CASE STUDY – JULY 2021

EXAMINERS’ COMMENTS AND MARK PLAN

Contents

Page
Part 1: Executive summary
Introduction 2
Overview of performance 2
Part 2: The Case Study examination
Scenario for the paper (Advance Information) 4
Analysis of Advance Information (AI) 4
Information provided in the Case Study Exam (CSE) 11
Exam requirements 11
Analysis of Case Study Exam information 12
Summary of grades available 13
Part 3: Commentary on candidates’ performance
Overview of professional skills 14
Overall Assessment Criteria 15
Executive summary 15
Requirement 1: Review of HP’s financial performance 15
Requirement 2: Evaluation of ERP Phase 2 vendors 16
Requirement 3: Evaluation of exclusive arrangement with Carey 17
Part 4: Appendices
Appendix 1: Financial statement analysis: HP’s financial performance 18
Appendix 2: Financial data analysis: Calculation of incremental operating profit 19
Appendix 3: Commercial data analysis: Calculation of revenue and gross profit from Carey 20
Part 5: Marking key

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PART 1: EXECUTIVE SUMMARY

Introduction

This report covers the July 2021 Case Study (CS) exam. It is issued in conjunction with two sample answers and
related Examiners’ commentaries. The first of these was near the top of all assessed scripts; the second failed the
exam. In reviewing these documents, it is important to be aware that it is rare for a script to be uniformly ‘bad’ or
uniformly ‘good’: a successful script will often present detailed coverage of all requirements but include errors of
calculation, spelling or logic; an unsuccessful script may contain one or two strong sections or several excellent
points but be let down by poor or incomplete text elsewhere. Unsuccessful candidates will also find helpful
guidance in the ICAEW Learning Materials.

Attached to this report are three appendices giving examples of the sort of analysis that candidates did or might
have done. The two sample answers offer further insights into this area.

Overview of performance

The pass rate was 84.4% (November 2020 – 76.4%; July 2019 – 75.7%). Successful candidates showcased their
higher skills and used the four hours effectively. The key reason for this record pass rate was the fact that
candidates made excellent use of the new software, especially the spreadsheet function, enabling them to
produce their number-work more efficiently and give themselves more time for their discussions. For example, in
Requirement 1 coverage of costs and profit was better than usual. The best scripts were methodical, well-
balanced and relevant, answering each element of each requirement and containing high-quality financial
analysis; sound judgement; commercial recommendations; and succinct, focused executive summaries. Good
candidates were able to assimilate the case material into a report, demonstrating business awareness and
appropriate professional scepticism. They had clearly prepared well, making the necessary effort not only to
master the Advance Information but also to hone their exam technique and to practise using the new software.

The subject of the case is House Pride Limited (HP), a supplier of building materials and home improvement
products to customers in two divisions – regional housebuilders (RH), building contractors and tradespeople (BCT) –
across the north-west of England. For both groups, sales are made through two channels: HP’s network of eight
branches; and online. Also included within online are ‘click-and-collect’ sales. Revenue and profit growth has been
slowing as HP grapples with the challenge of adapting its online capability to help it compete effectively. The
candidate is in the role of Jules Wingate, a final-year trainee ICAEW Chartered Accountant on secondment to HP
and reporting to HP’s Finance Director, Amanda Ellis.

The exam requirements comprised:

1. A review of HP’s management accounts for the year ended 30 June 2021 in comparison with 2020, covering
revenue, for each division, each channel and in total; cost of sales and gross profit for each division and in total;
distribution costs; administrative expenses; and operating profit.
2. An evaluation of two possible vendors for Phase 2 of HP’s ERP project. Candidates had to perform calculations;
assess the adequacy of assumptions and estimates; and recommend, by applying relevant financial and non-
financial criteria, which of the two vendors HP should accept. They also had to advise HP on the issues arising
from the plan to convert two branches (Warrington and Preston) to warehouse space.
3. An evaluation of the proposal to enter into an exclusive supply arrangement with Carey, a major UK builder of
care homes and retirement villages. Candidates were required to identify, with relevant calculations, the
financial, operational and strategic risks and benefits that HP should consider when deciding whether to accept
this proposal, incorporating any ethical and business trust aspects.

Alongside a very strong showing on Requirements 1 and 2, many candidates did better than is sometimes the case on
Requirement 3, revealing good understanding and analysis of the scenario. Reasons for failure were largely familiar –
albeit that there were fewer instances than usual. The quality of weaker candidates’ answers, especially in the skill of
Applying Judgement, was similar to the Examiners’ past experience. Similarly, recommendations were poor,
characterised by an inability, for all three requirements, to offer appropriate, commercial advice based on their work.

Review of professional skills

Assimilating and Using Information (A&UI): A&UI was a strong skill on this exam, reflecting in particular the
inclusion of appropriate appendices. Candidates exploited the spreadsheet functionality of the enhanced CBE
software to produce their calculations effectively and efficiently. For Requirement 1, they segmented their
financial statement analysis by channel and by division and worked out average monthly revenue by branch. For
Requirement 2, they produced relevant calculations, enabling them to go on to consider the relative merits of the
two vendors. Requirement 3 appendices were less well done as there was no obvious template. Where
candidates were marked down at Requirements 2/3, it tended to be for unclear labelling – perhaps reflecting a
tendency, when using the new software, not to explain the derivation of a figure when a neat formula can supply

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it readily. Box 3 (business issues and wider context) saw the lowest results for all three requirements. Candidates
who had immersed themselves in HP and its industry tended to achieve higher scores here.

Structuring Problems and Solutions (SP&S): Candidates generally displayed very good SP&S skills. For
Requirement 1, they commented methodically on the key components of revenue, integrating relevant new
facts. Discussion of cost of sales and gross profit is frequently a poor relation but for the HP case, candidates
analysed the headline figures into their respective elements and so obtained passing grades. Distribution costs,
administrative expenses and operating profit were also answered impressively. At Requirement 2, the vast
majority of candidates scored a passing grade for their calculation of operating profit and assessment of
assumptions. The warehouse proposal was often a differentiator: a sizable minority left out this section
altogether, thereby earning an NA grade. In Requirement 3, candidates did better for boxes 1 (financial
calculations) and 3 (ethical and business trust issues) than on box 2 (operational and strategic risks).

Applying Judgement (AJ): AJ was the weakest skill, although overall stronger than usual. At Requirement 1,
candidates did best in evaluating cost of sales and gross profit, displaying a good understanding of HP’s profit
model. For revenue, they failed to comment on individual branches. For distribution costs and administrative
expenses, their shortcomings were a function of unfamiliarity with the AI. For Requirement 2, candidates covered
the revenue assumptions well, but fewer than half gained passing grades for the rest of their work, especially on
the warehouse issues. For Requirement 3, evaluation of financial benefits/risks and ethical / business trust issues
achieved good marks overall but was noticeably weak lower down the cohort: candidates ignored the cashflow
impact of the proposed Carey arrangement and the challenge facing HP in sourcing new suppliers.

Conclusions and Recommendations (C&R): Candidates did better on Conclusions than Recommendations. For
Requirement 1, most concluded on the key elements but their recommendations did not follow logically from or do
justice to their foregoing analysis work. For Requirement 2, most concluded on most aspects. Some opted for Transit
because of the price differential, but others advised HP to remain with Grossmark on the basis of familiarity and
existing experience. Among recommendations, candidates struggled to offer sound commercial advice, and many
again failed to mention the warehouse issues here. For Requirement 3, candidates concluded on the key points
(cashflow was the one most usually excluded). The most frequent advice was to do due diligence on Carey.

Review of requirements

Requirement 1: The vast majority of candidates performed good analysis of the main numbers. By taking the time
and making the effort to master the upgraded software, they were able to produce higher-quality, detailed
appendices, as well as having more time to write their commentaries. Unlike for many past exams, discussion of
costs and profit was as good as that for revenue. Better candidates were able to draw together several strands of the
scenario, integrating the AI with new information, for example by bringing in relevant items from HP’s Risk Tracker or
by linking HP’s figures to industry benchmarks. Weaker candidates were unable to apply their higher skills to what
was often very good analysis work.

Requirement 2: Most candidates gained passing grades for their appendices – methodical calculations showing a
much better financial outcome under Transit. The most glaring error was in not applying a GP%, which produced
some unrealistically high incremental profits. Evaluation was not as strong as analysis but some did it very well, for
example by questioning, with simple computations, the redundancy costs and numbers of staff affected for each
vendor. A notable shortcoming lower down the cohort was a failure to discuss the warehousing plan. A sizable
minority of candidates missed it out altogether or – only slightly better – tried to include it as part of the main vendor
narrative. Even among those who did discuss it there was a tendency to focus on one aspect.

Requirement 3: Requirement 3 was – as often – the weakest across the cohort. Better candidates, by working
logically through the figures presented, calculated the expected revenue and GP, which revealed that Carey was
potentially a very lucrative customer. The challenge was not to get carried away by the attractive financial picture
but to temper it with the various issues of doubt surrounding the proposal: Carey’s problems with its previous
developments and its previous suppliers, plus the ongoing adverse media coverage. Having prepared good
calculations, many candidates could not evaluate them effectively or produce a balanced argument. They
identified and analysed the operational / strategic and ethical / business trust issues adequately but were less
good at evaluating them. In general, they did not reflect on the bigger picture.

In summary, the HP case dealt with an understandable and topical industry, with an appropriate level of
numerical content for students on the verge of qualifying as ICAEW Chartered Accountants. Candidates were
able to demonstrate a very high level of competency in meeting the requirements.

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PART 2: THE CASE STUDY EXAMINATION

Scenario for the paper (Advance Information)

The case relates to House Pride Limited (HP), a supplier of building materials and home improvement products to
trade customers across the north-west of England. Revenue for 2020 was just under £30 million, a new peak.

Prior to the examination, candidates were provided with a package of information, containing a series of exhibits
relating to HP and the industry, comprising:

1 About you (Jules Wingate) and your employer (House Pride Limited)
2 The UK building supplies industry
3 The UK building supplies industry: Revenue and costs
4 House Pride (HP): An introduction
5 HP: Review of management accounts for the three years ended 30 June 2020
6 HP: Management accounts for the three years ended 30 June 2020
7 HP: Business operations
8 HP: Customer profiles
9 HP: IT systems
10 HP: Suppliers
11 HP: Risk tracker
12 HP: Strategic plan
13 The UK competition and markets environment
14 Recent media coverage

Analysis of Advance Information (AI)

By carefully studying and analysing the 43 pages of the AI, candidates should have formed a detailed picture of HP
and the industry, using facts and figures from across the material. Candidates should be aware of the main
contents so that they can easily locate key topics in the exam. Key points are summarised below. (Additional
examiner commentary is given in this font, highlighting links between exhibits.)

Exhibit 1 introduces the candidate’s role: Jules Wingate, a final-year trainee ICAEW Chartered Accountant on
secondment to HP and reporting to its Finance Director, Amanda Ellis.

Exhibit 2 explains that builders’ merchants (merchants) act as intermediaries between manufacturers and users of
construction products for building/renovating domestic and commercial properties, including basic materials
(bricks, cement, tiles, flooring) as well as specialised items such as plumbing supplies and bathroom fixtures. The
product portfolio can be huge, often amounting to several thousand lines, with inventory worth several million
pounds. Merchants range from small, single-unit entities to the very large chain Travis Perkins. The industry has
been the subject of recent mergers and acquisitions: some of this and other (eg, price-fixing) corporate activity has
come under the scrutiny of the Competition and Markets Authority (CMA). Customers may be either personal or
trade (regional housebuilders, property developers, smaller building contractors, ancillary tradespeople). Sales are
made both physically and (increasingly) online. Merchants must manage carefully their relationships with large
numbers of customers and suppliers. IT is critical: inventory control, pricing and ordering systems; Enterprise
Resource Planning (ERP) to streamline business activities and processes; or e-commerce, including ‘click-and-
collect’, whereby customers buy products online and then collect them from a local branch.

Exhibit 3 notes that the prosperity of merchants depends on trends in construction and home improvement –
sectors representative of the wider economy. Sustainability, energy efficiency, weather and government policy also
impact demand. The recent economic downturn has largely not affected the UK construction industry (especially in
the north-west). The purchase of goods is merchants’ largest expense (typically 70% of revenue) followed by
payroll costs for customer-facing staff (15%). Another important cost is transport and distribution, whether in-house
or outsourced. A common phenomenon is that of buying groups: small and medium-sized merchants coming
together to achieve scale economies and compete against the large national chains with bigger volume discounts
and easier settlement, albeit with short credit periods and strict payment terms.

Exhibits 2 and 3 provide the context in which the remaining case material can be understood.

Exhibit 4 documents HP’s growth from its original incarnation over a century ago. HP itself was created in 1997
with one branch: it now has eight branches across the north-west of England (depicted on a regional map). It is a
business-to-business company, serving trade customers in two divisions: (1) regional housebuilders (RH); and (2)
building contractors and tradespeople (BCT). RH currently generates about 80% of revenue. Sales are made
through two channels: online (including click-and-collect) and at branches. Online sales tend to be at a higher
gross margin than branch sales, but this is not analysed. Branch openings over the period have been gradual. HP
had planned to open two new sites (Chorley and Blackpool) in 2020, but these plans are currently on hold because

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of uncertainty about general trading conditions. Revenue from each branch for each of the past three years is
tabled (reconcilable to the accounts). The directors and their responsibilities are: Emily Hanwell (CEO); Amanda
Ellis (Finance); Ross Connor (Sales and Marketing); Wei Li (Purchasing and Inventory); Hans Ritz (IT).

This sets the scene for Exhibit 5 (business review) and Exhibit 6 (June 2020 management accounts, with 2018 and
2019 comparatives). The analysis below is a synthesis of these two exhibits, together with some additional
calculations based on their contents. It should be readily apparent that the two documents are to be reviewed in
conjunction with each other; looking at either of them in isolation would tell only part of the financial story. A reading
of Exhibit 5 should make clear that: HP uses a single KPI, average revenue per branch per month; and the results
are segmented in two ways (RH/BCT and branch/online), with key factors affecting the results of individual branches
being highlighted where applicable.

Statement of profit or loss – revenue

• After rising by 21.4% to £23,394k in 2018 and 18.6% to £27,744k in 2019 (“above industry norms”), total
revenue grew by a further 6.5% in 2020, to reach a total of £29,554k. These compare with targets of £25 million
for 2019 and £30 million for 2020.
• For the two divisions, revenue has increased steadily in RH, by 16.8% from £18,036k (2018) to £21,075k (2019)
and by 9.9% to £23,168k (2020). BCT revenue grew by 24.5% from £5,358k (2018) to £6,669k (2019) and then
fell by 4.2% to £6,386k (2020), “partly reflecting a brief pause in small-scale refurbishment work”.
• For the two channels, online revenue has achieved strong, steady growth, by 27.4% from £5,697k (2018) to
£7,260k (2019) and by a further 25.0% to £9,075k (2020), while branch revenue, having risen by 15.7% from
£17,697k (2018) to £20,484k (2019), was virtually unchanged at £20,479k in 2020. Online now accounts for
30.7% of total revenue.
• Within the two divisions:
o In RH, online revenue has gone up by 19.5% from £5,222k (2018) to £6,241k (2019) and by 22.3%
to £7,633k (2020). In BCT, the rate of growth has been faster, by 114.5% from £475k (2018) to
£1,019k (2019) and by 41.5% to £1,442k (2020) – a function of the fact that BCT did not begin selling
online until 2018, after the successful pilot for RH.
o In RH, branch revenue has gone up by 15.8% from £12,814k (2018) to £14,834k (2019) and by
4.7% to £15,535k (2020). In BCT, it has moved up by 15.7% from £4,883k (2018) to £5,650k (2019)
and then fallen by 12.5% to £4,944k (2020) – almost back to its 2018 level.
o Thus for RH, online revenue is around a half of branch revenue, while for BCT it is about a quarter. Online
revenue is still very much a growth area for BCT.
• RH’s overall share of revenue has moved from 77.1% (2018) to 76.0% (2019) and 78.4% (2020).
• HP’s key measure, average branch revenue per month, having passed £200k for the first time in 2018
(£210.7k), moved steadily to £232.8k (2019) and £238.1k (2020). Exhibit 5 sets out clearly the basis of calculation
for this figure, highlighting the need to deduct from the denominator any month for which a branch was closed. Candidates
should ensure that they can prove the measure in case they are asked to calculate it for 2021 in the exam. (The inclusion of
this information and no other KPIs should tell them that they do not need to undertake any alternative analysis.)
• In 2018, the new Manchester branch opened, gaining £2 million sales in its first 12 months; and a major new
customer, Elevant, added over £1 million to RH revenue, spread across several branches. Bolton particularly
benefited from Elevant, with the highest growth rate of the existing branches. Candidates should reconcile these
facts to the chart of revenue by branch (Exhibit 4) and link it to later material on Elevant (Exhibit 7; see below).
• In 2019, with Manchester continuing to prosper, an eighth branch (Liverpool) opened, “adding £1 million to
revenue in the six months after opening.” Wigan benefited from some management action to overturn a slight
decline in the previous year. Again, these snippets about individual branches reinforce the importance of analysing the
table provided in Exhibit 4 and appreciating that the number of months of opening for Liverpool to be included in the
calculation of average branch revenue per month is 6 (not 12). BCT revenue growth came from a renewed local
interest in home refurbishments, customer referrals and media coverage. RH similarly benefited from “growth in
new housebuilding projects by Elevant – assisted by government subsidies” … These points can all be viewed
through the lens of other case material, notably: industry background (Exhibits 2/3); Risk Tracker/strategy (Exhibits 11/12).
• Also in 2019, HP began a rolling refurbishment programme at the two oldest branches (Warrington, Preston),
which included setting up click-and-collect facilities. They were closed for the quiet month of January, with
customers redirected and inventory transferred to other branches so as to minimise disruption. Within this short
section there are important points of understanding: (i) although taking place at the branches, click-and-collect revenue is
included within online revenue; (ii) seasonality (Exhibit 7) was a factor in deciding when to carry out this work; (iii) the
upgrades should lead to higher sales in future months and years; (iv) other branches should benefit from the redirection of
sales – this will not be so noticeable for a one-month closure but in the event that a branch has to be shut for longer, the
reallocation of revenue would be more marked.
• In 2020, results for the nine months to 31 March benefited from: new customers, notably Wrights; strong
revenue from existing customers; a full impact from Liverpool and the four newly-upgraded branches (two in
2019, two in 2020). However, the last quarter was affected by an economic downturn. All branches were shut in
June, but online sales continued, helped by advance orders and ongoing construction activity. The downturn is
unlikely to be a short-term issue, so a further decline in business for at least part of 2021 can be expected, impacting branch
activity in particular. It is also noteworthy that the upgrades have so far had the desired effect on performance.

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• The inventory management system (Exhibit 9) added £450k to revenue, “less than anticipated but still good”. HP
made small temporary enhancements to its online sales systems, “mindful that … more investment would be
needed ... We lost around £600k of revenue in the year through online systems issues.” The cross-reference here
to Exhibit 9 should highlight for candidates the need to understand these figures in the context of what was planned for the
ERP project.
• “With two branches open for 10 months and six for 11 months (a total of 86 months), average branch revenue
per month was up only slightly for the year … All individual branches – other than Liverpool, open for only half of
the previous year – suffered an absolute drop in revenue, ranging from 1.4% (Preston) to 6.9% (Burnley).” This
gives candidates a clear opportunity to prove the KPI and an appreciation that they need to look at revenue changes for
individual branches.

Statement of profit or loss – cost of sales

• Cost of sales went up by 17.1% from £19,021k (2018) to £22,279k (2019), then by 7,3% to £23,895k (2020).
• Cost of sales for RH is up from £15,298k (2018) to £17,681k (2019) to £19,493k (2020); for BCT, from £3,723k
(2018) to £4,598k (2019) and £4,402k (2020).
• The two components have both increased, but at different rates: goods and materials went up 18.5% from
£15,672k (2018) to £18,575k (2019) and by a further 6.4% to £19,762k (2020), while wages and salaries rose by
10.6% from £3,349k (2018) to £3,704k (2019) and by another 11.6% to £4,133k (2020).
• A footnote to the accounts states that:
o ‘Goods and materials’ includes impairment allowances against inventories (see note 4). The £
amounts can be demonstrated as being stable at around 67% of revenue over the three years – broadly in line
with the figure of 70% quoted in Exhibit 3 above.
o Wages and salaries relate to customer-facing staff, based in the branches, warehouse and e-
commerce operations. The £ amounts can be demonstrated as being 14.3%, 13.4% and 14.0% of revenue
respectively in 2018, 2019 and 2020 – in line with the figure of 15% quoted in Exhibit 3 above. Of the
increase in 2020, £80k is accounted for by the incentive scheme launched in the year.

Statement of profit or loss – gross profit (GP) and gross profit margin (GP%)

• As a result of the above revenue and cost changes, GP has risen from £4,373k (18.7% margin) in 2018 to
£5,465k (19.7%) in 2019 and £5,659k (19.1%) in 2020.
• GP in RH division increased from £2,738k (15.2% margin) in 2018 to £3,394k (16.1%) in 2019 and £3,675k
(15.9%) in 2020; GP in BCT division grew from £1,635k (30.5% margin) in 2018 to £2,071k (31.1%) in 2019 and
then dropped back to £1,984k (31.1%) in 2020. Thus in absolute terms, RH contributes more GP but at around half the
GP% earned by BCT. This is largely the result of the different discount arrangements for their respective sets of customers
(see below on Exhibit 7).
• Three reasons are given for the fall in GP% in 2018: pricing promotions, higher purchase costs, Manchester staff
numbers. Candidates should ensure that they understand how these, individually and collectively, might cause a squeeze
on profits.
• The higher GP% in 2019 is explained as: “The expansion in our online activity, across both divisions, has
undoubtedly introduced greater efficiencies. The overall increase in scale has also helped us to secure better
supplier terms.” This should be digested carefully, and linked to the earlier point (Exhibit 4): “Online sales tend to be at a
higher gross margin than branch sales”. The fall in GP% to 19.1% is then attributed to “the disruption involved in
finding new ways to work”.

Statement of profit or loss – distribution costs, administrative expenses and operating profit

• Distribution costs comprise a single line in the statement of profit or loss. Exhibit 7 lists its components:
packaging, running costs of vehicles (primarily fuel), repairs and drivers’ wages. They have been rising
sharply, from £1,337k (2018) to £1,825k (2019) and £2,070k (2020). As a percentage of revenue, these represent
5.7%, 6.6% and 7.0% respectively.
• The 2019 increase was due to a larger number of smaller orders, prompting the “need to review route
planning … as well as continuing our vehicle replacement programme”. Candidates should again ensure that they
understand the link between the numbers and the operational explanation.
• There are three lines of administrative expenses: personnel; IT, premises, depreciation and other; marketing
and advertising. In total, these correspond to 11.3% (£3,326k) of 2020 revenue, versus 10.9% (£3,016k) in
2019 and 11.4% (£2,659k) in 2018 – indicating variations in cost control.
• In 2019, HP “increased spend on staff recruitment and training, product management and customer services.
We initiated our ERP project. … We still managed to achieve strong growth in operating profit.”
• Personnel costs represent around 40% of the total. Unlike for branch employees, no information is given on non-
customer-facing staff numbers but it should be apparent that the head office operation (including directors) is small.
These costs rose by 17.4% from £1,208k to £1,418k in 2020. A footnote breaks out the costs attributable to
the directors’ salaries, up from £446k (2018) to £601k (2019) and £694k (2020), which explains £93k of the
increase in 2020. (A close reading of the AI should reveal the reason for the sharp increase in 2019 – namely, the
appointment of an IT director, Hans Ritz: see Exhibit 9 below.)
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• IT, premises, depreciation and other broadly reflect changes in depreciation, which accounts for around one-
third of the total – £525k (2018), £565k (2019), £537k (2020) – and ongoing technology changes, flagged
throughout the AI. In particular, in 2020 “staff were re-trained, notably in e-commerce support, and moved to
remote working, a situation that we expect to continue [a helpful pointer towards possible 2021 developments] …
Where necessary, we paid for them to have suitable IT facilities at home.” This caption also includes
impairment charges for irrecoverable receivables. The charges have been modest to date but could increase in
future with high levels of business failure.
• Marketing and advertising costs have moved steadily from £223k (2018) to £250k (2019) and £289k. As a
small part of HP’s cost base, they do not warrant significant analysis, but they should be viewed in the light of the
description of HP’s promotional activity (Exhibit 7 – see below).
• Net finance income/expense (interest) has moved in line with the overdraft and its conversion into positive cash
in 2020.
• With all the changes at gross profit level, in distribution costs and administrative expenses, partly offset by
savings from the ERP system (Exhibit 9), operating profit, having risen from £377k (2018), a margin of 1.6%, to
£624k / 2.2% (2019), fell back to £263k / 0.9% in 2020. It remains to be seen whether this is a short-term setback or
the worrying start of a decline.

Statements of financial position and cash flow

• The statements of financial position and cash flow are straightforward to understand.
• The notes to the accounts show two categories of PPE: land, buildings, plant, machinery, fixtures, fittings
and equipment – around two-thirds of the total – and motor vehicles (vans, etc).
• The total carrying amount has remained consistent at around £4 million over the three years. This reflects
the roughly offsetting effects of additions/disposals (£360k, £1,085k, £318k) and depreciation (c. £500k per
year). The business review refers to some of the specific activity in the period, eg, branch upgrades (2019 –
£150k; 2020 – £120k); new inventory management system; replacement of delivery vehicles. Additions also
include the new Liverpool branch (2019) but not Manchester: Exhibit 5 specifically notes that “the capital
costs [were] all incurred by 30 June 2017.” Candidates should ensure that they understand how the operational
changes are reflected in the accounts.
• Inventories are a significant balance for HP, as for all merchants (Exhibit 2). They have steadily risen over
the period, from £1,591k (2018) to £1,861k (2019) and £2,020k (2020). Inventory days can be shown to
have been consistent at about 37 days throughout. Allowances for obsolete/slow-moving items are
recognised in cost of sales (goods and materials): 2018 – £106k; 2019 – £121k; 2020 – £135k. Exhibit 5
notes that some products “are beginning to move slowly: we will continue to monitor this closely. The issue is
picked up later – see Exhibit 12.
• Trade receivables are by far the largest part of receivables: £2,310k (2018), £2,723k (2019), £3,009k
(2020), compared with other receivables and prepayments (constant at just over £300k).
• They are stated after impairments for irrecoverable amounts. Insights into this are provided in Exhibit 5, which
states that in 2018 HP strengthened the central credit control function and computer systems to combat a rise in aged
receivables: “This led to the recovery of some large balances and a fall in trade receivables days.” Trade receivables
days moved from 36.1 (2018) to 35.8 (2019) but went back up, to 37.2 in 2020. The accounts commentary
warns of possible customer problems lying ahead. This is picked up later – see Exhibit 12.
• The majority of payables are trade balances, mainly amounts due to goods and material suppliers (Exhibit
10): £2,561k (2018), £3,128k (2019), £3,583k (2020). They have gone up broadly in line with the
corresponding cost of sales caption, but the increase of 14.5% in 2020 is much higher than that for the
underlying costs of goods and materials, perhaps suggesting that HP is choosing to take longer to settle
accounts.
• No information is given about other payables and accruals, but they will include the normal items for
ongoing expenditure and payroll liabilities. They have moved steadily over the period – £560k (2018), £657k
(2019), £767k (2020) – and do not merit any special attention.
• The net cash balance has moved as follows: 2017: £(832)k; 2018: £(288)k; 2019: £(256)k; 2020: £227k.
• In general, for each year working capital changes largely cancel each other out and depreciation remains
relatively constant, so the variation between profit and cash depends on the volume of capital expenditure.
Thus the low level of PPE additions in 2020 played a big part in clearing what had been a substantial
overdraft three years earlier. Future PPE changes will need to reflect the need for further investment in IT and in a
modern fleet of vehicles, alongside branch upgrades (or possibly closures if the growth in online continues).
• A reconciliation of retained earnings would show that no dividends have been paid in the period under
review.

As always, time spent prior to the exam on the management accounts and commentary would have been invaluable. Exhibit
5 highlights the issues likely to be important.

Exhibits 7, 8, 9 and 10 expand and explain important operational and financial points about the business model
that reinforce material in the management accounts and elsewhere in the AI.

Exhibit 7 builds on Exhibit 4 with more detail about HP’s business, with connections to a variety of other exhibits:

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• Sales are partly seasonal: around occur in March-June – so a January branch closure is sensible timing.
• HP’s product portfolio comprises a wide range of items: Wei Li, Purchasing and Inventory Director, and her
team oversee the significant inventory across its branches and Warrington warehouse.
• Small teams under Ross Connor (Sales and Marketing Director) are responsible for RH and BCT customers.
• All branches are in industrial parks, alongside other large enterprises such as Ridley Plumbing, with whom
there are frequent cross-referrals. Each branch has around 15 staff, led by a Branch Manager.
• HP has been developing its e-commerce systems but they need upgrading: around 50% of IT outages in
2020 (up from 20%) related to e-commerce, causing £600k of lost revenue – reiterating a point from Exhibit 5.
The online platform, at first available only to RH customers, was extended to BCT customers from 1 July
2017. Recently, click-and-collect has been successfully introduced at some branches.
• Distribution is key. HP has a fleet of vehicles for transportation and delivery and a team of qualified drivers.
Distribution costs comprise packaging, vehicle running costs, repairs and drivers’ wages.
• HP applies a delivery charge for orders of more than £100, but it is currently reviewing this threshold. The
proportion of deliveries made on time has been rising: for 2020, it was 94% against target of 95%. There are
penalties for late deliveries – indicating a relationship between the delivery measure and distribution costs.
• Staff development and retention are key. HP offers a clear promotion structure: most branch managers have
been promoted internally, while others have moved from rivals with inferior pay and working conditions.
• RH customers receive a 10% discount, regardless of volume/value of transactions. BCT customers who
hold a loyalty card receive a 5% discount when spending a minimum amount each month. Thus BCT earns
a much higher gross profit margin than RH – a key pointer for candidates in analysing the accounts. Typically all
customers get 30 days’ credit, linking to the trade receivables days calculation that candidates should have
conducted (see above).
• HP monitors its Health and Safety procedures closely, by regularly reviewing its policy and risk assessments.
• Through its Environment and Sustainability Policy, HP also seeks to comply with environmental regulations
and best practice, for example by checking emissions on old vehicles, storing dangerous products safely
and consulting on the local environment impact when acquiring or upgrading premises.
• HP promotes itself through social and other media outlets, plus sports and event sponsorship. It subscribes
to several trade bodies. It recently began to benefit from reduced advertising rates by broadcasters – a
possible indicator of lower marketing costs in future.
• HP has earned several professional accreditations plus several accolades from key customers including
Orko – see Exhibit 8. It also supports various local charitable and community ventures.

Exhibit 8 overviews some of HP’s customers, together with testimonials:

• Elevant has built hundreds of new homes in the north-west since 2018. After a long selection process, it
chose HP as one of several suppliers for building products and materials. HP has so far earned over £1
million annually from Elevant. Elevant advertises HP as a partner in an ongoing flagship project.
• Wrights (builder and manager of serviced offices) appointed HP in September 2019 as sole supplier of
building products, after the incumbent went bankrupt. HP earned £0.8 million from Wrights in the nine
months to June 2020, but an increase in working from home (WFH) could reduce future revenue.
• Orko, builder of care homes in the north-west, has HP as a main supplier, responsible for construction
materials, windows and doors. Orko has used other suppliers for other items such as sanitaryware and
heating supplies (mainly from Ridley Plumbing). The average value of supplies to each care home from HP
has been £0.4 million. Orko recently acquired Dolphino, a developer of retirement villages in the north-west.
• Members of NWFT (North-West Federated Tradespeople) contribute over half of HP’s BCT business,
especially through recommendations. NWFT advises homeowners on how to avoid being targeted by rogue
contractors – people who fraudulently claim to be qualified to carry out building work.

These profiles show the range in size/type of HP’s customers, the scope of work carried out for each and related fees, as
well as indicating how HP wins work. The data for Elevant and Wrights links back directly to Exhibit 5, while Orko was
referred to in Exhibit 7. For both Wrights and Orko, there are also suggestions about possible future work (or maybe the
lack of it) – to bear in mind for any financial analysis in the exam.

Exhibit 9 (March 2021) details HP’s IT systems. Some are ageing, as indicated by a sharp rise in outages (which
are time-consuming and labour-intensive to resolve) from 77 in 2018 to 273 in 2020. in 2019 HP began a three-
phase, all-encompassing, integrated Enterprise Resource Planning (ERP) project, led by IT Director, Hans Ritz,
each phase the subject of a separate bidding process. Phase 1 was a new inventory management system. Phase
2 is due to start after 30 June 2021 and be completed by 30 June 2022 (the end of Phase 1’s three-year term),
followed by Phase 3, completed by 30 June 2023. The main part of Phase 2 will be a new website/e-commerce
facility. Phases 2/3 will also incorporate an account portal, CRM (customer relationship management) system,
upgraded supplier platform and new accounting and route management systems.

Before any major IT investment, HP follows eight steps, which include setting a budget, obtaining quotes and
making a selection using a blend of financial and non-financial criteria: an assessment of expected incremental

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profits together with other relevant factors. From a shortlist of three suppliers (its preferred number), Hans Ritz
appointed Grossmark for Phase 1: although expected to generate the lowest profit, it best met HP’s needs and
offered more certainty. Key figures (capital outlay, maintenance, estimated additional revenue, cost savings) are
given for each quote, with explanatory notes, a summary of expected incremental profits per year and a review
of the other factors determining the choice. Phase 1 has worked out broadly as expected: cost savings have
been higher, but Grossmark has been slow to answer maintenance requests, and additional revenue (£450k)
has been lower than estimate (£600k). Data protection and security are key parts of the IT strategy, especially
with online sales growing: procedures include daily cloud-based back-ups and fraud awareness training.

It should be evident that Exhibit 9 is pivotal, especially the numerical components. Candidates should realise that they need
to work through the calculations to ‘prove’ the outcome shown, as well as appreciate the qualitative issues evaluated in
choosing a supplier.

Exhibit 10 overviews HP’s supplier arrangements, especially for its main purchases (goods for resale), which
come from a range of UK-based companies. A pie-chart shows the major suppliers as a percentage of total
2020 purchases (the largest supply £1 million of goods annually). Before appointing a new supplier, HP
undertakes rigorous due diligence, topped up at regular intervals thereafter. This covers financial stability;
quality and safety of goods; treatment of employees; and sustainability. There have been some issues in
relation to hazardous packaging, tightened payment terms and late deliveries. HP likes dealing direct with
suppliers, but joining a buying group would protect it against sudden cost increases, which cannot always be
passed on to customers.

The percentage figures can be translated roughly into £ amounts to give an idea of the absolute scale of purchases from key
suppliers. The comments on buying groups can be linked to other references scattered across the AI.

Exhibit 11 describes HP’s risk management processes by presenting the latest (July 2020) version of its Risk
Tracker. This shows in diagram form eight identified risks, depicted with arrows or circles to show the extent of
any change in assessment since the previous review (January 2020), measured by reference to two criteria:
likelihood and impact. The diagram is accompanied by a table describing each risk and its implications, together
with a mitigation/contingency. In particular:

• the impact of Risk 7 (health & safety) has increased from ‘negligible’ to ‘moderate’, while the likelihood of
Risk 1 (adverse market conditions) has increased from ‘possible’ to ‘likely’;
• the impact of Risk 3 (negative liquidity and cash flow) has reduced from ‘moderate’ to ‘minor’ and the
likelihood of Risk 4 (loss of major customer) has reduced from ‘likely’ to ‘possible’.

Exhibit 12 (July 2020) sets out HP’s strategic plan. HP expects the north-west housebuilding / home renovation
market to remain strong, with continuing UK government incentives for home-buyers and growth in niche
sectors, notably properties for the elderly (care homes, retirement villages). The key opportunities, challenges
and their responses include: potential price rises and long lead times for some products (eg, roofing) – joining a
buying group could help to limit the impact; the need for IT systems to remain reliable and up to date, especially
in e-commerce – the ERP project will be key; the need to control costs and inventory, potentially by rationalising
the product portfolio; continuing the upgrade programme, with some branches being made smaller, click-and-
collect being expanded and additional storage being built to meet the move to online.

As for any Case Study in which the company’s strategy and future plans are set out, these should be digested carefully as
they will inevitably be a reference-point in the exam. Candidates should have found that those for HP linked back to other
case facts – whether in relation to the wider industry, HP itself or both – or that they are logical extensions of these facts.

Exhibit 13 offers further insights into the workings of the CMA. It notes that the CMA has recently carried out
several investigations in the wider construction sector, especially in relation to anti-competitive practices, and
presents short summaries of two such investigations. Although these do not directly refer to merchants, they
relate to companies with which merchants would be closely involved.

The CMA was previously mentioned in Exhibit 2 and in Exhibit 11. Candidates should ensure that they understand the
general competition environment and how it might impact HP’s work.

Exhibits 14a-d are a series of four media articles on:

• the growth of online activity, spotlighting a new, online-only merchant (cementonline) and an established
one (Greg & Sons). Greg’s internet-based sales function, developed by Transit (website specialists), had –
with marketing support – generated 10% sales growth. Both companies had also adapted their warehousing
arrangements, in different ways, to meet increased demand.
• the development of retirement villages, with focus on Antoine, operator of four villages in the south of
England. The article emphasises the importance of good relationships with merchants/suppliers. It notes
that the overall purchase cost of building products at each Antoine village is about 25% of the total building

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 CASE STUDY – JULY 2021
cost, though this can vary, and that a 15% trade discount from merchants/suppliers is typical. All Antoine’s
villages to date have experienced overruns in timetable and/or budget, and Antoine has needed bank
support to tide it over.
• MiNW, a buying group comprising 20 independent merchants in the north-west.
• problems faced by a clothing retailer, Yorath & Co, by not following its normal arm’s length and parallel
running processes respectively when seeking tenders for and implementing its new e-commerce system.

Collectively, these articles highlight topics clearly of relevance to HP, offering a different perspective on issues mentioned
elsewhere and some new insights into others. There will always be some marks available in the exam for appropriate
reference to AI media coverage, and this should therefore be treated as a serious part of preparation and not simply light
reading to gloss over once the more technical detail of the rest of the AI has been mastered.

Overall, the AI will have provided candidates with the opportunity to develop a comprehensive understanding of
the company and its industry with focused preparation and without the need for any significant further research.

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Information provided in the Case Study Exam (CSE)

The Exam contained six exhibits comprising new information:

15 Email dated 21 July 2021 from Amanda Ellis to Jules Wingate: Draft management accounts and business
developments
16 HP: Draft management accounts for the year ended 30 June 2021
17 Note dated 21 July 2021 from Amanda Ellis: Additional information relating to the draft management
accounts for the year ended 30 June 2021
18 Email dated 19 July 2021 from Hans Ritz to Amanda Ellis: ERP – Phase 2
19a Email dated 20 July 2021 from Ross Connor to Amanda Ellis: Carey – proposal for exclusive supply
arrangement
19b Recent media coverage

Exam requirements

Please draft for my review a report addressed to the Scour board. The report should comprise the following.

1. A review of HP’s management accounts for the year ended 30 June 2021 in comparison with the year ended
30 June 2020.

Your review should be based on the management accounts as set out in Exhibit 16. It should cover
revenue, for each division (RH and BCT), each channel (branch and online) and in total; cost of sales and
gross profit for each division and in total; distribution costs; administrative expenses; and operating profit.
You should incorporate in your review the additional information in Exhibit 17.

2. An evaluation of the two possible vendors for Phase 2 of HP’s ERP project (Exhibit 18).

Using the information in Exhibit 18, you should calculate the incremental operating profit for HP using each
vendor (Grossmark and Transit), for each of the three years and in total. You should assess the adequacy of
the assumptions and estimates. Applying relevant financial and non-financial criteria, you should recommend,
with reasons, which of the two vendors HP should accept. You should also advise HP on the issues arising
from the plan to convert Warrington and Preston branches to warehouse space.

3. An evaluation of the proposal to enter into an exclusive supply arrangement with Carey, a major UK builder
of care homes and retirement villages (Exhibit 19a).

You should identify, with relevant calculations, the financial, operational and strategic risks and benefits that HP
should consider when deciding whether to accept this proposal. You should incorporate any ethical and
business trust aspects, including those arising from Exhibit 19b.

Candidates were also told to include an executive summary and to balance their report across the three main
requirements, with other familiar guidance on time allocation; inclusion of ethical issues; and the need to cover at
each requirement all four skills areas: Assimilating and Using Information (A&UI), Structuring Problems and Solutions
(SP&S), Applying Judgement (AJ) and Conclusions & Recommendations (C&R). They had additionally been given
advice prior to the exam about the extent to which they should refer to the Covid-19 pandemic in their answers.

They should have spent time studying Exhibit 15 carefully so as to understand the key elements of each requirement;
digest the other new exhibits; and identify the related AI exhibits to integrate into their answers.

For Requirement 1, they should then have begun a more detailed review, enabling them to assess HP’s 2021
results in light of both their analysis of 2020 carried out in preparation for the exam and the new information
(Exhibit 17). For Requirement 2, it was essential to read Exhibit 18 carefully to identify all critical assumptions,
estimates and other issues to be discussed, to set out calculations methodically, and then to consider the
implications of the warehouse conversion proposal. Finally, for Requirement 3, candidates had to relate Exhibits
19a/19b to relevant material within the case – notably HP’s current situation, customer portfolio and strategic
plans, together with the AI media coverage.

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 CASE STUDY – JULY 2021
Analysis of Case Study Exam information

From an initial reading of the new exhibits, candidates should have established that:

• The analysis of performance had to cover the whole statement of profit or loss to operating profit. HP had seen
a decline in revenue and a sharp fall in operating profit in 2021, with the growth in online sales being
insufficient to redress a large decrease in branch revenue.
• The ERP evaluations depended on a range of financial and non-financial factors, necessitating an appreciation
of the key differences between the two vendors. The warehouse issue required a balanced discussion that took
account of HP’s existing arrangements and strategic goals, as well as the experiences of other merchants.
• The discussion on Carey entailed a good understanding of the benefits and risks of taking on a new customer
that was potentially very lucrative but which was also unreliable and could cause damage to HP’s reputation.

A more detailed review of the CSE should then have elicited the key facts to be addressed in the exam.

Candidates should have recognised the importance of making relevant use of the additional information at Exhibit 17
and linking it to both the accounts themselves and the foregoing AI material. Comparison of the 2021 accounts and
additional information against the 2020 accounts and business review (Exhibits 5/6) would then reveal that:

• Revenue fell by £2,518k (8.5%) from £29,554k to £27,036k. Both divisions were affected, but RH remains by far
the larger, with a slightly increased 79.2% share.
• Branch sales fell 29.6% / £6,072k, partly offset by the growth in online sales (39.2% / £3,554k), which now
account for 46.7% of revenue. All branches saw sharp falls, especially Wigan (40.9%) and Bolton (38.8%).
• Average monthly branch revenue is now just £160k, down almost one-third (32.8%) from £238k.
• Online revenue might have been higher but for a sharp rise in the number of IT outages relating to e-commerce.
• COS decreased by £1,823k (7.6%). Purchases fell by £1,441k (7.3%) because of supply issues. Wages were
down 9.2% (£382k), with some branch staff leaving and no bonus paid. As a result, gross profit fell by 12.3%
(£695k), GP% from 19.1% to 18.4%.
• Distribution costs fell by £127k (6.1%), and now represent 7.2% of revenue. 90% of deliveries were made on
time, further below the 95% target, causing charges to be refunded and potentially alienating customers.
• Administrative expenses fell by 9.3% (£310k), mainly because of the directors’ agreed 20% salary reduction.
• Overall OP fell from £263k in 2020 to £5k in 2021. Accompanied by a £435k positive cash inflow, this is a
reasonable result when many other businesses have struggled, but the near breakeven position is a concern.

Candidates will have expected to analyse the 2021 management accounts and to make use of information on revenue by channel
and division, as well as explanations for cost changes. These were all well signposted in the AI and were clearly key business
drivers. There was plenty of new data to analyse.

For the main part of Requirement 2, Hans Ritz (IT Director) explains in Exhibit 18 that HP is planning Phase 2 of
its ERP project, beginning with a new website and e-commerce facility – an essential step if it is to compete more
effectively and improve overall IT reliability. Phase 2 will launch on 1 January 2022 with a two-month parallel run.
There are two possible vendors: Grossmark, the successful bidder from Phase 1 and HP’s existing provider; and
Transit, a specialist in website design for retailers (referred to in an earlier media article, Exhibit 13a). Candidates are
presented with a table of key financial terms (capital outlay, cost savings, etc) for both suppliers, following the
format used in Exhibit 9. Some of these are provided by the suppliers themselves, some by HP. The table is
supplemented by explanatory notes with more facts about, for example, the functionality of the two possible
systems; the useful lives of the new hardware and software; and the number of staff potentially being made
redundant.

For the subsidiary section of Requirement 2, candidates must consider the issues arising from HP’s proposal to
convert two branches (Warrington and Preston) to additional warehouse space. They should keep in mind that HP
already has a warehouse (its only one) at Warrington and make use of the map that was given in Exhibit 4 to
understand the logistics of creating further storage capacity at Preston. They must also assess the impact on
staffing and view the proposal not in isolation but in the context of HP’s current and future business situation.

Exhibit 18 gave candidates a clear set of data with which to work for each element of the main requirement: calculation;
assessment of assumptions and estimates; evaluation of financial and non-financial criteria; and reasoned recommendation. It
should have been apparent that: a logical approach was needed for the calculation; there were numerous assumptions and
estimates to query; and the decision involved weighing up the quantitative outcome with a range of qualitative criteria.
Similarly, for the warehouse issue, while there was no number-work to do, they had to marshal a range of case facts, including
some from the AI media articles, into a balanced and integrated analysis.

Exhibit 18a is an email from Ross Connor (Sales and Marketing Director), supplemented by media articles (Exhibits
19a/b). These provide candidates with the following facts for Requirement 3:

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 CASE STUDY – JULY 2021
• After poor experiences with previous suppliers, Carey has asked HP to be its exclusive supplier of building
products for a series of new developments,
• These comprise two care homes (Trafford and Blackpool) and one retirement village (Preston). The planned
building costs, together with start/end dates, are given, as well as actual equivalent data for Carey’s previous
three care homes and one retirement village and some notes on specific problems encountered with these.
• Carey aims to continue building further sites until 2025, so this is potentially a very attractive longer-term
opportunity for HP.
• Carey will expect HP to source from other suppliers those items not currently in HP’s product range. This may
involve working with local specialist providers such as Ridley Plumbing and/or joining a buying group.
• Carey has provided HP with a series of additional information and terms, notably: average purchase cost of
building products as a percentage of total building cost; its expectation of a 15% discount on all products; its
delivery requirements and payment terms (60 days after issue of invoice); its demand that HP advertise itself as
‘exclusive supplier of building products to Carey, the UK’s premier builder of retirement accommodation’.
• The accompanying media articles note that Carey is to feature on a forthcoming TV documentary about dubious
practices in the construction industry, including a legal claim against poor workmanship at one of its existing
care homes; and that it is also the subject of a price-fixing claim being investigated by the CMA.

With proper preparatory work on the AI, candidates should have been able to respond to a requirement of this type. The
challenge lay in integrating the new information with that previously seen, primarily in Exhibits 9, 12 and 13, and planning the
structure of their answers so as to cover all parts of the requirement, including calculations and ethical considerations.

The CSE develops a number of features of HP’s business from the AI, each needing a different technique for
advising the board. Exhibit 15 sets out the route to be followed in writing the report:

• Requirement 1 entails a clear focus on financial statement analysis across the statement of profit or loss.
• Requirement 2 involves financial data analysis, along with professional scepticism and commercial awareness.
• Requirement 3 comprises strategic, operational, financial and ethical analysis. To do justice to this, familiarity
with HP’s strategy and the wider scenario is needed.

With proper time allocation, careful planning and a logical approach, candidates should have been able to
complete all the requirements within the four hours.

Summary of grades available

Grades were awarded under five topics: Review of HP’s financial performance; Evaluation of ERP Phase 2 vendors;
Evaluation of exclusive arrangement with Carey; Executive summary; Overall Assessment Criteria. For each of the
three main requirements, under each of the four Professional Skills, there were two or three ‘boxes’ representing
specific areas in which the skill was to be demonstrated. At each box, one of five available grades was awarded: CC
(Clearly Competent); SC (Sufficiently Competent); IC (Insufficiently Competent); ID (Insufficiently Demonstrated); NA
(Not Attempted). The number of boxes per topic and skill (below) reflects an even balance between the three main
requirements, as indicated in the CS Exam rubric.

A&UI SP&S AJ C&R Total

Review of HP’s financial performance 3 3 3 2 11
Evaluation of ERP Phase 2 vendors 3 3 3 2 11
Evaluation of exclusive arrangement with Carey 3 3 3 2 11
9 9 9 6 33
Executive summary 6
Overall Assessment Criteria 1
40

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PART 3: COMMENTARY ON CANDIDATES’ PERFORMANCE

Overview of professional skills

Assimilating and Using Information (A&UI)

A&UI was a strong skill on this exam, reflecting in particular the inclusion of appropriate appendices in
Requirements 1 and 2 and, to a lesser extent, Requirement 3. Candidates exploited the spreadsheet
functionality of the enhanced CBE software to produce their calculations effectively and efficiently.

For each requirement, there were three boxes, the first two for use of numerical information in the case and the
third for referring to HP’s business issues and wider context. For boxes 1 and 2 at Requirement 1, many
candidates achieved strong passing grades by segmenting their financial statement analysis by channel and
division and by working out average monthly revenue by branch. For Requirement 2, the majority produced
relevant calculations, enabling them to go on to consider the relative merits of the two vendors. Where they were
marked down, it tended to be for unclear labelling – perhaps a function of the new software as there may be a
tendency not to explain the derivation of a figure when a neat formula can supply it readily.

As often, Requirement 3 appendices were less well done as there was no obvious template. Better-organised
candidates will have spent a few valuable minutes deciding how best to present calculations that needed only a
few lines – not a page of figures in which the author could easily get lost and forget what needed to be worked
out (there were numerous instances of this lower down the cohort). A consequence of this was, as with
Requirement 2, not earning the mark for clear labelling/derivation.

The result for Box 3 was comfortably the lowest for all three sections, especially for Requirements 2 and 3. In all
instances, the options provided covered a wide range of issues from the case material, both AI (notably the Risk
Tracker, HP’s strategic imperatives and the media articles) and exam. Candidates who had immersed themselves in
HP and its industry tended to achieve higher scores here.

Structuring Problems and Solutions (SP&S)

Candidates generally displayed very good SP&S skills, especially in Requirements 1 and 2.

Box 1 at Requirement 1 (revenue by division/channel) was answered well. Candidates commented on the key
elements of revenue, integrating relevant facts from Exhibit 17 and pinpointing as necessary the main changes for
individual branches. Better ones delved into the segmental analysis and considered the results not merely by
division and channel but also by channel within each division. Box 2 covered cost of sales and gross profit. This is
frequently a poor relation but for the HP case, candidates ensured that they analysed the headline figures into their
respective elements and, as a result, obtained passing grades. Box 3 – taking them further down the statement of
profit and loss into distribution costs, administrative expenses and operating profit – was also answered
impressively. Good candidates took the time to analyse the components of administrative expenses and to look at
cost changes by comparison with revenue.

At Requirement 2, the vast majority of candidates scored a passing grade for boxes 1 (calculation of operating
profit) and 2 (assumptions). However, rather fewer did so for box 3 (warehouse issues): most covered some points,
but there was a tendency to focus on one or two issues rather than to consider the wider picture – perhaps a
function of not focusing on the AI media article highlighting similar scenarios. A sizable minority of candidates left
out this section altogether, thereby earning an NA grade.

In Requirement 3, candidates did better for boxes 1 (financial calculations) and 3 (ethical and business trust
issues) than on box 2 (operational and strategic risks).

Applying Judgement (AJ)

AJ was, once more, the weakest skill. Although overall stronger than usual, it was again a critical differentiator
among marginal candidates.

At Requirement 1, the best performance came – perhaps surprisingly – in box 2 (evaluation of cost of sales and
gross profit analysis). Here, better candidates displayed a good understanding of the dynamics of HP’s profit model,
such as the impact of the different discount arrangements for the two groups of customers. At box 1 (evaluation of
revenue), they failed to comment on individual branches: they were not expected to talk about each – any single one
would have been sufficient. For box 3 (evaluation of distribution costs and administrative expenses), their
shortcomings were a function of unfamiliarity with the AI, for example in not linking the fall in marketing and
advertising to the reduced rates from broadcasters. They also did not step back and appreciate HP’s near-
breakeven position.

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For Requirement 2, candidates discussed the revenue assumptions well (box 1). The main omission was in not
flagging the difficulty in ascribing revenue increases to a single source. For boxes 2 and 3, fewer than half of all
candidates achieved passing grades. They did not consider in enough detail the capital expenditure aspects of the
bids or recognise the huge differential between the two sets of figures for staff cost savings. Of those who did
address the warehouse issues, a significant proportion failed to evaluate them altogether.

For Requirement 3, box 2 (operational and strategic benefits) was covered very poorly. Candidates did not
consider the timing of the work in the context of HP’s normal seasonality – or in light of their own earlier work.
Box 1 (financial benefits/risks) and box 3 (ethical / business trust issues) achieved higher marks overall but were
noticeably weak lower down the cohort. In box 1, they did not fully focus on the cashflow impact of the proposed
arrangement and for box 3 they did not grasp the challenge facing HP in having to apply its usual criteria in
finding new suppliers.

Conclusions and Recommendations (C&R)

Candidates did better for all three requirements on the Conclusions boxes than on the Recommendations boxes.

For Requirement 1, candidates concluded on the key elements but their recommendations did not always follow
logically from or do justice to their foregoing analysis work.

For Requirement 2, most candidates concluded on most aspects, following from their analysis and judgement work.
Inevitably, the topic most commonly missed was the warehouse. There was a mix in terms of which vendor was
favoured (either was valid): some opted for Transit because of the price differential, but others advised HP to remain
with Grossmark on the basis of familiarity and existing experience. Among recommendations, candidates did best in
advising HP to negotiate on terms and conditions but otherwise they struggled to offer sound commercial advice.

Requirement 3 was similar. Candidates again concluded on the key points (cashflow was the one most usually
excluded, a consequence of not discussing it earlier). The most frequent advice was to do due diligence on Carey
(or in many cases, despite access to a spellchecker – see next section – the traditional Case Study version, “due
dilligence”).

Overall Assessment Criteria (OAC)

A majority of the cohort achieved passing grades for OAC. The most common failing was in not structuring the
document with enough headings, including titles for appendices. Most candidates rightly excluded a disclaimer of
liability (this was an internal report). Under language, candidates who availed themselves of the spellchecker on
the new software were able to cut down on the sort of errors that have plagued Case Study scripts since the
introduction of CBE, but a surprising number did not do so and so they lost a mark for poor spelling.

Executive summary

The marking key offered considerable flexibility (eg, a range of possible comments on the very low operating profit at
Requirement 1; evaluation of any revenue/cost assumption at Requirement 2; any operational/strategic risk and
benefit at Requirement 3).

Performance was excellent for Requirement 1 box 1 but weak for box 2. As box 1 was based on conclusions from
within the requirement itself (which were done well) and the second from the recommendations (done less well), this
profile is as expected. It was especially pleasing that candidates concluded on all aspects of the statement of profit
and loss rather than – as they often do in the executive summary – focus on revenue. For Requirement 2, box 2
generally earned high marks. The main omission, consistent with work in the main body of the report, was in relation
to the warehouse issues. In box 1, while more than half of candidates gained a passing grade, this was almost
always SC: candidates typically did not step back and view the big picture, which showed that the biggest financial
difference between the two vendors lay in the estimated staff cost savings. For Requirement 3, they did better in box
2; for box 1, many failed to refer to the funding aspects of taking on such a major new piece of work.

Overall, candidates achieved the ‘Appropriate summary of report section’ bullet at each requirement, producing a
summary of the requisite length.

Requirement 1: Analysis of HP’s financial performance

On reading Exhibit 15, candidates may have been relieved not to find an extra task (‘twist’) to Requirement 1, as
there has been in many recent sessions. However, they will have soon realised that this was not such good news as
there was scope for detailed financial statement analysis, with quite a bit of new information to assimilate. (If they
looked ahead, as they should do on opening any exam, they would have seen that there was instead a twist at
Requirement 2, and made a mental note of this when planning their time.) The challenge was to integrate the

© The ICAEW 2021 Page 15 of 20

 CASE STUDY – JULY 2021
additional financial and non-financial information at Exhibit 17 into a coherent narrative on HP’s performance by
working through it systematically and without spending time on excessive – or irrelevant – analysis.

The vast majority produced good-quality analysis of the main numbers. Appendix 1 was mostly very well done at a
sufficient level of detail, showing key movements, with both absolute and % figures. Where lower grades were
awarded, this was usually because candidates had not delved into the detail at individual branch level, although
they should have been ready for this if they had worked through Exhibit 5 during their preparation. Presentation
was mostly clear, indicating that candidates had taken the time and made the effort to hone their CBE technique
and master the upgraded software, giving them extra time to write their commentaries.

As well as the management accounts themselves, candidates were presented with a set of facts about HP’s
performance for the year. If they had spent the necessary time studying HP’s performance in previous years, they
should have come to the exam fully equipped to tackle a requirement of this nature. The exam material will always
introduce changes in the year, and this was no different. For candidates who had spent preparation time
understanding HP’s business model, the issues in Exhibit 17 should have been familiar – and even predictable –
from the AI, but the exact figures involved and their impact on the results needed careful thought. In particular, to
appreciate fully the bullet-point relating to IT outages, candidates had to bring to bear their knowledge of the ERP
project from Exhibit 9 and its impact on the prior-year results (Exhibit 4) to consider both revenue and cost
implications.

Unlike for many past exams, discussion of costs and profit was as good as that for revenue. Better candidates were
able to draw together several strands of the scenario, integrating the AI with new information, for example by
bringing in relevant items from HP’s Risk Tracker or by linking staff costs and/or purchase costs with industry
benchmarks: “Prices are affected by commodity prices and the CMPI, which has been rising for some time and is expected to
continue to do so. As such goods and materials now represent 67.8% of sales (still below the industry average of 70%), it is
difficult to pass on these prices due to the competitive nature of the industry, so this has affected profit margins”. Weaker
candidates, in contrast, commented on cost changes without making clear linkages to the relevant cost drivers.

Grades on the right-hand side of the marking key were lower than for the left-hand side. As frequently occurs,
weaker candidates were unable to apply their higher skills to very good analysis work. Better examples included
commentary such as: “Total branch revenue saw a fall of £6,072k/29.6%, a particular concern given that three of the
branches are now seeing average revenue per month at less than £140k (Preston, Liverpool and Wigan). However, this is
distorted through the increase in click-and-collect, which is now in 6 of the 8 stores”.

Requirement 2: Evaluation of ERP Phase 2 vendors

The main part of Requirement 2 produced a good set of results. Most candidates gained passing grades for their
appendices. They produced a methodical calculation with the intended outcome – namely, that Transit would produce
a significantly bigger increase in operating profit over the three years. A template for the calculation had been given in
the AI (Exhibit 9) but this was set out in such a way as to require candidates to work through the figures presented in
order to understand the conclusion that Hans Ritz (IT Director) had reached. Those – clearly the vast majority – who
had made the effort to do this stood themselves in excellent stead to tackle the exam task.

In some places, alternative numbers were possible:

• In choosing a gross profit margin, candidates could have used either the 20% in Exhibit 9 or (preferably) the
actual 18.4% that HP achieved in 2021.
• When depreciating Transit’s equipment, they could have opted for a useful life of three or five years.

Marks were available for discussing the selection. However, some approaches were just wrong. Some candidates –
no doubt in the heat of the moment – must have entered an incorrect formula in their spreadsheets and so, for
example, they deducted the cost savings and ended up with an operating loss. Worse still, some did not take their
calculations down as low as operating profit, thus depriving themselves of some straightforward marks. The most
glaring error was in not applying a GP% at all, which produced some implausibly high incremental profits. Better
candidates went on to flex their assumptions, for example by using different figures for cost savings. It is apparent
that the new software offers much improved scope for this type of developed analysis.

Presentation of appendices was poor among weaker candidates, with unclear labelling that expected too much
knowledge and understanding from the reader. This is perhaps an easy mode to fall into with the enhanced
functionality of the new software, but as markers cannot see the spreadsheets with their underlying formulae,
candidates must ensure that they explain their workings within their submitted answers. Weaker candidates also
failed to set their answers in the context of HP’s current business position and future plans.

Having completed their analysis work, candidates should have been well placed to develop it into a rounded
discussion of the financial and non-financial factors influencing HP’s decision. Inevitably, this evaluation work was
not as strong but some did it very well, for example by questioning, with simple computations, the redundancy costs

© The ICAEW 2021 Page 16 of 20

 CASE STUDY – JULY 2021
and numbers of staff affected for each vendor. Candidates generally did not ponder such issues as the scale of the
capital outlays involved by comparison with revenue expenditure; the merits of starting the project at a quiet time of
the year; or the reasonableness or otherwise of using 7% to calculate distribution costs.

A notable shortcoming lower down the cohort was a failure to discuss the warehousing plan. A sizable minority of
candidates missed it out altogether or – only slightly better – tried to include it in part of the main vendor narrative.
There was plenty that they could have said if they had studied the AI properly, with references to similar issues in
both HP’s strategic plan and a media article, and a commonsense approach to the logistical challenges involved:
“HP should assess its storage capacity requirements in light of demand projections for sales for each channel/branch and take the
opportunity to reassess its supplier arrangements and levels of inventory that it needs to hold, ensuring that it is making full use
of the new inventory management system. HP should calculate the full cost of conversion, with a timetable of the key stages,
enabling it to determine when the new space could be ready.” Among those who did discuss the warehousing, there was a
tendency to focus on one aspect, such as the geography, and not to think about wider implications.

Requirement 3: Evaluation of exclusive arrangement with Carey

Requirement 3 was the weakest across the cohort, with a lower profile of marks than Requirements 1 and 2.
There were several parts here: candidates had to address the financial, operational, strategic and ethical and
business trust issues relating to a proposal for HP to form an exclusive supply arrangement with Carey, a
developer of retirement properties. Although there were several references to this sector of the industry within the
AI, the requirement itself would have been less predictable and so it needed some thought on the day.

The nature of the calculation was not spelt out but most candidates realised that they should determine the revenue
and profit that HP would generate from Carey on the three properties specifically identified. By working logically
through the figures presented, they should have been able to show the expected revenue and then to apply a
sensible GP% in arriving at a profit (by using HP’s margin – or maybe that of the RH division – for 2021, or by using
70% and 15% respectively as estimates of materials and staff costs, in line with industry norms). The pressure of the
situation caused some common errors, such as deducting the costs of the new heating products rather than adding
them to the overall cost; not reading the base data correctly; or getting muddled as to how to apply the 15%
discount.

For candidates who did produce relevant calculations and plausible figures, these would have revealed that Carey
was potentially a very lucrative customer – even more so if the arrangement continued beyond its initial period as
Carey was planning to continue building more sites in the medium term. Better ones went on to test the underlying
figures and do some sensitivity analysis – as with Requirement 2, a luxury afforded by the new software – or to
consider the reasonableness of average building cost per room by comparison with past builds.

The challenge was not to get carried away by the attractive financial picture but to temper it with the various issues
of doubt surrounding the proposal: Carey’s problems with its previous developments and its previous suppliers (why
did it want to appoint as a replacement a company such as HP with no direct experience in some of the key products
required?), plus the adverse media coverage that was casting a shadow on its image – not to mention HP’s stated
wish not to have a single large individual customer.

It was disappointing that having prepared good calculations, many candidates could not evaluate them effectively or
produce a balanced argument. As a general rule – and as is often the case – they found it easier to identify risks and
weaknesses of the proposal than benefits and strengths. Those who discussed whether HP should join a buying
group such as MiNW tended to recycle the generic material from the case rather than adapt it to HP’s circumstances.
More considered comments included: “Carey is requesting 60-day credit periods, whereas buying groups tend to have only
30-day periods. This could cause significant cashflow issues for HP if it has to pay the suppliers prior to being paid by Carey.”
The timing of the work also passed many by; this was a rare exception: “There is a significant overlap between delivery
dates for each of the homes/villages and, given there have been shortages of supplies, this may be unachievable. There may also
be staff capacity issues, given the number of staff that have not been replaced …”

Candidates identified and analysed the operational / strategic and ethical / business trust issues adequately but were
less good at evaluating them.

In general, candidates did not reflect on the bigger picture. Stronger ones were troubled by the demands being set
on HP, in terms of product sourcing and cashflow; Carey’s current media exposure; and its poor record in completing
jobs on time and to budget. In doing so, they were able to display sound judgement and professional scepticism –
vital qualities for anyone aspiring to qualify as an ICAEW Chartered Accountant in 2021.

© The ICAEW 2021 Page 17 of 20

 CASE STUDY – JULY 2021
PART 4: APPENDICES

APPENDIX 1: FINANCIAL STATEMENT ANALYSIS: HP’s financial performance

30/06/2021 30/06/2020 Change Change 30/06/2021 30/06/2020

Summary £000 £000 £000 % Share Share
Revenue 27,036 29,554 (2,518) (8.5%)
Cost of sales (22,072) (23,895) 1,823 7.6%
Gross profit 4,964 5,659 (695) (12.3%)
GP% 18.4% 19.1%
Distribution costs (1,943) (2,070) 127 6.1%
Admin expenses (3,016) (3,326) 310 9.3%
Operating profit 5 263 (258) (98.1%)
OP% 0.02% 0.9%

Revenue
RH – branch 11,300 15,535 (4,235) (27.3%) 41.8% 52.6%
RH – online 10,120 7,633 2,487 32.6% 37.4% 25.8%
RH – total 21,420 23,168 (1,748) (7.5%) 79.2% 78.4%
BCT – branch 3,107 4,944 (1,837) (37.2%) 11.5% 16.7%
BCT – online 2,509 1,442 1,067 74.0% 9.3% 4.9%
BCT – subtotal 5,616 6,386 (770) (12.1%) 20.8% 21.6%
27,036 29,554 (2,518) (8.5%) 100.0% 100.0%

Branch – total (below) 14,407 20,479 (6,072) (29.6%) 53.3% 69.3%

Online – total 12,629 9,075 3,554 39.2% 46.7% 30.7%
27,036 29,554 (2,518) (8.5%) 100.0% 100.0%

Revenue by branch (no.) £000 (no.) £000 Change Change Average Average
Warrington (12) 1,922 (11) 2,970 (1,048) (35.3%) 160 270
Preston (12) 1,564 (11) 2,457 (893) (36.3%) 130 223
Blackburn (12) 2,413 (10) 3,168 (755) (23.8%) 201 317
Burnley (12) 2,091 (10) 2,860 (769) (26.9%) 174 286
Wigan (9) 1,242 (11) 2,101 (859) (40.9%) 138 191
Bolton (9) 1,570 (11) 2,565 (995) (38.8%) 174 233
Manchester (12) 2,069 (11) 2,513 (444) (17.7%) 172 228
Liverpool (12) 1,536 (11) 1,845 (309) (16.7%) 128 168
(90) 14,407 (86) 20,479 (6,072) (29.6%) 160 238
( ) = months open Fall = 32.8%

Cost of sales (division)

RH 18,141 19,493 (1,352) (6.9%)
BCT 3,931 4,402 (471) (10.7%)
22,072 23,895 (1,823) 7.6%

Cost of sales (type)

Purchases 18,321 19,762 (1,441) (7.3%)
Wages and salaries 3,751 4,133 (382) (9.2%)
22,072 23,895 (1,823) (7.6%

Purchases / revenue 67.8% 66.9%

Wages / revenue 13.9% 14.0%

© The ICAEW 2021 Page 18 of 20

 CASE STUDY – JULY 2021

Gross profit £000 £000 £000 Change % GP% GP%

RH 3,279 3,675 (396) (10.8%) 15.3% 15.9%
BCT 1,685 1,984 (299) (15.1%) 30.0% 31.1%
4,964 5,659 (695) (12.3%) 18.4% 19.1%

Distribution costs
Distribution / revenue 7.2% 7.0%

Admin expenses
Personnel (below) 1,249 1,418 (169) (11.9%)
IT & premises (below) 1,543 1,619 (76) (4.7%)
Marketing & advertising 224 289 (65) (22.5%)
3,016 3,326

Admin / revenue 11.2% 11.3%

Personnel
Directors’ salaries 555 694 (139) (20.0%)
Other (balancing figure) 694 724 (30) (4.1%)
1,249 1,418

IT & premises
Depreciation 547 537 10 1.9%
Receivables impairment 79 31 48 154.8%
Other (balancing figure) 917 1,051 (134) (12.7%)
1,543 1,619

APPENDIX 2: FINANCIAL DATA ANALYSIS: Calculation of incremental profit

Note Grossmark Transit
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
£000 £000 £000 £000 £000 £000
Additional sales (given) 1,000 1,200 1,400 1,400 1,700 2,000
Gross profit (18.4%) (2021 a/cs) 184 221 258 258 313 368
Delivery (7.0%) (given) (70) (84) (98) (98) (119) (140)
Maintenance (given) (40) (40) (40) (80) (80) (80)
Redundancies (given) (100) - - (160) - -
Other cost savings (given) 250 250 250 500 500 500
Capital w/o: hardware* (3 yrs / 3 yrs) (117) (117) (117) (183) (183) (183)
Capital w/o: software* (3 yrs / 3 yrs) (33) (33) (33) (67) (67) (67)
Operating profit 74 197 220 170 364 398
Operating profit 491 932

* If the hardware and software for Transit were instead depreciated over 5 years, annual write-offs would be £110k and £40k,
adding £100k to incremental profit per year (£300k for the whole review period)

© The ICAEW 2021 Page 19 of 20

 CASE STUDY – JULY 2021
APPENDIX 3: COMMERCIAL DATA ANALYSIS: Calculation of revenue and gross profit from Carey

Care home Care home Village TOTAL

Trafford Blackpool Preston
£000 £000 £000 £000

Estimated building cost 4,400 3,300 12,000 19,700

Revenue earned by HP

Cost of building products (20%/20%/30%) 880 660 3,600

Cost of heating products

200 x 1,000 200
150 x 1,000 150
120 x 2,000 240

Total cost before discounts (Note 1) 1,080 810 3,840 5,730 5,730
Discount (15%)/(10%, using HP's normal figures – Note 2) (860) (573)
4,871 5,157
Gross profit (whole-company GP% for 2021 = 18.4%) 896 949
Gross margin (RH-only GP% for 2021 = 15.3%) 745 789

Relative size of contract

HP total RH
% of annual revenue (using 2021 figures) 18.0% 22.7%
% of gross profit (using 2021 figures) 18.1% 27.3%

Note 1: All figures assume that discount is to be deducted from calculated total costs. Alternative approach would be to consider
discount as having already been applied, with £5,730k as a net figure, so gross costs would be £5,730k x 115/100 = £6,741k
Note 2: To normalise figures, GP% has been applied to revenue as if the standard 10% discount had been given

© The ICAEW 2021 Page 20 of 20

JULY 2021 - House Pride Ltd

First Marking

DATE CANDIDATE NO.

TIME MARKER NUMBER

ES Req 1 Req 2 Req 3 TOTAL

CC

SC

IC

ID

NA

Total 7 11 11 11 40

Abbreviations
RH Regional Housebuilders War Warrington
BCT Building Contractors & Tradespeople Pre Preston
C&C Click-and-collect Bla Blackburn
AI Artificial intelligence Bur Burnley
G Grossmark Wig Wigan
T Transit Bol Bolton
WFH Working From Home Man Manchester
Liv Liverpool

TEAM LEADER CHECKER

SIGNATURE SIGNATURE

Changes made?
 EXECUTIVE SUMMARY
R1 - Review of HP's financial performance

ES.OAC ES.R1.1

w Appropriate headings (HA) w Qualitative comment on total revenue with fig

w No disclaimer of liability AND report from A Ellis/J Wingate (K) w Qualitative comment on division/channel revenue with fig

w Tactful AND ethical language (FT) w Qualitative comment on COS/GP/GP% with fig

w Formal language AND reasonable spelling AND grammar (S) w Qualitative comment on dist/admin/OP/OP% with fig

NA ID IC SC CC NA ID IC SC CC

ES.R1.2

w OP/OP%: breakeven / loss without directors' pay cut /

unsustainable / acceptable result in adverse mkt conditions

w Further analysis of C&C / upgrade Liv/Man to C&C facility

w Improve IT/delivery times / reassess bonus/directors' pay cut

w Appropriate summary of report section

NA ID IC SC CC
R2 - Evaluation of ERP Phase 2 vendors R3 - Evaluation of exclusive arrangement with Carey

ES.R2.1 ES.R3.1

w Gives incremental OP for G AND T with figs w Gives total revenue/GP with fig

w Evaluates revenue/cost assumptions w Concludes on cashflow impact / additional funding

w Non-financial considerations G/T eg w Concludes on main operational/strategic risk

T unknown company, meets spec, two suppliers OR
G known supplier, poor track record on maintenance

w Staff savings: critical to decision w Concludes on main operational/strategic benefit

NA ID IC SC CC NA ID IC SC CC

ES.R2.2 ES.R3.2

w Concludes on way forward (re G&T) with reason w Concludes on way forward with reason

w Concludes/recommends on warehouse issues w Concludes/recommends on ethical/business trust issues

w Backup for assumptions / 3rd quote / consider WC funding w Research new suppliers/MiNW

w Appropriate summary of report section w Appropriate summary of report section

NA ID IC SC CC NA ID IC SC CC
 REQUIREMENT 1 - Review of HP's financial performance
ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS

R1.AUI.1 R1.SPS.1
Appendix 1 FA: Revenue by Division/Channel (report)
w Presents 2021 figures w RH: decline due to Wrights/£800k lost sales

w Presents 2020 figures w BCT: down eg despite inc in online/WFH

w Analysis of revenue by RH/BCT AND branch/online w RH/BCT Mix: RH 79.2% v 78.4% / still largest / consistent

w Analysis of COS AND distribution/admin w Online: growth of C&C / impact of IT issues (£300k/162)

NA ID IC SC CC w Branch: changes by individual branch with fig

w Mix: online 46.7% v 30.7% / branch 53.3% v 69.3%

(or RH online 2021 v RH online 2020 etc)

R1.AUI.2 NA ID IC SC CC
AI/CSE information (report/appendix)
R1.SPS.2
w Overall revenue: down £2,518k / 8.5% Financial analysis: COS/GP (report)
w RH: down £1,748k / 7.5% OR w Overall COS: down £1,823k / 7.6% OR
BCT: down £770k / 12.1% RH down £1,352k / 6.9% OR BCT down £471k / 10.7%

w Purchases: down £1,441k / 7.3% / 67.8% rev >

w Branch: down £6,072k / 29.6% OR
Online: up £3,554k / 39.2%
w Wages: down £382k / 9.2% / 13.9% rev >

w RH branch: down £4,235k / 27.3% OR

RH online: up £2,487k / 32.6% OR w Overall GP: down £695k / 12.3% OR
BCT branch: down £1,837k / 37.2% OR Overall GP%: down 18.4% v 19.1%
BCT online: up £1,067k / 74.0%
w RH: GP down £396k / 10.8% / GP% down 15.3% v 15.9% OR
w Ave Branch Rev: down £160k v £238k / £78k / 32.8% BCT: GP down £299k / 15.1% / GP% down 30.0% v 31.1%

NA ID IC SC CC NA ID IC SC CC

R1.AUI.3 R1.SPS.3
Business issues / wider context Financial analysis: Dist/Admin/OP (report)
w Impact of COVID-19 on the business / economic downturn w Deliveries on time: down 90% v 94% / further below 95% target

w Ind trends: 10% fall in building work / online growth / WFH w Distribution: down £127k / 6.1% / 7.2% of revenue

w Ind averages: purchases 70% of rev / payroll 15% of rev w Admin: down £310k / 9.3% / 11.2% of revenue

w New branches opening delayed / no new branches in 2021 w Personnel: down £169k / 11.9%

w Risk Tracker (eg updated July 2020, loss of supplier/cust) w IT/other: down £76k / 4.7% OR
Mktg/Ad: down £65k / 22.5%

w Movements in Construction Materials Price Indices (CMPI) w Overall OP: down £258k / 98.1% OR
Overall OP%: down 0.02% v 0.9%

NA ID IC SC CC NA ID IC SC CC
APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS

R1.AJ.1 R1.CR.1
Evaluation of revenue analysis Draws conclusions (under a heading)
w Total revenue: down (8.5%) v growth (6.5%) last year w Qualitative comment on total revenue with fig

w Again below £30m target / comparison to ind decline w Qualitative comment on division/channel revenue with fig

w Diverse products/customers mitigate risk w Qualitative comment on COS/GP/GP% with fig

w ERP Phase 1: predictions closer than PY / £800k in 2021 w Qualitative comment on dist/admin/OP/OP% with fig

w Branch: comment on reasons for indiv branch performance NA ID IC SC CC

eg Wig/Bol 3mth closure / Man/Liv redirected sales

w Comments on inclusion of C&C in online not branch

(revenue in online / costs in branch)

NA ID IC SC CC R1.CR.2
Makes recommendations
R1.AJ.2
Evaluation of COS/GP analysis w Further analysis of C&C / upgrade Liv/Man C&C facility

w Compares COS/fall in GP to revenue

w Reset revenue target / join buying group / reassess openings

w Purchases: impact of Rustan / costs not passed on / £250k

/ write-off of (£190k) inventory / shortage of roofing w Investigate/remedy IT outages / update Risk Tracker

w Wages: no bonus in 2021 / leavers not replaced

w Reassess bonus policy / continue 20% directors' pay cut

w RH GP% impacted by 10% discount v BCT 5% discount

w Improve delivery times / invest more in vehicles

w GP/GP%: expected inc from move to higher GP% online

has not materialised w Other commercial recommendation

NA ID IC SC CC
NA ID IC SC CC
R1.AJ.3
Evaluation of Dist/Admin/OP analysis
w Impact of lack of vehicle investment /
late deliveries will incur costs/damage reputation

w Distribution: higher % of revenue suggests inefficiencies /

more online sales / reduced by C&C / electric vehicles

w Wages: fall mainly due to directors' (20%) pay cut

CC
w IT: higher due to WFH / (£10k) less savings than predicted
SC
IC
w Mktg/Ad: lower advert rates / fewer events sponsored
ID
NA
w OP/OP%: at B/E / loss without directors' pay cut OR
OP/OP%: unsustainable/concerning Total 11

NA ID IC SC CC
 REQUIREMENT 2 - Evaluation of ERP Phase 2 vendors
ASSIMILATING AND USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS

R2.AUI.1 R2.SPS.1
Appendix 2 Calculation of OP (report/appendix)
w Numbers labelled AND clearly derived w Delivery: 70+84+98 AND 98+119+140

w Maintenance: 40+40+40 AND 80+80+80

w Calculations for Grossmark (G)

w Redundancy: 100+0+0 AND 160+0+0

w Calculations for Transit (T)

w Savings: (250)+(250)+(250) AND (500)+(500)+(500)

w Calculation for three years AND total

w Depn: 150+150+150 AND 250+250+250

NA ID IC SC CC

w OP: G £491k AND T £932k

NA ID IC SC CC

R2.AUI.2 R2.SPS.2
AI/CSE information (report/appendix) Assumptions
w Extra rev: 1,000+1,200+1,400 AND 1,400+1,700+2,000 w Capex: T higher costs / compares to bank balance >

w Uses HP 2021 GP% of 18.4% - 20% w Useful life: T says 5-year life / would reduce overall costs >

w Maintenance: G expecting economies of scale with Phase 1 >

w GP: 184+221+258 AND 258+313+368

w Staff savings: calc of ave salary / >

compares redundancies under G (8) v T (12)
w Uses 7% for delivery costs
w Dist: 7% compared to current 7.2% / > 6% for Phase 1 >

w Uses 3 yrs for G depn AND 3 or 5 yrs for T depn w Starts Jan 2022 / Jan is quiet time / 2mths parallel run

NA ID IC SC CC NA ID IC SC CC

R2.AUI.3 R2.SPS.3
Business issues / wider context Warehouse issues
w Impact of COVID-19 on the business w May be unsuitable site eg high rent, motorway access, parking

w Risk Tracker (eg multiple suppliers, cybersecurity) w War/Pre on edges of existing region / impact on dist costs

w Strategic Plan (eg new system needed for online growth) w May lose War/Pre existing revenue/customers

w New system needed to reduce IT outages w Staff may need re-training/re-locating/may not want to move

w G is known supplier / T has e-commerce AI experience w Extra closure/conversion costs / unknown Phase 2 impact
(Greg & Sons)

w Bank balance £662k at year end w Greg & Sons 'expensive, disruptive' to convert warehouse

NA ID IC SC CC NA ID IC SC CC
APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS

R2.AJ.1 R2.CR.1
Evaluation of revenue assumptions Draws conclusions (under a heading)
w T substantially more revenue/OP for HP w Gives incremental OP for G AND T with figs

w Phase1 revenue not met so could be optimistic OR

Greg & Sons estimated 10% inc so figures may be prudent w Evaluates revenue/cost assumptions

w Difficult to attribute extra revenue to single source

w Concludes on warehouse issues

w Add'l T functionality: impact on revenue / meets HP spec

('people who buy X buy Y') w Concludes on way forward (GvT) with reason

w 2021 may not be good year on which to base rev/GP%

NA ID IC SC CC

w Any changes in assumptions will impact calc/decision

NA ID IC SC CC

R2.AJ.2 R2.CR.2
Evaluation of cost assumptions Makes recommendations
w Capex: contract costs would be fixed / may need funding w Back-up for vendor/HP assumptions

w Useful life: no evidence for T claims w Get a 3rd quote / discuss funding with bank

w Maintenance: G failing to meet Phase 1 standards w Negotiate T&C eg payment terms, data security

w Staff savings: critical to decision w DD on T / update DD on G

w Dist: could be small deliveries / new route mgt system w Warehouse: eg cost v benefits, set timetable
/ more online sales

w May be extra costs eg marketing, wage inflation, discounts w Other commercial recommendations

NA ID IC SC CC
NA ID IC SC CC
R2.AJ.3
Evaluation of warehouse issues
w Quicker to convert existing sites / War has a warehouse

w Improve transport times / improve KPI to 95% target /

improve carbon footprint

w War/Pre poor performing branches

CC
w Buying in larger quantities will reduce cost / SC
help with staff redundancies / consider staff welfare IC
ID
w Disposal proceeds of £20k to offset conversion costs /
consideration of funding NA
Total 11
w More warehouse space consistent with strategy /
eases capacity constraints

NA ID IC SC CC
 REQUIREMENT 3 - Evaluation of exclusive arrangement with Carey
ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS

R3.AUI.1 R3.SPS.1
Appendix Financial calculations (appx or report)
w Numbers labelled AND clearly derived w Building revenue: £880k + £660k + £3,600k

w Calculates rev/GP for Trafford and Blackpool only w Heating products revenue: £200k + £150k + £240k

w Calculates rev/GP for Preston only w Discount: own fig

w Calculation: relative size / sensitivity / extra costs w Calculates GP using current 15% / 15.3% / 18.4% - 20%

NA ID IC SC CC w Calculates cost per bedroom / per property

NA ID IC SC CC

R3.SPS.2
R3.AUI.2 Operational and strategic risks
Uses information (report/appendix)
w Limited time before start date may cause problems
w Costs: Traff £4.4m + B'pool £3.3m + Prest £12m
(in 2022) w Size will stretch current capacity / inc demand for transport

w Uses 20% + 20% + 30% of build costs as HP rev

w HP has no experience of some products required by Carey
(eg furniture, heating supplies)
w Uses 200 + 150 + 120 beds/homes
w Need to source new suppliers

w Uses £1k + £1k + £2k cost of heating products

w Risk 4: significant customer means less well diversified

w Uses 15% discount

w Carey may be demanding partner / biased estimates
/ negative impact on other customers
NA ID IC SC CC
NA ID IC SC CC

R3.AUI.3 R3.SPS.3
Business issues and wider context Comments on ethical/trust issues
w Impact of COVID-19 on the business w Carey has eco-friendly image / recent industry awards >

w Growing sector reflecting changing demographics w Carey ongoing legal claim / damaging TV documentary >

w Carey: relatively new to villages / new to HP w Carey involved in price-fixing allegations >
/ plans to build more up to 2025

w HP: sector experience (Orko) / strategy to expand w Carey wants positive publicity message from HP >
/ customer service ethos / long relationships

w HP: high H&S stds / twice yearly supplier checks w Carey requires sustainable timber >

w Flexible OD arrangement / y/e bank £662k w Heating products must comply with energy efficiency stds

NA ID IC SC CC NA ID IC SC CC
APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS

R3.AJ.1 R3.CR.1
Evaluates financial benefits/risks Draws conclusions (under a heading)
w Significant proposal / Carey would be largest customer w Gives total revenue/GP with fig
/ helps to meet revenue target

w Revenue greater if contract renewed in Nov 2022 w Concludes on main operational/strategic risk/benefit

w Cashflow: WC terms longer / 60 v 30 / potential bad debt

w Concludes on ethical/business trust issues
w Cashflow: outflows at same time as Phase 2 outflows

w Could help recovery from 2021 decline/breakeven OP / w Concludes on way forward with reason
need to include costs in analysis (eg dist)

w Compares with previous Carey/Antoine projects/RH NA ID IC SC CC

(eg delays, overruns, discount)

NA ID IC SC CC

R3.AJ.2 R3.CR.2
Operational and strategic benefits Makes recommendations
w Most work fits into quiet season w Find suppliers for new products / reconsider MiNW

w All sites within HP's current geographical area

w Negotiate T&C eg payment terms, overruns

w Ridley relationship could mean good plumbing discounts

w DD on Carey

w Considers benefits of joining buying group (eg MiNW)

w Appoint project team / consider logistics/capacity

w Could reduce Phase 2 staff losses / save redundancy cost

w Update cashflow re funding / talk to bank

w Accepting proposal could enhance HP reputation

w Other commercial recommendations
NA ID IC SC CC

R3.AJ.3 NA ID IC SC CC
Evaluation/recs: ethical/trust issues
w In line with HP ethos / investigate eco claims

w Discuss with Carey / investigate facts of legal claim

w Potential damage to reputation by association

/ CMA investigation may take long time/large fine CC

w Need to check claims true / only do this if benefits HP /

SC
/ consider impact on Orko IC
ID
w HP has accredited/sustainable timber suppliers already
NA
Total 11
w Need to to DD on new suppliers / check efficiency claims

NA ID IC SC CC