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@opentuition_team said:
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In my opinion, Q1(C) – Maximax was an overkill to calculate. Used expected values technique.
I have approached it from calculating expected demand.
This resulted in 1400, 1420, 1400.
Range was from 1200 to 1600 (median point 1400).Therefore assumed that 1,400 seems quite right.
Then went to calculate net margin, net margin %, breakeven point and margin of safety.
A 11% B 11.1% C 10%
Margin of safety in units 95k, 96k, 81k.
Breakeven point for B was 1,150 units.Minimum demand as per question was ca. 1,200 units, therefore highly unlikely to happen below.
Selected B based on highest net margin%, breakeven point below minimum demand, distribution weighting of 30% of 1,600 – which gives a chance of upside.
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That’s true. thought it could be lengthy and there is pressure for time
You are right that Maximax was an overkill. I think the same and I’m almost sure I miss the question.
However, in your calculations you do not take into account at any moment the appetite for risk of the board? Looks as a neutral risk approach to me.
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Hi. I though the question was to evaluate using the criteria for risk and uncertainty. Den select the appropriate one and justify. my approach was to calculate for maxima maximin minimax regret. I dint calculate expected value as I was running out of time. Also to get the pay off table. I had to derive the sales which is the price X 360x activity level. After that I went on for the contribution. since contribution to sales ratio was given. then finally got the profit by subtracting the fixed cost frm the contribution
It was unreasonable for me to select any other options based that Net margin % was lower and total return was within 20k difference across options. Didn’t believe that board would make a decision to potentially gain 20k, loosing 1% net margin with potentially unrealistic demand. Maybe I am just too risk averse, as I wouldn’t recommend such project at my work place. 🙂
Yes the scenario stated that the board had a strong appetite for risk so I took it that they were risk seekers so they would be happy with the maximax decision. Expected values are more for risk neutral appetites I thought !!
Hello yinka, I followed the same approach.
However, not using these % of demand. I’m sure there is something missing. Michal approach look coherent to me, except for the fact of not getting the maximum outcome option, not matter of the probability.
I did the same – if you see the specimen paper there is a near identical question in there that calculates maximax, maximin and minimax regret and EV.
Does anyone know if error carried forward will apply to this question??
I think I went wrong with the payoff tables at some point but I know the methods I used to evaluate them were right. Every single answer I seemed to get option C for expected value, maximax, maximin and for minimax regret – surely can’t be right..
I also rounded massively, surely they can’t expect everyone to write out all the answers to the nearest pound which seems to be the case in past paper answers!?
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Q1. Evaluate performance report n choice of metrics.
1 b what gets measured gets done. discuss in relation to scenario
1c. The risk n uncertainty using the criteria n select the appropriate measure
1d. brand n image.q2. budgeting. rolling vs incremental. n computation of change in buffeted income
q3. bcg analysis
q4. predicting corporate failure. calculation of gscore n evaluation of the score
4b evaluate quantitative analysis
4c evaluate causes of corporate failureAny comments on other parts?
I found the paper completely different that past papers with overload of information and required calculations (even though basic calcs – took a lot of time to calculate and cross check).
Ran out of time on last Q (2), where even at fast pace, couldn’t restate all budget in time and provide enough rationale to why rolling budget could be better for the company – outside of focus on the gap to hit full year operating margin (which the company failed before). – I have personally found the Q2 very entertaining, as new CEO comes in and says that he can save 2% or 2.5% rolliing Qrt on Qrt in admin costs and increase sales by 2% and then do price increase to drive another 1.5%. Very realistic indeed. 🙂
From looking at the layout of previous exam papers, I believe the correct approach was to calculate the maximax, maximin, min regret and EV. The question asked for the methods for risk and uncertainty and these are the four methods as stated in the syllabus. I found the calculations to be straightforward and did not take particularly long. Once you have used the percentages to calculate variable costs then you can make up a standard cost and use this to multiple by the relevant demands. Using this approach project C was selected under maximax criteria as they were risk seeking and all methods showed positive returns regardless.
I feel this paper was fine, hoping for a good pass!
I am pretty sure that the Q asked for 1 method to be chosen and justified why selected. Calculating all the methods would take way too much time to gain most of marks.
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Also for c part. I concluded that bavus was risk seeking as it operates a franchise biz. only a risk seeking mind set who want to let out its brand for financial gains. so maxima works for me
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@ Michael. If u look at previous marking scheme. dere are usually marks for calculation. E. g maximax 1 mk. minimax 1 mk. minimax regret 2 mks. expected values 2 marks. evaluation of each 1 mrk. N d choice n justification may b up to 4 marks
Yes the question asked you to choose the most appropriate method. Takes the same time to calculate all three as calculating one as you use the same pay off table. There was an almost identical question in pilot paper and the same method was used. Calculate all using the one table and then comment on which is best for company.
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The corporate failure question. my computation had gscore in a grey area category. any 1 with such answer?
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Hey, Sarahp44. I used the same approach for Q1 c as per the pilot paper. Maximax, Maximin, Minimax regret and expected values. Although the calculations gave me a headache and ate up my time! the scenario did mention that the board had a strong risk apetite, hence the maximax option.
Q1 a appeared to need an evaluation of a suitable performance report for a franchisee, hence comments such as useful information required for a performance report (declutter, clarity, bechmarking, comparatives and balance sheet/cash flow statements were missing).
Question 3 was the BCG matrix, that was ok but needed a bit of time to find suitable metrics (shoot the dog, milk the cow) etc. then overall evaluation of the usefulness and limitations of BCG.
Question 4… time consuming but str8forward. The same evaluation of Altman’s Z model would have worked for the quantitative model they utilised. Then came evaluation of the importance of liquidity indicators, some of the metrics were easy to pick out from the balance sheet (NCL dropping from $25m to 40.1m in one year! Finally, I actually used Argenti model to identify the factors that cause corporate failure such as an autocratic CEO, passive board, weak FD, failed project (investment project), high gearing etc.
Overall, I found it ok, but just hope it gets marked fairly. I am always nervous about not getting to see your marked paper… Don’t want to be the unlucky one marked by some bitter lecturer looking to get through his scripts in record time 🙁
Good luck people!
I thought this was ok. Had been having nightmares about this exam having looked through past questions and answers.
1. a) Evaluation the performance report and choice of performance measures – looked pretty standard type question – everything financial no NFKPIs etc
b) What gets measured gets done – no KPIs for clean restaurants, tasty food fast service which is what customers want so should measure them. Franchisees struggling with cost control – so break down other costs into items which can be controlled.
c) Choice of project – one exogenous variable – demand so one way data table required.
I got EVs slightly over £200k for each with project B best. However given EVs are close and not that useful in one off scenarios maybe use maximax which chooses project C and consistent with boards risk appetite. Don’t really see the point of calculating maximin or minimax regret as not really relevant but it was for 17 marks so what do I know
d) Importance of brand image/ management
Better brand can charge more fees in the future as more attractive investment.2. a) Nice question but adjustments a bit fiddly, especially the exchange rate and fuel tax where you have to apply the change to only a portion of the COS/ delivery costs. I got there but over ran a bit. I got $6100kish operational profit for the year
b) Rolling budget/ incremental budget. Obv dairy needs an incremental and luxury a rolling. Loads of easy marks here but only had about 7-8 minutes for this so was kicking myself a bit.4. a) Easy Z-score calcs. I got 4.17 so close to the risk of failure boundary of 4. Then the standard reasons which quantitative measures using financial ratios are bad
b) Liquidity assessment – I only calculated the current ratio here – saw it decreased by 46% or something over the two years. Also had been missing loan payments so company at risk of failure based on this. Don’t know if there was anything else to say here – I remember some figures about free cash flow but didn’t have time to think about it.
c) Factors for failure – stole the defects and mistakes headings from Argenti’s model and made a couple of pointsI attempted Q2 also.
The part B looked quite straight forward. Recommend to change for luxury, stay the same for diary. Explains pros and cons of both budgeting methods applied to the case.
For part A, some calculations looked tricky, even if simple. Price and volume split. Delivery costs (6% and increased by taxation). COS to be levelled by level of activity as well the exchange rate increase?
I think I missed some important points (and marks) on this part. Hopefully the small recommendation of overoptimism on revenues and cost cuts will add some to both of us 😉
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