourly rates
paid to them by BVS. These three firms operate 215 of the 320 outsourced workshops and garages.
These 215 workshops could allocate a maximum of 700,000 vehicle service hours per year for BVS.
Even though the three firms approached BVS independently on demanding an increase in hourly
rates the conditions and suggested rates put forward by the three firms are very similar to each other.
They have expressed that they will discontinue supplying to BVS if their terms are not met by 1 April
2013.
New estimated Outsourced
maintenance hours
(Overall)
FYE 31.03.2014
FYE 31.03.2015
FYE 31.03.2016

780,000
1,120,000
1,200,000

Currently agreed
hourly rate for all
suppliers ( per
hour)
12.50
11.50
11.00

Demanded hourly rate (

per hour)

17.00
16.50
16.00

It is estimated that BVS will make use of 1.2 million hours of vehicle maintenance from outsourced
suppliers from March 2016 to March 2018 at the rate agreed for 2016. The total of hourly rates paid to
outsourced suppliers is estimated to be 14% of cost of sales (inclusive of price increases for all
suppliers) for year ended 31 March 2014 (excluding cost of sales for REX if taken up: See below). If
BVS agreed for the rate hike and retain all 5 outsourced suppliers, the administrative expenses for the
year ended 31 March 2014 are forecast to remain at the same level that is given in original 5-year
Business Plan. BVS uses post-tax cost of debt (long term) to evaluate all long term decisions and
considers a planning horizon of 5 years.

Henry Stanton
Leo Willems, Operations Director, has identified a seller for a chain of vehicle workshops, which are
considerably larger than those currently provided to BVS by outsourced suppliers and comprising of
260 in total. These workshops are spread across the three countries in which BVS operates. The
owner of the company which owns these workshops, Henry Stanton, is willing to sell the workshops
on following terms and has expressed that he is willing to finance lease the workshops if the
purchasing party is unable to raise finance for an outright purchase.
Henry Stanton is a resident of European country C in which the BVS currently has operations. The
functional currency in C is C$. Leo Willems has established that the 260 workshops have a total
capacity of 1,600,000 hours of vehicle maintenance per year and these are located approximate close
proximity to those operated by current five outsourced suppliers. Although the capacity is more than
the necessity of BVS, it will have to procure the whole chain of 260 workshops in order to provide
service centers for its clientele that is spread across the three countries.
The workshops will have an upfront capital cost of C$30 million for a purchase decision which can be
financed by debt raised in the BVSs own country (country B) and secured on its assets. The debt
would be denominated in euro and repayable in five years time. At the end five years time the
workshops are estimated to carry no residual value. The current pre-tax rate of interest required by
the banks to provide this loan to BVS is 12% per annum considering the risk factor. Interest payments
would be made at the end of each year.
The lease option is for a finance lease raised in country C. The terms would be five annual payments
of C$7.5 million payable at the beginning of each year. The workshops will be transferred to BVS at

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the end of the lease contract for a negligible amount. Assume the whole amount of each annual
payment is tax deductible.
Other information relevant to the decision is as follows:

The gross profit margin is forecast to be 25% for the year ended 31 March 2014 inclusive of
depreciation for new workshops and rates paid to the in-house technicians of new workshops
(except for REXs vehicles: See below) if the buy/lease option is chosen and all outsourced
suppliers will be discarded
BVSs tax rate is 30%. This rate is not expected to change in the foreseeable future. Tax is
payable in the year in which the liability arises and tax depreciation allowances are available
at 25% per annum on a reducing balance basis
The spot rate is estimated to be C$1.10 : 1 as at 26 February 2013
Nominal interest rates are 45% per annum in country C and 35% per annum in country B.
These rates are not expected to change in the foreseeable future
The administration expenses will amount to 19 million for the year ended 31 March 2014 if
the buy/lease option is chosen because of the additional administrative tasks of managing
workshops
If lease option is pursued, the implied interest rate to be charged to books of accounts is
12.59%

One of Leo Willems work associates at BVS informed him that a confidential source has disclosed to
him that two other small scale competitors are also interested in a portion of 260 workshops on offer.
The associate has suggested to Leo Willems that for a suitable compensation in cash, his informant
will be able to hold the other two buyers until the deal with BVS is completed.

New Customer
Phillip Beck has identified a potential new customer whose vehicle fleet amounts to 15,000. REX is an
apparel manufacturer operating in Europe and it has been faced with severe operational difficulties
during the previous two years. In an effort to optimise the operating efficiencies REX has decided to
outsource its non-core activities to specialised parties, hence the decision to hand-over the fleet
maintenance to BVS. REX maintains a large fleet of lorries for raw material and finished good
transportations, and maintenance of this fleet with in-house staff has proved costly and inefficient.
From Phillip Becks initial survey of REX, he has found out that REX had been incurring operational
losses for the past three years and their forecast operational profits are just breaking even for the year
ended 31 December 2013. This forecast has already taken into account the optimisations to be
implemented in 2013, including the outsourcing of fleet maintenance.
For the new customer Philip Beck has quoted a 10% discounted price of 1350 per vehicle which will
earn only 10% gross profit margin for BVS for this contract, however REX has requested a price that
carries approximately a 20% discount from the original price if it were to outsource its fleet
maintenance to BVS.
Paul Kirtley
Paul Kirtley is a customer account manager who is responsible for four customers of BVS. He has
had an above average record so far since the inception of BVS. Pauls service levels with
instantaneous response for queries have resulted in some customers of BVS referring BVSs service
to their peers.

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Recently, Paul Kirtley has called in sick twice for periods of three days and then for a week. The HR
manager Carmen Kemp has noticed the absence of Paul Kirtley for extended time periods and has
queried his reasons. Paul Kirtley has replied that he had personal issues for taking leave but Carmen
Kemp, who is also under a lot of pressure to increase the performance level of the staff employees,
has admonished him for not setting up a good example of himself to his support team. The situation
has led into a confrontation between the two parties and Carmen Kemp has immediately requested
the removal of Paul Kirtley from the position of account manager to demote him to a member of a
support team under another account manager, without giving him the opportunity to justify his
position.
Management Accounting for operational efficiencies
Annika Larsen, the Finance Director of BVS asked you to accompany her to a Board meeting
yesterday, in which the future of the BVSs business was discussed in great length. Given the strict
targets imposed by PIE, a question was aimed at you on how Management Accounting techniques
can help the company to increase its efficiencies and achieve targets. You recently participated in a
Professional Development Programme that was sponsored by BVS in which you enhanced your
knowledge on modern Management Accounting techniques. You are expected to use this knowledge
in advising the Board of a suitable course of action.
You are required within your report to forecast the profitability for the year ended 31 March 2014,
under three possible scenarios (rate increase for all outsourced suppliers, outright purchase of Henry
Stantons workshops and finance leasing of the same workshops) and the year-end vehicle count at
the same date, with due consideration of all new developments stated herein. It is assumed that the
revenue for the year will comprise of 1,500 per vehicle (excluding any vehicle from REX) into the
number of vehicles at the end of the year irrespective of the outsourced supplier decision. The
Distribution costs will remain at 300,000 for the year for each of the scenarios.

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