ACCA

Mock Exam
Winter 2016

Paper P3 – Business Analysis

Time Allowed:
3 hours 15 minutes

This paper is divided into two sections:

SECTION A – This ONE question is compulsory and

MUST be attempted

SECTION B – TWO questions ONLY to be attempted

Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may be annotated.
You must NOT write in your answer booklet until instructed by the supervisor.
This question paper must not be removed from the examination hall.
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Section A – This ONE question in this section is compulsory and MUST

be attempted.
Question 1

Roam Group Co
Roam Group Co (The Roam Group) was formed in 2009 when the owners of Stuart Roam Road Transport
decided to create a group structure to facilitate the acquisition of companies. The CEO of The Roam Group
is Sir John Watt, a highly experienced businessman and he has a financial director and an operations director
to assist him. The objectives of The Roam Group is to acquire companies which fit well with its existing
companies, which would benefit from being part of the Group and which would also bring benefits to
companies already in the Group. The Roam Group is a very lean operation. Besides the three full-time
directors, it only has two full-time administrative employees.
There are currently three operating companies in the Group: Stuart Roam Road Transport, Stuart Roam
Warehousing and Stuart Roam Rail. The managing directors of all three operating companies also sit on the
board of The Roam Group. Each of these operating companies has significant autonomy within the Group.
The Roam Group, like all the operating companies in the Group, has the majority of its shares owned by the
Roam family. Financial information for the operating companies is given in Table One. The Roam Group
and its operating companies are all based in the country of Meeland.

Stuart Roam Road Transport

Stuart Roam Road Transport (SRRT) was founded in 1955 by Stuart Roam. It has grown to be the largest
road freight company in Meeland, with over 2,000 trucks. It specialises in the haulage of consumer food and
drink and it has significant contracts with most of the large supermarket chains. There are no toll roads in
Meeland. Taxes for roads are levied through a fuel tax and an annual road fund licence. The managing
director of SRRT is Stuart Roam junior, who was originally employed by his father as a driver. He still
drives a truck for one day every month, so that ‘he never loses touch with the business’. SRRT’s distinctive
red and white trucks are seen all over the country, and all carry the company’s catchphrase ‘All roads lead to
Roam’. They have attracted a fan club, whose members spot the trucks on the road and record their
movements on a dedicated internet site. These so-called ‘New-Roamantics’ have themselves become famous
and, partly as a result of this, Stuart Roam has become a household name and is the most recognisable brand
in the road transport industry. To maintain a modern fleet, SRRT replaces its trucks every three years. It
wants to ensure that they are reliable, efficient and that they project a modern image which is attractive to
their customers.

Stuart Roam Warehousing

The growth of company outsourcing and consumer internet purchasing made it increasingly clear that
SRRT’s customers wanted an integrated transport and storage solution. The Roam Group acquired a number
of warehouses from its customers who wished to divest themselves of this part of their operations. In 2009, it
consolidated these, together with a number of small warehousing companies it had acquired, into a company
called Stuart Roam Warehousing (SRW). The 2010 figures shown in Table One represent the first year that
the company traded in its current form. Nationwide, it owns 4 million square metres of warehousing, with its
warehouses painted red and white and prominently displaying the Stuart Roam logo. The warehouses are
efficient and highly automated. However, development land for warehouses is getting more difficult to find
and acquisition costs of the land are also increasing.
The average price for warehouse development land in Meeland is now $20,000 per hectare. A hectare is
10,000 square metres.

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Stuart Roam Rail

Increasing fuel costs, increasing road congestion and concern about the environmental consequences of road
transport caused The Roam Group to look at opportunities offered by rail transport.
In 2010 The Roam Group purchased the Freight Direct Rail Company (FDRC). FDRC was formed in 2000
when the government of Meeland privatised the rail freight business. FDRC had struggled to survive in a
business dominated by two large companies who shared the lucrative bulk freight contracts (coal, iron ore
and oil) between them. The FDRC board welcomed The Roam Group acquisition and the locomotives were
quickly painted in the red and white corporate colours and FDRC was renamed Stuart Roam Rail. However,
despite experienced managers being transferred into the company from other companies in the Group, Stuart
Roam Rail (like FDRC) has struggled to make a significant impact in the rail freight sector. Most of its
customers are at locations which are not directly accessible by rail. Furthermore, the lucrative bulk rail
freight contracts (coal, iron ore and oil) are in products which companies within The Roam Group have no
experience in. It is still unclear whether the movement of consumer food and drink to multiple locations (The
Roam Group’s core business) is suited to rail transport. Furthermore, it has also been difficult for The Roam
Group’s senior management to understand the culture and economics of the rail freight business. The railway
tracks, which are still owned by the state, are subject to very close control and monitoring and Stuart Roam
Rail’s use of these tracks is directly charged. There has also been a failure to recognise that train driving
requires far greater skills and training than truck driving.
However, on the positive side, Stuart Roam Rail has developed an innovative mini-container system which
can easily transfer goods between trucks and trains and it also effectively uses warehouse space.
Furthermore, most of the supermarkets, attracted by a green image, are very supportive of the rail initiative
and wish to be associated with it.

2013 2012 2011 2010 2009

Roam Industry Roam Industry Roam Industry Roam Industry Roam Industry
Stuart Roam Road Transport
Revenue 575 2,050 565 2,025 550 2,015 520 2,050 500 2,000
Operating
profit 10.80% 9.98% 10.75% 9.95% 10.80% 9.93% 10.45% 9.50% 10.25% 9.57%
ROCE 12.25% 11.50% 12.15% 11.45% 12.05% 11.45% 11.95% 11.30% 11.95% 11.35%
Stuart Roam Warehousing
Revenue 315 3,200 275 3,010 270 3,050 255 2,950 250 2,850
Operating
profit 14.55% 14.50% 14.25% 14.15% 14.20% 14.25% 14.00% 14.25% 13.85% 14.15%
ROCE 14.50% 14.15% 14.25% 14.10% 14.15% 14.10% 13.95% 13.90% 13.95% 13.85%
Stuart Roam Rail
Revenue 112 3,150 110 3,000 105 2,850 105 2,650 105 2,500
Operating
profit 4.75% 12.45% 4.50% 12.35% 4.85% 12.25% 4.95% 12.75% 5.15% 12.85%
ROCE 3.50% 8.75% 3.65% 8.55% 3.75% 8.55% 3.85% 8.35% 3.85% 8.25%

Table One: Financial data for operating companies in The Roam Group.

The performance of the company is shown under the columns headed Roam. Industry averages (provided by
Freight Line International) are shown under the columns headed Industry. All revenue figures are in
$million.
Note 1: Stuart Roam Warehousing first traded in 2010. The 2009 figure is compiled from companies which
were consolidated into Stuart Roam Warehousing.
Note 2: Stuart Roam Rail was formed after the takeover of FDRC. 2011 was the first reporting period for
Stuart Roam Rail. The 2009 and 2010 figures are for FDRC.
Note 3: The standard payment terms in Meeland is payment within 30 days of the invoice date.
Godiva airport The Godiva airport is situated on the outskirts of Boleyn town where SRRT already has three
transport depots and warehouses. The airport occupies a site of 450 hectares and it has two tarmac runways,
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four hangers and a small terminal/flying club facility. The airfield is exclusively used by private flyers and
two flying clubs. The airport is adjacent to the motorway which connects North and South Meeland.
Financial information for Godiva airport is given in Table Two.
All figures in $000s

Assets
Non-current assets $000
Property, plant and equipment 6,000
Goodwill 250
Total non-current assets 6,250

Current assets
Inventory 550
Trade receivables 80
Cash 370
Total current assets 1,000
Total assets 7,250

Equity and liabilities

Share capital 2,550
Retained earnings 250
Total equity 2,800
Non-current liabilities
Long-term borrowings 4,050
Current liabilities
Trade payables 120
Short-term borrowings 250
Current tax payable 30
Total current liabilities 400
Total liabilities 4,450
Total equity and liabilities 7,250

Statement of profit or loss

Revenue 975
Cost of sales (700)
Gross profit 275
Administrative expenses (125)
Finance costs (100)
Profit before tax 50
Tax expense (10)
Profit for the period 40
Table Two: Godiva airport – extracts from financial statements – 2013
The Roam Group has recently issued the following press release from Sir John Watt:
The Roam Group is pleased to announce that it has signed an initial agreement to purchase Godiva airport
from the Godiva Airport Company for the sum of $7m, funded from retained profits from within the Group.
We see this as a natural extension of our transport capabilities. Road, rail and air have long been
complementary forms of transport and we are pleased to be able to offer our customers all three, using our
innovative mini-container system as an effective transhipment method between transport modes. We also
hope to attract a no-frills airline to the airport, encouraged by low landing fees and a population of over
150,000 people living within 20 miles of the airport. Godiva Airport Company will become an operating
company within The Roam Group, and renamed Stuart Roam Air.

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In a critical article on the proposed airport acquisition in the financial press, an independent aviation
consultant has provided national performance statistics for airports of a similar size and type to Godiva
airport (see Table Three).

Operating profit Return on

Current ratio Acid test ratio Gearing ratio
Margin Capital Employed
17.5% 8.5% 2.25 1.50 40%
Table Three: Average national performance figures for medium-sized light aviation airports: 2013

He has also cast doubt on Sir John Watt’s statement about attracting a no-frills airline to the airport. He says
that a local regional population of at least 500,000 people is required to make such a service attractive. He
believes that the population of the Boleyn area is much too small to make passenger services economical.

Required:
(a) Write an independent report which:
(i) Evaluates the current performance and contribution of each of the three current
operating companies in The Roam Group portfolio and assesses their relative significance
in its future strategy. (21 marks)

(ii) Evaluates the proposed acquisition of Godiva airport. (15 marks)

Professional marks will be allocated in part (a) for the clarity, structure, logical flow and appropriate
tone of your answer. (4 marks)

(b) Portfolio managers, synergy managers and parental developers are three corporate rationales for
adding value.
Explain each of these separate rationales for adding value and their relevance to understanding
the overall corporate rationale of Roam Group Co. (10 marks)

(Total: 50 marks)

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Section B – TWO questions ONLY to be attempted

Question 2

ATD is a medium-sized engineering company providing specialist components for the marine engineering
market. The sales manager is currently under pressure from the other departmental managers to explain why
his sales revenue forecasts are becoming increasingly unreliable. Errors in his forecasts are having
consequential effects on production, inventory control, raw materials purchasing and, ultimately, on the
profitability of the company itself. He uses a ‘combination of experience, intuition and guesswork’ to
produce his sales forecast, but even he accepts that his forecasts are increasingly inaccurate.
Consequently, he has asked a business analyst to investigate more rigorous, appropriate ways of forecasting.
The business analyst has suggested two possible alternatives. The first (summarised in Figure 1) is least
squares regression. The second (summarised in Figure 2) is time series analysis. The actual sales figures in
both of these examples are for ATD, so the company is currently in quarter 3 – 2013. However, the business
analyst has left the company before completing and explaining either the basis for, or implications of, these
two alternative approaches to forecasting.
Figure 1: Least squares analysis
Year/quarter Sales
Quarter
($000)
x y x2 xy y2
2010 quarter 1 1 110 1 110 12,100
2010 quarter 2 2 160 4 320 25,600
2010 quarter 3 3 155 9 465 24,025
2010 quarter 4 4 96 16 384 9,216
2011 quarter 1 5 116 25 580 13,456
2011 quarter 2 6 160 36 960 25,600
2011 quarter 3 7 153 49 1,071 23,409
2011 quarter 4 8 100 64 800 10,000
2012 quarter 1 9 128 81 1,152 16,384
2012 quarter 2 10 180 100 1,800 32,400
2012 quarter 3 11 169 121 1,859 28,561
2012 quarter 4 12 99 144 1,188 9,801
2013 quarter 1 13 137 169 1,781 18,769
2013 quarter 2 14 180 196 2,520 32,400
1,943 1,015 14,990 281,721
b = 1.84
a = 125.022
r = 0.253
The equation of a straight line is y = a + bx

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Figure 2: Time series analysis

Sales
Quarter Trend Deviation Svar (1) Residual Sadj (2)
($000)
2010 quarter 1 110 124.70
2010 quarter 2 160 127.77
2010 quarter 3 155 131.00 24.00 22.55 1.45 132.45
2010 quarter 4 96 131.75 –35.75 –40.08 4.33 136.08
2011 quarter 1 116 131.50 –15.50 –14.70 –0.80 130.70
2011 quarter 2 160 131.75 28.25 32.23 –3.98 127·77
2011 quarter 3 153 133.75 19.25 22.55 –3.30 130.45
2011 quarter 4 100 137.75 –37.75 –40.08 2.33 140.08
2012 quarter 1 128 142.25 –14.25 –14.70 0.45 142.70
2012 quarter 2 180 144.13 35.88 32.23 3.64 147.77
2012 quarter 3 169 145.13 23.88 22.55 1.33 146.45
2012 quarter 4 99 146.25 –47.25 –40.08 –7.17 139.08
2013 quarter 1 137 151.70
2013 quarter 2 180 147.77

Analysis of seasonal variation 1 2 3 4

24.00 –35.75
–15.50 28.25 19.25 –37.75
–14.25 35.88 23.88 –47.25
Totals –29.75 64.13 67.13 –120.75
Average –14.88 32.06 22.38 –40.25 –0.69
Adjustment 0.17 0.17 0.17 0.17
Svar (1) –14.70 32.23 22.55 –40.08
Note 1: Svar: seasonal variation
Note 2: Sadj: seasonally adjusted figures
The failure of the company to meet sales targets for quarters 1 and 2 of 2013 has prompted the Chief
Executive Officer (CEO) to put into place a broad cost-cutting policy. He has banned business travel,
cancelled a number of marketing initiatives and introduced a complete freeze on recruiting for posts which
become vacant on the resignation of the current post holder. He claims that ‘our failure to meet sales targets
means we must ruthlessly cut costs’. However, many of the departmental managers are critical of such an
indiscriminate approach and believe that the measures might be counter-productive.
This cost-cutting has particularly demotivated the production manager and he inventory manager, who both
blame the sales director for setting unrealistic targets. The production manager has commented that, ‘I am
working tirelessly to keep costs down, but my only reward is that I cannot replace one of my best purchasing
administrators who left last month’. In general, departmental managers at the company feel ‘powerless and
undervalued’.
The company currently does not have a formal budgeting process in place. The production manager is sure
that such a process, particularly if senior managers were involved in the budget setting process, would help
address issues around forecast reliability, the low morale of departmental managers and the seemingly
indiscriminate cost-cutting of the CEO.
Required:
(a) Explain and analyse the data in the least squares regression and time series analysis
spreadsheets (Figure 1 and 2) left by the business analyst and evaluate the appropriateness of
both techniques to sales forecasting at ATD. (15 marks)
(b) Analyse how introducing a formal budgeting process would address the issues of inaccurate
forecasting, low morale and indiscriminate cost cutting at ATD. (10 marks)
(Total: 25 marks)

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Question 3

Yvern is large region in the country of Gaulle. It is ethnically and culturally distinct from the rest of the
country and it has aspirations for independence. The desire for this independence is reflected by consumers
in Yvern preferring to buy products which have been produced in the region.
Yvern Trinkets Regional (YTR) is a manufacturer of giftware products aimed at the Yvern market. Its
products are bought primarily by residents of Yvern and visitors to the Yvern region. It is the third largest
company of its type in the region, and the 50th largest producer of giftware in Gaulle. Its marketing message
stresses the regional identity of the company and its employment of local skills and labour. It currently
manufactures four products, designated here as products A, B, C and D. The company does not sub-contract
or outsource any element of production and it has never done so. Data concerning products A, B, C and D
are given in Table one.

A B C D
Monthly production (in units) 2,000 5,500 4,000 3,000
Direct materials cost ($ per unit) 3 5 2 4
Direct labour cost ($ per unit) 9 6 9 6
Variable production overheads ($ per 2 3 1 2
unit)
Table one: Production and marginal cost data for the YTR product range
YTR recently appointed a new managing director, born outside the region. He has been tasked with
improving the profitability of the company.
After a short period of consultation, the new managing director produced a proposal for the board. Here is an
extract of his proposal.
‘First of all, we need to be clear about our generic strategy. Strategists have suggested that we have four
alternatives. I have reproduced them in this slide (shown here as Table two).
Cost Leadership Differentiation
Cost Focus Differentiation Focus
Table two: Generic strategies
My vision for YTR is that we should pursue a cost leadership strategy. I have already established that our
products can be produced by an established company in the distant country of Tinglia at the following prices
(see Table three). These costs include the delivery of products to our warehouse here in Yvern.
A B C D
Buy-in price ($ per unit) 11·5 16·5 12·5 13·5
Table three: Contract prices per unit from the external supplier in Tinglia

Our financial director of YTR has also estimated that we have company-wide fixed overheads of $75,000 per
month. He assures me that $16,000 per month of these is directly attributable to the production of products
A, B, C and D, evenly split across the four products, each having $4,000 of fixed overheads. So, we could
save overheads of$16,000 per month by outsourcing all of our products to the Tinglia supplier.
I realise that this leaves us with $59,000 per month fixed overheads, but I will be looking for savings there
also. The information technology of YTR is outdated and inefficient.
Productivity benefits will follow from harnessing the power of modern technology.
However, returning to my main concern: production costs. My view is that increased profitability can only
be achieved if we take advantage of the cheaper production costs now available to us. All four products can
be produced more cheaply by the supplier in Tinglia. So, this strategy of outsourcing is the one we should
pursue to achieve our cost leadership strategy.’

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Required:
(a) Evaluate the claim that all four products can be produced more cheaply by the supplier in
Tinglia and discuss the issues raised by outsourcing the production of YTR's products to
Tinglia. (15 marks)

(b) Examine the relevance of each of the four generic strategies shown in Table two to the
competitive environment in which YTR operates and evaluate the choice of a cost leadership
strategy by YTR's managing director. (10 marks)

(25 marks)

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Question 4

iCompute was founded twenty years ago by the technology entrepreneur, Ron Yeates. It initially specialised
in building bespoke computer software for the financial services industry. However, it has expanded into
other specialised areas and it is currently the third largest software house in the country, employing 400
people. It still specialises in bespoke software, although 20% of its income now comes from the sales of a
software package designed specifically for car insurance.
The company has grown based on a ‘work hard, play hard work ethic’ and this still remains. Employees are
expected to work long hours and to take part in social activities after work. Revenues have continued to
increase over the last few years, but the firm has had difficulty in recruiting and retaining staff.
Approximately one-third of all employees leave within their first year of employment at the company. The
company appears to experience particular difficulty in recruiting and retaining female staff, with 50% of
female staff leaving within 12 months of joining the company. Only about 20% of the employees are female
and they work mainly in marketing and human resources.
The company is currently in dispute with two of its customers who claim that its bespoke software did not fit
the agreed requirements. iCompute currently outsources all its legal advice problems to a law firm that
specialises in computer contracts and legislation. However, the importance of legal advice has led to
iCompute considering the establishment of an internal legal team, responsible for advising on contracts,
disputes and employment legislation.
The support of bespoke solutions and the car insurance software package was also outsourced a year ago to a
third party. Although support had been traditionally handled in-house, it was unpopular with staff. One of the
senior managers responsible for the outsourcing decision claimed that support calls were ‘increasingly varied
and complex, reflecting incompetent end users, too lazy to read user guides.’ However, the outsourcing of
support has not proved popular with iCompute’s customers and a number of significant complaints have
been made about the service given to end users. The company is currently reviewing whether the software
support process should be brought back in-house.
The company is still regarded as a technology leader in the market place, although the presence of so many
technically gifted employees within the company often creates uncertainty about the most appropriate
technology to adopt for a solution. One manager commented that ‘we have often adopted, or are about to
adopt, a technology or solution when one of our software developers will ask if we have considered some
newly released technology. We usually admit we haven’t and so we re-open the adoption process. We seem
to be in a state of constant technical paralysis.’
Although Ron Yeates retired five years ago, many of the software developers recruited by him are still with
the company. Some of these have become operational managers, employed to manage teams of software
developers on internal and external projects. Subba Kendo is one of the managers who originally joined the
company as a trainee programmer. ‘I moved into management because I needed to earn more money. There
is a limit to what you can earn here as a software developer. However, I still keep up to date with
programming though, and I am a goalkeeper for one of the company’s five-a-side football teams. I am still
one of the boys.’
However, many of the software developers are sceptical about their managers. One commented that ‘they are
technologically years out of date. Some will insist on writing programs and producing code, but we take it
out again as soon as we can and replace it with something we have written. Not only are they poor
programmers, they are poor managers and don’t really know how to motivate us.’ Although revenues have
increased, profits have fallen. This is also blamed on the managers. ‘There is always an element of ambiguity
in specifying customers’ requirements. In the past, Ron Yeates would debate responsibility for requirements
changes with the customer. However, we now seem to do all amendments for free. The customer is right
even when we know he isn’t. No wonder margins are falling. The managers are not firm enough with
customers.’
The software developers are also angry that an in-house project has been initiated to produce a system for
recording time spent on tasks and projects. Some of the justification for this is that a few of the projects are
on a ‘time and materials’ basis and a time recording system would permit accurate and prompt invoicing.
However, the other justification for the project is that it will improve the estimation of ‘fixed-price’

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contracts. It will provide statistical information derived from previous projects to assist account managers
preparing estimates to produce quotes for bidding for new bespoke development contracts.
Vikram Soleski, one of the current software developers, commented that ‘managers do not even have up-to-
date mobile phones, probably because they don’t know how to use them. We (software developers) always
have the latest gadgets long before they are acquired by managers. But I like working here, we have a good
social scene and after working long hours we socialise together, often playing computer games well into the
early hours of the morning. It’s a great life if you don’t weaken!’

Required:
(a) Analyse the culture of iCompute, and assess the implications of your analysis for the company’s
future performance. (13 marks)

(b) iCompute is currently re-considering three high level processes:

(i) Advice on legal issues (currently outsourced)
(ii) Software support (currently outsourced)
(iii) Time recording (in-house, bespoke software development)

Evaluate, using an appropriate framework or model, the suitability of iCompute’s current

approach to EACH of these high level processes. (12 marks)
(25 marks)

(Total: 25 marks)

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