R4 Case Study

Additional practice exam paper

Outcome

By the end of this session you should be able to:

further develop your exam technique.

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R4 Waste Collection & Recycling

All of the exercises set on this course are designed to develop your general skills and
allow you to practise the techniques and processes involved in tackling a case study
exam.

Although the exercises have been based on the information provided by the ICAEW,
Kaplan has no knowledge of what the requirements will be in the exam.

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the new information presented. A common failing of weaker candidates is an over-
reliance on the analysis of the advance information.

You should thus not reproduce any of Kaplans material in your exam script

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Kaplan Financial Limited, 2017

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 Additional practice exam paper

EXHIBIT K1
EMAIL
From: Shan Patel
To: Nik Harris
Subject: R4 recent developments
Date: 8 November 2017

R4 has produced its management accounts and requires our assistance in assessing the
past year and advice on dealing with some specific matters and broader strategic and
operational issues. I am attaching the following:

R4s draft management accounts for the year ended 30 September 2017 (Exhibit K2)
An email from Freda Tusk: Review of R4s financial performance (Exhibit K3)
An email from Mina Singh about a potential investment in trucks (Exhibit K4a) and
related news articles (Exhibit K4b).
An email from Ali Mann regarding two new SEWCO opportunities (Exhibit K5a) and
related news articles (Exhibit K5b).

Please draft for my review a report addressed to the R4 board. The report should comprise
the following:

1. A review of R4s revenue and gross profit by business line and overall operating profit
for the year ended 30 September 2017 in comparison with the previous year.

Your review should be based on the management accounts as set out in Exhibit K2.
You should also take into account the additional information contained in Freda
Tusks email (Exhibit K3). You should also evaluate the profitability of the waste
processed for 3rd party collectors and the impact on the business.

2. An evaluation of the proposed investment trucks as detailed in Exhibit K4a.

Using the data provided, you should calculate the potential impact on the annual
revenue and gross profit for both the mixed waste and general waste business lines
for the year ended 30 September 2018. You should also discuss the adequacy of the
assumptions used in your calculation and assess the impact of the investment on
R4s operations and cash flow. You should take into account any potential business
trust and ethical considerations, including those arising from Exhibit K4b.

3. An assessment of two potential SEWCO opportunities as detailed in Exhibit K5a.

Your assessment should cover the financial, strategic and operational issues for each
option. Please also consider any ethical or business trust issues arising for R4 from
Exhibits K5a and K5b. You should provide appropriate calculations to support your
evaluation and give a clear decision regarding which opportunity should be pursued.

I look forward to receiving your draft report.

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R4 Waste Collection & Recycling

EXHIBIT K2

R4: Draft management accounts for the year ended 30 September 2017

Statement of profit or loss for the year ended 30 September 2017

000
Revenue (Note 1) 50,032
Cost of sales (Note 2) (42,470)
Gross profit 7,562
Operating costs (6,574)
Operating profit 988
Finance charges (875)
Profit before taxation 113
Taxation (23)
Profit for the year 90

Statement of financial position as at 30 September 2017

000
Non-current assets
Tangible assets (Note 3) 14,831
14,831
Current assets
Trade and other receivables (Note 4) 8,351
8,351

Total assets 23,182

Shareholders equity
Ordinary share capital 1,500
Retained earnings 2,209
3,709

Non-current liabilities
Bank loan (Note 5) 12,000
12,000
Current liabilities
Trade and other payables (Note 6) 6,254
Bank overdraft 1,219
7,473

Total equity and liabilities 23,182

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 Additional practice exam paper

Statement of cash flows for the year ended 30 September 2017

000
Profit before tax 113
Adjust for:
Depreciation & loss on disposals 2,015
Net finance expenses 875
3,003
Change in trade and other receivables (479)
Change in trade and other payables (198)
Cash generated from operations 2,326
Taxation paid (162)
Net finance expenses (875)
Net cash from operating activities 1,289

Investing activities
Purchase of tangible assets (1,134)
Proceeds from disposal of tangible assets 12
Net cash used in investing activities (1,122)

Net change in cash and cash equivalents 167

Cash and cash equivalents at beginning of the year (1,386)
Cash and cash equivalents at the end of the year (1,219)

Notes to the management accounts

Note 1 Revenue

000
Mixed waste 17,803
General waste 32,229
50,032

Note 2 Cost of sales

000
Mixed waste 13,555
General waste 28,915
42,470

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R4 Waste Collection & Recycling

Note 3 Property, plant & equipment

Leasehold IT, Plant & Vehicles Total

improvements Machinery
000s 000s 000s 000s
Cost
At 1 October 2016 1,070 15,598 5,477 22,145
Additions - 284 850 1,134
Disposals - (48) (482) (530)
At 30 September 2017 1,070 15,834 5,845 22,749

Depreciation
At 1 October 2016 655 2,459 3,307 6,421
On disposals - (32) (402) (434)
Charge for the year 83 1,260 588 1,931
At 30 September 2017 738 3,687 3,493 7,918

Carrying amount 332 12,147 2,352 14,831

Note: disposal proceeds - 2 10 12

Note 4 Trade and other receivables

000
Trade receivables 7,631
Prepayments and sundry 720
8,351

Note 5 Bank loans

000
Initial loan 3,000
Additional loan 9,000
12,000

Note 6 Trade and other payables

000
Trade payables 5,311
Other payables 943
6,254

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 Additional practice exam paper

EXHIBIT K3
EMAIL
From: Freda Tusk
To: Shan Patel
Subject: Review of the financial performance of R4
Date: 8 November 2017

Matters reflected in the draft management accounts

In total we have processed 86,650 tonnes of mixed waste this year and collected
124,955 tonnes of general waste. We believe that we have successfully achieved
the Local Authority recycling target.

We were disappointed to lose a number of our regular SEWCO customers during

the year who switched to a new competitor who offered cheaper fees.

There was continued replacement of upgraded vehicles for the collection of mixed
waste and general waste. However, due to cash flow restrictions it has not been
possible to increase the total number of trucks used by the business, despite
these vehicles operating at full capacity. As a result of this our I&C collections
have remained at the same level as the previous year.

Several of our I&C clients have experienced instances of low-quality fly-tipping.

This led to an increase the proportion of non-recyclable waste.

A 1 increase in landfill taxes prompted WDF operators to increase charges. Our

own MRF costs were 87 per tonne this year.

Additional operating costs resulted from a cyber-security incident in the summer.

We have continued to experience growth in the volume of waste being processed

for 3rd party waste collectors (47,650 tonnes processed this year). This has been
achieved by keeping our gate fees at a competitive rate of 20 per tonne which
has helped to attract a number of new clients on a regular basis.

We have experienced a number of difficulties with the quality of mixed waste

delivered by some of these new 3rd party collectors. In addition to the fly-tipping
instances, the result was that 15% of all I&C and 3rd party mixed waste was non-
recyclable waste this year.

In addition to this problem, we have also suffered a significant drop in the average
commodity price paid for cardboard after the Chinese government announced
their forthcoming ban on waste imports. As a result of these two issues our
average recyclate revenue from 3rd parties and I&C waste fell to 71 per tonne.

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R4 Waste Collection & Recycling

EXHIBIT K4a
EMAIL
From: Mina Singh
To: Shan Patel
Subject: I&C waste truck investment
Date: 8 November 2017

This year we have been unable to increase I&C waste collections due to the limited
capacity of our collection trucks. We have therefore decided that now is the right time
to increase the size of our fleet. However, we are conscious of our need to work
within our overdraft limit. Therefore we are looking for a bargain.

We recently became aware of a large waste management company in Leeds called

Ridsdale Waste Management Limited (RWM) that need to raise some finance quickly
to repay a bank loan and are looking to sell ten of their 21-tonne trucks. Due to their
desperate situation we believe that we could buy all ten trucks from them for a
combined knock-down price of 200k cash-in-hand.

These trucks are much larger than the trucks that we currently use and were
previously used for municipal waste collections. Despite the fact that the trucks are
all four-years old, they are believed to be more environmentally friendly than some of
our existing vehicles as they meet Euro-6 emission standards.

The following assumptions should be used calculate the impact on the revenue and
gross profit for both the mixed waste and general waste business lines for the year
ended 30 September 2018:

Working assumptions

R4 intends to use four of these trucks to collect mixed waste and the other six
trucks to collect general waste.

These trucks are three times bigger than our existing trucks. Therefore we expect
each truck to be able to make an average of 300 lifts per day.

Taking holidays, maintenance and breakdowns into account, each truck should
operate for the same number of days as our existing vehicles.

The total cost per lift and prices charged to I&C clients are expected to remain the
same as the costs outlined in Exhibit 8.

Mixed waste will continue to be processed through our MRF. A cost of 87 per
tonne should be deducted to represent the cost of processing mixed waste.

After a difficult year in 2017, we are expecting our average net revenue from
recyclates to return to 86 per tonne in 2018. This is partly due to a recent
increase in plastic prices being offered by Commercial Plastic Product Limited.

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 Additional practice exam paper

EXHIBIT K4b
PRESS ARTICLES

Rubbish company makes disposals (Yorkshire Evening Post, October 2017)

A large waste management company from Leeds, Ridsdale Waste Management

Limited are believed to be in serious financial difficulty and the companys directors
have actively been trying to sell off surplus assets in order to repay the companys
bank loan on time next month and to recoup their own directors loan balances.

The companys financial difficulties appear to stem from the loss of a major municipal
waste contract with the Local Authority. The contract was ceased after complaints
from local residents regarding excessive noise pollution from the companys vehicles
as they deposited waste at the companys depot during anti-social hours.

Plastic company under investigate (Recycle News, November 2017)

Trade Authorities announced today that they were investigating a number of

organisations who have been accused by the Chinese government of attempting to
strike illegal deals with Chinese waste importers.

China announced earlier this year a ban various forms of waste imports. This
included cardboard and plastic waste.

However, the demand for plastic recyclates in China remains strong. High street
clothing brand G-Star RAW recently announced an outsourcing deal with Chinese
manufacturers to produce Pharrell Williams new range of Happy Pants featuring
denim containing recycled plastics.

Subsequently, the Chinese government are accusing a number of UK companies of

trying to circumvent the ban by agreeing illegal contracts with local importers.

One company rumoured to be involved in the scandal is Commercial Plastic

Products Limited from Sheffield. The companys directors have refused to respond to
the allegations.

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R4 Waste Collection & Recycling

EXHIBIT K5a
EMAIL
From: Ali Mann
To: Shan Patel
Subject: Potential SEWCO opportunities
Date: 8 November 2017

We wish to evaluate two new SEWCO opportunities. Both events take place during
the same week in July 2018. Therefore we feel that it would only be possible for us to
pursue one of these options. The details are outlined below:

Underneath The Stars festival

This is a family-orientated music and arts festival that takes place every year in
Barnsley. Various musical acts perform in large marque tents, supported by a
selection of indoor and outdoor attractions.

The waste collection contract has been put out to tender for 2018 after the organisers
had a dispute with their long-term waste collection service provider over unpaid fees.
All tenders must be submitted by 23 November 2018.

Eurocycle Road Race

A major cycling event is due to take place in a route that weaves through Leeds,
York, Harrogate and Sheffield. The event is held in different locations across Europe
each year. Yorkshire was the unanimous choice for this years event as the
organisers wanted to follow the 400-km route used for the 2014 Tour de France.

The overall responsibility for road-side waste collections has already been assigned
to ZQ Recycling Limited (ZQ). However this is their first event of this nature and they
are looking to collaborate with a waste management company with SEWCO
experience. They have therefore approach our directors.

The operation to clean-up from this event is expected to take 7-days during which
time a total of 10,000 tonnes of waste are expected to be collected. R4 would be
expected to collect approximately half of this waste.

Comparative figures are provided below:

Music festival Cycling event

Total tonnes collected by R4 2,000 tonnes 5,000 tonnes
Mixed waste vs general waste 75:25 60:40
Proposed fee charged by R4 500k 1,000k
Recyclate revenue per tonne 300 300
Collection and processing costs 650k 1,500k

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 Additional practice exam paper

EXHIBIT K5b
PRESS ARTICLES

Masses party underneath the stars (Barnsley Chronicle, July 2017)

The organisers of local family-friendly festival Underneath the Stars celebrated their
most successful year this weekend after attracting record numbers. Over 15,000
festival-goers attended the event, an increase of 50% from the previous year. As a
result of this the clean-up operation is expected to continue into early next week.

The impact on the local area was hard to miss, with convoys of 7-seater MPVs and
campervans queueing to get in and out of the town throughout the weekend.

The festival organisers were thankful for the favourable weather which helped them
to attract more families than initially anticipated. This was also aided by the pay-at-
the-gate option that was introduced this year.

On yer bike (Yorkshire Evening Post, October 2017)

Leeds City Council yesterday announced details of various strategic partnerships

that have been put in place in preparation for the 2018 Eurocycle Road Race.

Household name Yorkshire Tea have been chosen to sponsor the event and their
logo will appear on 500 pop-up tea and coffee stands that will be serving hot drinks
to spectators at various stages of the events. The stores themselves will be run by
the council and all drinks served will be in disposable coffee cups.

The company responsible for cleaning up these cups will be a local waste
management company called ZQ Recycling Limited. The local waste management
company has been awarded a lucrative 3 million contract to oversee all waste
collections.

However, this decision has led to fierce criticism after some local residents pointed
out that this company had recently been investigated for claims of fly-tipping. All
allegations against the company were dropped last month after a lack of evidence.

Rubbish train set to operate from Harrogate (The Northern Echo, October 2017)

A new freight train is set to operate from Harrogate railway station each evening
carrying various items of general waste to a waste-to-energy plant in Scotland.

The waste will then be used to create energy for local homes, minimising the
volumes of local waste being sent to landfill. Environmental campaigners have
praised the new initiative which follows a similar scheme which operates in Italy.

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