(b) Assess the likely strategic impact of the new customer delivery system on Supaserve’s activities and its ability

to differentiate itself from its competitors. (10 marks)

1 The Great Western Cake Company (GWCC) is a well-established manufacturer of specialist flour confectionery

products, including cakes. GWCC sells its products to national supermarket chains. The company’s success during

recent years is largely attributable to its ability to develop innovative products which appeal to the food selectors within

national supermarket chains.

The marketing department of Superstores plc, a national supermarket chain has asked GWCC to manufacture a cake

known as the ‘Mighty Ben’. Mighty Ben is a character who has recently appeared in a film which was broadcast

around the world. The cake is expected to have a minimum market life of one year although the marketing department

consider that this might extend to eighteen months.

The management accountant of GWCC has collated the following estimated information in respect of the Mighty Ben

cake:

(1) Superstores plc has decided on a launch price of ￡20·25 for the Mighty Ben cake and it is expected that this

price will be maintained for the duration of the product’s life. Superstores plc will apply a 35% mark-up on the

purchase price of each cake from GWCC.

(2) Sales of the Mighty Ben cake are expected to be 100,000 units per month during the first twelve months.

Thereafter sales of the Mighty Ben cake are expected to decrease by 10,000 units in each subsequent month.

(3) Due to the relatively short shelf-life of the Mighty Ben cake, management has decided to manufacture the cakes

on a ‘just-in-time’ basis for delivery in accordance with agreed schedules. The cakes will be manufactured in

batches of 1,000. Direct materials input into the baking process will cost ￡7,000 per batch for each of the first

three months’ production. The material cost of the next three months’ production is expected to be 95% of the

cost of the first three months’ production. All batches manufactured thereafter will cost 90% of the cost of the

second three months’ production.

(4) Packaging costs will amount to ￡0·75 per cake. The original costs of the artwork and design of the packaging

will amount to ￡24,000. Superstores plc will reimburse GWCC ￡8,000 in the event that the product is

withdrawn from sale after twelve months.

(5) The design of the Mighty Ben cake is such that it is required to be hand-finished. A 75% learning curve will

apply to the total labour time requirement until the end of month five. Thereafter a steady state will apply with

labour time required per batch stabilising at that of the final batch in month five. The labour requirement for the

first batch of Mighty Ben cakes to be manufactured is expected to be 6,000 hours at ￡10 per hour.

(6) A royalty of 5% of sales revenue (subject to a maximum royalty of ￡1·1 million) will be payable by GWCC to the

owners of the Mighty Ben copyright.

(7) Variable overheads are estimated at ￡3·50 per direct labour hour.

(8) The manufacture of the Mighty Ben cake will increase fixed overheads by ￡75,000 per month.

(9) In order to provide a production facility dedicated to the Mighty Ben cake, an investment of ￡1,900,000 will be

required and this will be fully depreciated over twelve months.

(10) The directors of GWCC require an average annual return of 35% on their investment over 12 months and

18 months.

(11) Ignore taxation and the present value of cash flows.

Note: Learning curve formula:

y = axb

where y = average cost per batch

a = the cost of the initial batch

x = the total number of batches

b = learning index (= –0·415 for 75% learning rate)

Required:

(a) Prepare detailed calculations to show whether the manufacture of Mighty Ben cakes will provide the required

rate of return for GWCC over periods of twelve months and eighteen months. (20 marks)

(ii) Explain why Galileo is able to pay the inheritance tax due in instalments, state when the instalments are

due and identify any further issues relevant to Galileo relating to the payments. (3 marks)

(c) Issue of bond

The club proposes to issue a 7% bond with a face value of $50 million on 1 January 2007 at a discount of 5%

that will be secured on income from future ticket sales and corporate hospitality receipts, which are approximately

$20 million per annum. Under the agreement the club cannot use the first $6 million received from corporate

hospitality sales and reserved tickets (season tickets) as this will be used to repay the bond. The money from the

bond will be used to pay for ground improvements and to pay the wages of players.

The bond will be repayable, both capital and interest, over 15 years with the first payment of $6 million due on

31 December 2007. It has an effective interest rate of 7·7%. There will be no active market for the bond and

the company does not wish to use valuation models to value the bond. (6 marks)

Required:

Discuss how the above proposals would be dealt with in the financial statements of Seejoy for the year ending

31 December 2007, setting out their accounting treatment and appropriateness in helping the football club’s

cash flow problems.

(Candidates do not need knowledge of the football finance sector to answer this question.)

(b) Identify and explain THREE approaches that the directors of Moffat Ltd might apply in assessing the

QUALITATIVE benefits of the proposed investment in a new IT system. (6 marks)

(b) Criticise the internal control and internal audit arrangements at Gluck and Goodman as described in the case

scenario. (10 marks)

(b) Briefly describe the five extreme scores identified by Blake and Mouton. (5 marks)

(c) Maxwell Co is audited by Lead & Co, a firm of Chartered Certified Accountants. Leo Sabat has enquired as to

whether your firm would be prepared to conduct a joint audit in cooperation with Lead & Co, on the future

financial statements of Maxwell Co if the acquisition goes ahead. Leo Sabat thinks that this would enable your

firm to improve group audit efficiency, without losing the cumulative experience that Lead & Co has built up while

acting as auditor to Maxwell Co.

Required:

Define ‘joint audit’, and assess the advantages and disadvantages of the audit of Maxwell Co being conducted

on a ‘joint basis’. (7 marks)

(b) Discuss the relative costs to the preparer and benefits to the users of financial statements of increased

disclosure of information in financial statements. (14 marks)

Quality of discussion and reasoning. (2 marks)

6 Sergio and Gerard each inherited a half interest in a property, ‘Hilltop’, in October 2005. ‘Hilltop’ had a probate value

of ￡124,000, but in November 2005 it was badly damaged by fire. In January 2006 the insurance company made

a payment of ￡81,700 each to Sergio and Gerard. In February 2006 Sergio and Gerard each spent ￡55,500 of the

insurance proceeds on restoring the property. ‘Hilltop’ was worth ￡269,000 following the restoration work. In July

2006, Sergio and Gerard sold ‘Hilltop’ for ￡310,000.

Sergio is 69 years old and a widower with three adult children and seven grandchildren. His annual income consists

of a pension of ￡9,900 and interest of ￡300 on savings of ￡7,600 in a bank deposit account. Sergio owns his home

but no other significant assets. He plans to buy a domestic rental property with the proceeds from the sale of ‘Hilltop’,

such that on his death he will have a significant asset which can be sold and divided between the members of his

family.

Gerard is 34 years old. He is employed by Fizz plc on a salary of ￡66,500 per year together with a performance

related bonus. Gerard estimates that he will receive a bonus in December 2007 of ￡4,500, in line with previous

years, and that his taxable benefits in the tax year 2007/08 will amount to ￡7,140. He also expects to receive

dividends from UK companies of ￡1,935 and bank interest of ￡648 in the tax year 2007/08. Gerard intends to set

up a personal pension plan in August 2007. He has not made any pension contributions in the past and proposes to

use part of the proceeds from the sale of ‘Hilltop’ to make the maximum possible tax allowable contribution.

Fizz plc has announced that it intends to replace the performance related bonus scheme with a share incentive plan,

also linked to performance, with effect from 6 April 2008. Gerard estimates that Fizz plc will award him free shares

worth ￡2,100 each year. He will also purchase partnership shares worth ￡700 each year and, as a result, will be

awarded matching shares (further free shares) worth ￡1,400.

Required:

(a) Calculate the chargeable gains arising on the receipt of the insurance proceeds in January 2006 and the sale

of ‘Hilltop’ in July 2006. You should assume that any elections necessary to minimise the gain on the receipt

of the insurance proceeds have been submitted. (4 marks)