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Section A- This ONE question is compulsory and MUST be attempted




Meherland Sportswear (MS) is the market leader in sportswear in Zealand, selling a variety of sportswear products under its own well-known brand. It is primarily a product development and marketing business as it contracts out all of its manufacturing to third parties around the world and it mostly sells its products through third-party retailers. It has only one store which is located in the capital city of Zealand. The purpose of this store is to act as a centre for its marketing activities and to be a tangible representation of the MS brand. However, the main marketing activity for MS is the recruitment and promotion of star sports men and women as MS brand ambassadors.

MS tries to have the most well-known sports star in each of the 10 most popular sports in Zealand as an ambassador. You are a performance management advisor to MS, brought into the company by the chief executive officer (CEO) to help the board with a number of issues. The first area which the board of MS requires your input is in a review of the existing performance dashboard for MS (Appendix 1). The dashboard is deliberately kept focused as it is for board use and the CEO has indicated that the three performance headings of ‘financial, design and brand’ will be kept at this time. The board has accepted that there may need to be up to two metrics for each of ‘brand’ and ‘design’ but they want to keep the number of financial metrics at three.

The mission statement of the business is designed to be broadly appealing. It is ‘to inspire Zealanders to compete’. From a business perspective, the aims are more focused, MS aims to grow as a business and to maximise shareholder wealth. The CEO further clarified the broad strategy to achieve these aims saying, ‘We want to inspire competition not just in our customers but also within the company, to seek our greatest competitive advantage. We will achieve this by creating innovative products which provide reduced risk of injury and enhanced sporting performance supported by the best marketing operation in Zealand.’

In order to assist in providing more detailed strategies to achieve these aims, the board has instituted a review of the competitive position of MS by commissioning a SWOT analysis (Appendix 2).

The CEO has asked that your first task be a review of the current dashboard metrics (Appendix 1). You should then review the SWOT analysis to suggest changes to the dashboard metrics within the constraints which the CEO has outlined.

Also, you are given details on a recent new development in the market. Neil Sportswear, one of the major competitors of MS, has recently suffered a scandal which has been widely reported. An investigative reporter discovered that one of the suppliers who manufactured sports shoes for Neil had been using child labour. The country in which the manufacturer worked had rules prohibiting child labour, but enforcement was very weak. This story has been widely covered in the media and has led to consumer boycotts and a review by the Zealand business regulator into Neil’s sourcing policies. It has been discovered that this is common practice in the sports footwear business where manufacturing is outsourced to such countries.

MS’ shareholders have reacted with alarm to the potential damage that this could do to MS’ brand. They have asked the board to consider changing their policy of outsourcing footwear manufacture. The board is considering two alternative responses:

Review and ensure that all outsourced footwear manufacture complies with appropriate employment terms and conditions (where necessary manufacturing would move to third-party companies in countries with appropriate regulation and enforcement); or

Create a manufacturing operation for MS in order to have full control of operations. In response 1, the review of existing third-party manufacturers is being performed by a team from the procurement department. They have also considered the impact of moving all footwear sourcing to more strictly regulated environments. The results of this investigation are given in Appendix 3 and the board wants an evaluation of the qualitative and quantitative impact of this response.

In response 2, the board is considering setting up a factory for the manufacture of all MS footwear. They want to understand the impact of this on MS’ existing performance metrics. First, they need a forecast of the profit from the factory as there are three distinct economic scenarios under which it might operate (see Appendix 4 for details).

Second, the board wants to know how the new factory will impact on the existing performance dashboard. However, since the probabilities of these economic scenarios are under debate, the board has said that they want this work to be independent of the results of the profit calculation from Appendix 4. Therefore, the board wants you to use an estimate of $103m profit before interest and tax from the new factory to evaluate the impact of the new factory on the dashboard. (This estimate is before product development and marketing costs as it only represents the manufacturing operation at the factory.)

Finally, the consultant who did the SWOT analysis has mentioned to the board that if they are thinking of reviewing their existing strategies, then they should consider using the value chain to secure competitive advantage. The CEO thinks that you should assess the implications of using the value chain for the performance management of MS. (An outline of the value chain is given in Appendix 5.)



Write a report to the board of MS to:


a. Assess the existing five metrics (Appendix 1). Using the SWOT analysis in Appendix 2, make suggestions for improvements within the constraints outlined by the CEO. Note: You should ignore the impact of the Neil scandal in this part of the question.

(16 marks)


b. Using the data in Appendix 3, assess the qualitative and quantitative impact on performance management at MS of response 1.

(8 marks)


c. Calculate the expected operating profit of the new factory and evaluate the use of this method of decision-making under risk.

(6 marks)


d. Using 2015 figures as a base, evaluate the impact of the new factory on the values and choice of metrics in the existing dashboard.

(10 marks)


e. Explain the implications of using the value chain for performance management at MS.

(6 marks)

Professional marks will be awarded for the format, style and structure of the discussion of your answer.

 (4 marks)

 (Total: 50 marks)


Appendix 1

MS performance dashboard

Report for the year to March 2015

  2015 2013 2014 Change 2015/2014
Financial % Revenue ($m) 273 238 209 14.7%
Operating profit ($m) 71 60 54 18.3%
ROCE 41.7% 37.5% 36.0% 11.2%
Design awards won 2 2 1 0.0%
Brand Awareness 64% 63% 59% 1.6%



Design awards are national clothing design awards which address both the look and technology in a product. Brand awareness is the percentage of those sampled who could identify the company’s logo and can name at least one of its products.


Appendix 2

SWOT (completed before the Neil scandal was reported)


-       High market share

-       Excellent brand awareness

-       Strong revenue growth (compared to industry average of 11%)

-       Supply chain management


-       Loss of a key brand ambassador (who was injured when he tripped over the laces of his MS boots)

-       Weak IT expertise


-       New products in the market for new sports (such as those being introduced at each World Championships)


-       Growth of social media as main marketing channel


Appendix 3

Procurement review of new outsourced footwear manufacturers

Currently, MS buys 2 million pairs of shoes at an average of $21 per unit (a pair of shoes) and we assume an average selling price of $75. Cost per unit will increase by 10%. Additionally, there will be a need to perform annual audits of these suppliers which will cost $0.5m.

The change of policy will be marketed as sustaining the values of MS. The MS ethics code states ‘We will play fair and source our goods responsibly.’ This marketing will cost $0.8m p.a. but it is hoped that this will produce a gain in market share. However, the increase in sales cannot be estimated at this time as competitors are making similar moves. The reviewer commented, ‘It would be helpful to know how many units we would need to sell in order to cover these increased costs so this can be used as a marketing target.’


Appendix 4

New factory

The data collected on the new factory depends on three possible economic scenarios in response to MS’ change in sourcing policy:

  Bad Medium Good
Probability 30% 60% 10%
Units manufactured (000s) 1,800 2,000 2,200
Variable costs per unit ($) 21 22 23
Fixed costs ($000s) 2,500
Capital required $000    
Building and equipping 36,000
Working capital 11,000



One unit is one pair of shoes.

Assume all units made are sold.

Assume an average selling price of $75.

The total Zealand market for this type of shoe is estimated as 6.25m p.a.


Appendix 5

2 / 3

Section B – BOTH questions are compulsory and MUST be attempted




Company background and objectives

Jason, Lora and Watson (JLW) manufactures tubes of acrylic paint for sale to artists and craft shops in Rayland and Savoy land. JLW has two divisions, Domestic Division and Export Division, both based in Rayland. All costs are incurred in Rayland dollars ($RL). Domestic Division is an investment centre and sells only to customers in Rayland. Export Division is a profit centre and exports all its products to Savoy land, where customers are invoiced in Savoy land pounds (£SL), at prices fixed at the start of the year. The objective of JLW is to maximise shareholder wealth.


Capital expenditure

At the beginning of the year ended 31 December 20X6, the head office at JLW purchased new production machinery for Export Division for $RL2.5m, which significantly increased the production efficiency of the division. Managers at Domestic Division were considering purchasing a similar machine, but decided to delay the purchase until the beginning of the following financial year. On 30 June 20X6 the $RL weakened by 15% against the £SL, after which the exchange rate between the two currencies has remained unchanged.


Performance appraisal

The managers of the two divisions are currently appraised on the performance of their own divisions, and are awarded a large bonus if the net profit margin of their division exceeds 8% for the year. Extracts from the management accounts for the year ended 31 December 20X6 for both divisions are given in Appendix 1. On being told that she would not be receiving a bonus for the financial year, the manager of Export division has commented that she has had difficulty in understanding the bonus calculations for her division as it is not based on traceable profit, which would consider only items which relate directly to the division. She also does not believe it is appropriate that the net profit margin used to appraise her performance is the same as 'that which is used to evaluate the performance of Export division itself'. She has asked for a meeting with the directors to discuss this further.

JLW's directors intend to award divisional managers' bonuses on the basis of net profit margin achieved in 20X6 as planned, but have asked you as a Performance Management Consultant for your advice on the comments of the Export Division Manager in advance of their meeting with her. One director has also suggested that, in future, economic value added (EVATM) may be a good way to evaluate and compare the performance of the two divisions. You are asked for your advice on this too, but you have been specifically asked not to attempt a calculation of EVATM.




a. Evaluate the comments of the Export Division Manager that the net profit margin used to appraise her own performance should be different from that used to appraise the performance of the Export Division itself.

(7 marks)


b. Recommend, using appropriate calculations, whether the manager of the Export Division should receive her bonus for the year.

(8 marks)


c. Advise whether the use of economic value added (EVATM) is an appropriate measure of performance of the divisions. You are not required to perform an EVATM

(10 marks)

(Total= 25 marks)


Appendix 1 – Extracts from management accounts for year ended 31 December 20X6

  Export Division


Domestic Division


Revenue (Note 1) 8,000 12,000
Cost of sales (4,800) (7,800)
Gross profit 3,200 4,200
Depreciation (395) (45)
Allocated head office costs (360) (540)
Other overheads (Note 2) (1,900) (2,300)
Net profit 545 1,315
Net profit margin on revenue 6.8% 11.0%
Capital employed (Note 3) 6,500 8,500



  1. Revenue accrues evenly over the financial year.
  2. Other overheads for Domestic Division include the creation of a bad debt provision equivalent to $RL75,000 for a wholesale customer who had financial difficulties during the year, and $RL90,000 for advertising a new range of paints launched at the end of the year.
  3. JLW is financed in equal proportions by debt and equity. The cost of equity is 8% and the after-tax cost of debt is 5%.

3 / 3



Company background and structure

Benson Foods (Benson) is a family-owned business which has grown strongly over its 100-year history. The objective of the business is to maximise the family's wealth through their shareholdings. Benson has three divisions. It manufactures a variety of foods in two of the divisions: Benson Baby Foods (Baby) and Benson Chocolate Foods (Chocolate). Each of these divisions knows its own market and sets prices accordingly. The third division (R&D) researches new products on the instructions of the other divisions and is considered to be vital to the survival and growth of Benson. The board of Benson has been considering the impact of using a divisional structure and has come to you as a performance management consultant to ask for your advice.


Divisional performance measures

There is disagreement at board level about the correct choice of divisional performance measure to be used in the two manufacturing divisions. Currently, the business uses EVATM but two directors have been questioning its value, complaining that it is complicated to understand. These directors have been promoting the use of either residual income (RI) or return on investment (ROI) as alternatives. The board wants to use the same measure for each division. As well as qualitatively evaluating these different measures, the board needs an assessment of the impact of a change in performance measure on their perception of these divisions' performance. Therefore, as an example, they require you to calculate and discuss the use of ROI and RI at Baby Division, given the data in Appendix 1.


Divisional control and management style

The Chief Executive Officer (CEO) of Benson has engaged a business analyst to perform a study of the portfolio of manufacturing businesses which make up Benson. This has been completed in Appendix 2. The CEO wants your comments (based on the categorisation given in Appendix 2) on how this work will impact on the performance management of the divisions. Specifically, the CEO has asked for your recommendations on how to control each division; that is, whether each division should be treated as a cost/profit/investment centre and also the appropriate management style to use for handling staff in each division. The CEO commented to you:

'I have heard of different approaches to the use of budget information in assessing performance: budget-constrained, profit-conscious and also a non-accounting style. I need to know how these approaches might apply to each division given your other comments.'


Managers' concerns

All of this work has been partly prompted by complaints from the divisional managers. The Chocolate divisional managers complain that they had to wait for a year to get approval to upgrade their main production line. This production line upgrade has reduced wastage and boosted Chocolate's profit margin by 10 percentage points. The Baby Division has been very successful in using the ideas of the Research and Development (R&D) Division, although Baby's managers do complain about the recharging of R&D costs to their division. Head office managers are worried about Chocolate as it has seemed to be drifting recently with a lack of strategic direction. Chocolate's managers are considered to be good but possibly not sufficiently focused on what benefits Benson as a whole.




a. Assess the use of EVATM as a divisional performance measure for the manufacturing divisions at Benson.

(8 marks)


b. Using Appendix 1, calculate the ROI and RI for Baby and assess the impact of the assumptions made when calculating these metrics on the evaluation of the performance of this division and its management.

 (7 marks)


c. Provide justified recommendations for each division's control and management style as requested by the CEO.

(10 marks)

 (Total = 25 marks)

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