Case 1_The Food Pyramid

8/12/2019 Case 1_The Food Pyramid

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THE FOOD PYRAMID

IntroductionFood Pyramid Plc (FP plc) is a food manufacturer based in the United Kingdom. It generatesits revenue from three divisions named the Meals, Snacks and Desserts divisions. Eachdivision specialises in the production of different types of food and operates from its ownfactory located on three different sites in England. FP plcs head office is located in a remotepart of England and is about equidistant from each of the companys three divisions.

Currently, FP plc has a total employment establishment of about 10,000 full-time equivalentemployees, about 97% of whom are employed in its three divisions. It is constantly runningwith about 700 full-time vacancies, mostly in the Desserts Division. This vacancy factor inthe Desserts Division impedes its productivity.

The company was founded over 150 years ago by an entrepreneurial farmer who saw theopportunity to expand his farming business by vertically integrating into food production.Instead of selling his crops on the open market, he established a mill and produced flour.From this, it was a natural progression to diversify into producing other crops which werethen processed into different ingredients for food products.

The company grew steadily and it became clear at the beginning of the 20th Century thatincreased production facilities were needed. It was at this point that the company built its firstfactory which at the time was a state of the art manufacturing facility. As demand continuedto grow during the 20th Century, the company required additional manufacturing facilitiesand made a public offering of shares in 1960 to finance this expansion. The public offer wassuccessful and FP Limited was established. The original familys holding in the company fell

to 25% at this point. Although a second factory was opened with the capital that had beenraised, FP Limited continued to manage the company on a centralised basis.

The next phase of development came in the late 1980s when FP Limited became FP plc.After this, FP plc had a successful rights issue which raised sufficient capital to enable athird factory to be built. It was at this point that the divisionalised and de-centralised structurewas established. Prior to this, the company managed its factories directly from its headoffice. The family shareholding fell to 20% at this point, with one family member holding 10%of the shares and family trusts holding the other 10%.

The environment in which FP plc trades is dynamic, particularly with regard to the growth oflegislation relating to food hygiene and production methods. FP plc now exports many of itsproducts as well as obtaining ingredients from foreign producers, which means that FP plcmust observe legislative requirements and food standard protocols in different countries.

Mission statementFP plcs missionstatement, which was set in the year 2000, is as follows:

FP plc is committed to continually seek ways to increase its return to investors byexpanding its share of both its domestic and overseas markets. It will achieve this bysourcing high quality ingredients, using efficient processes and maintaining the higheststandards of hygiene in its production methods and paying fair prices for the goods and

services it uses.


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Strategic aimsThe strategic aims are set in order to enable FP plc to meet the obligations contained in itsmission statement. FP plc aims to:

I. increase profitability of each of its divisions through increased market share in both

domestic and overseas marketsII. source high quality ingredients to enhance product attractivenessIII. ensure that its factories adhere to the highest standards of food hygiene which

guarantee the quality of its productsIV. strive to be at the forefront in food manufacturing techniques by being innovative and

increasing efficiency of production with least waste.

Corporate Social ResponsibilityFP plc takes Corporate Social Responsibility (CSR) seriously. The post of EnvironmentalEffects Manager was created two years ago and a qualified environmental scientist was

appointed to it. The Environmental Effects Manager reports directly to the Director ofOperations. The role of the Environmental Effects Manager is to develop initiatives to reduceenvironmental impacts, capture data on the environmental effects of divisional and headoffice operations and report to the Board of Directors on the progress towards theachievement of FP plcs CSR targets. An extract from FP plcs internal CSR report for 2013is shown in Appendix 1. FP plc does not publish its CSR report externally.

Last year, FP plc received criticism in the national press in England and in other countries forexploiting some of its suppliers in Africa by paying low prices for ingredients. This resulted inan extensive public relations campaign by FP plc to counter these accusations. Itestablished a programme to channel funds to support farmers in Africa via payments madethrough African government agencies. The programme, which is managed through FP plcs

head office, received initial financing from FP plc itself and is now widening its remit to drawfunding from other sources including public funding from the European Union.

The Board of DirectorsThe Board of Directors comprises five executive and five non-executive members all ofwhom are British. No member of the Board is from an ethnic minority.

The Chairman is a senior non-executive director and a retired Chief Executive of a majorquoted retail clothing company based in England. He received a knighthood two years agofor services to industry.

The Chief Executive is 52 years old and was Director of Operations at FP plc before takingup his current post three years ago.

The Finance Director is 49 years old and a qualified CIMA accountant. He has experience ina variety of manufacturing and retail organisations.

The Director of Operations is 65 years old and is a member of the original family whichfounded the business. He has been employed by FP plc for all of his working life. He took uphis current post three years ago following the promotion of the previous post holder to therole of Chief Executive.

The Marketing Director is 43 years old and has held various positions in sales and marketingfor different organisations before being appointed to the Board. He came to the attention of


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the Chief Executive when he was instrumental in a successful initiative to market a newshopping complex in the city in which FP plcs head office is based. At the time, theMarketing Director was the Chief Marketing Officer for the local government authority in thearea.

The Director of Human Resources, the only female member of the Board, is 38 years oldand holds a recognised HR professional qualification. Last year she was presented with anational award which recognised her achievements in the development of human resourcemanagement practices.

In addition there are four other non-executive directors on the Board. Two of them previouslyworked in senior positions alongside the Chairman when he was Chief Executive of the retailclothing company. One of them was the clothing companys finance director, but is nowretired and the other was its marketing director but is now the sales and marketing directorfor a pharmaceutical company. One of the other non-executive directors is a practisinglawyer and the other is a sports personality of national renown and a personal friend of theChairman.

The Divisional General Managers, responsible for each of the three divisions, are notmembers of FP plcs board. The Divisions are organised along traditional functional lines.Each division is managed by a Divisional Board which is headed by a Divisional GeneralManager. Each Divisional Board comprises the posts of Divisional Operations Manager,Divisional Accountant, Divisional Marketing Manager and Divisional Human ResourcesManager. Each division undertakes its own marketing and human resource management.The divisional accountants are responsible for the management accounting functions withintheir divisions. Each member of the divisional boards is directly accountable to the DivisionalGeneral Manager but have professional accountability to the relevant functional FP plcexecutive board members.

Financial position and borrowing facilitiesExtracts from FP plcs financial statements for the year ended 31 December 2013 are shownin Appendix 2.

FP plcs long term borrowings are made up of a 160 million bank loan for capitalexpenditure and a 74 million revolving credit facility (RCF). The bank loan is secured on FPplcs assets and is repayable on 1 January 2021.

The RCF allows FP plc to borrow, make repayments and then re-borrow over the term of theagreement. This provides FP plc with flexibility because it can continue to obtain loans as

long as it remains at or below 80 million, being the total amount agreed for this facility. TheRCF expires on 31 December 2016.

Planning processThe planning process employed by FP plc is one which can be described as adhering toclassical rational principles. This has been the method of planning used for many years andculminates in the production of a five year forecast. The annual budget cycle feeds in to thestrategic plan which is then updated on an annual basis. All FP plcs revenue is derivedthrough the operations of the three divisions. The only income generated by FP plcs headoffice is from investments.

The five year forecast for sales revenue and net operating profit for each division and FP plcin total, after deduction of head office operating costs, is shown in Appendix 3. This shows


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that FP plc is seeking to increase its sales revenue and net operating profit over the five yearplan period.

Competition within the industry

FP plc is one of the largest food production companies in England. It had an overall share ofabout 6% of its home market in 2013. Its nearest competitors held 5% and 7% market sharerespectively in 2013. The products in the industry have varying product life cycles.Competition is intense and there is a high failure rate for new products. Usually, newproducts require significant marketing support particularly if a new brand is beingestablished.

Organisational culture within each divisionDifferent cultures have emerged within each division.

Meals Division :

In the Meals Division, each function operates with little direct interference from the DivisionalBoard members. The approach is to allow each function to operate with as little control aspossible being exercised by the Divisional Board.

Snacks Division:

In the Snacks Division, the emphasis of the Divisional Board is on product research anddevelopment and marketing. The Snacks Divisional Board expects its divisional marketingstaff to undertake market research into customer tastes and preferences and then forproducts which satisfy these to be developed by its divisional research staff.

Desserts Divis ion:

In the Desserts Division, the finance function is the dominant force. The finance functions inthe other two divisions exert less influence over operations than is the case in the DessertsDivision. It is not unusual for the Divisional Accountant in the Desserts Division to haveconfrontational meetings with managers of other functions. Such confrontation is particularlyevident in the monthly meetings between the Divisional Accountant and the DivisionalMarketing staff. It is clear that within the Desserts Division, the Divisional General Manager,a food technologist by profession, and the Divisional Accountant, formerly an auditor with alocal government authority, maintain strict control over the operation of the division.

Further details relating to the three divisions are as follows:

Meals Division

The Meals division is located in the South of England. It specialises in manufacturing frozenmeals, which are designed to be easy for consumers to quickly heat up and serve. Themeals are sold to supermarkets and other retail outlets. Some are manufactured under FPplcs own brand and others are manufactured under supermarkets own labels. The divisionis also increasing its sales to welfare organisations which support elderly and infirm people.These organisations purchase simple frozen meals in bulk which they then heat up toprovide a hot meal each day to those people in their care. In 2013, the Meals Divisionearned 14% of its revenue from outside the United Kingdom.

One of the Meals Divisions most profitable products is a steak pie that is flavoured withspecial gravy that was developed by one of FP plcs founding family members in the earlypart of the 20th Century. FP plcs competitors cannot copy this gravy because the

ingredients have to be combined in a very precise manner and then cooked in a particular


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way. The recipe for this gravy is known only to FP plcs Director of Operations and themanager of the pie factory.

Two of the Meals Divisions products are currently subject to investigation by the FoodStandards Authority of a European country. Please see Appendix 1 under the heading Foodlabelling for more information on this.

Snacks Division

The Snacks Division, located in the East of England, mainly manufactures confectionerysuch as packet savouries and chocolate bars. Its main customers are supermarkets andretail shops. It has a growing market in continental Europe and in 2013 the division earned19% of its revenue from non-United Kingdom sales. Many of its products are FP plcs ownbrands, although, similarly with the Meals Division, it supplies products to supermarketsunder their own label.

The Snacks Division successfully launched a new premium brand of chocolate bars in theUK in 2013.

Desserts Divis ion

The Desserts Division is located in the North of England where road, rail and air links are notwell developed. This has resulted in high transportation costs for goods into and out of thefactory. Originally, this location was chosen because the lease terms for the factory werevery competitive but in recent times the local taxes placed on the factory have becomeexpensive. There is some limited room for expansion on the site the factory occupies but thelocal government authority has repeatedly rejected the expansion plans when the Divisionhas sought the necessary planning permission to put its plans into action. This has causedthe Divisional Board to consider whether it should move its entire operation to another part ofEngland where its expansion plans may be more easily accomplished.

The Division has experienced technical and managerial staff shortages. The workforce of theDivision has an establishment of 4,700 full-time equivalent employees. Despite there being aready supply of manual labour for production work, the Desserts division runs with anaverage of 385 full-time vacancies at any one time.

The Divisions products range from cold desserts, particularly ice cream, which can be eatendirectly from the packaging, to those which require some preparation by the final purchaserbefore the product can be consumed. The Divisional Marketing Department has beeninvestigating the possibility of negotiating Freezer deals by which the Desserts Divisionwould supply ice cream freezers to independent retailers which sell the Divisions ice creamproducts. An independent retailer is a shop or outlet that is not part of a larger chain. This isin order to investigate the possibility of increasing the Divisions share of the ice cream

market sold by independent retailers.

The Divisions sales increase in the periods which lead up to national and internationalfestive periods such as Christmas and Chinese New Year. The Division is constantlyresearching new markets in an effort to increase its foreign earnings. Revenue from outsidethe United Kingdom in 2013 represented 23% of the Divisions total revenue.

Inventory control and IT systemsThere have been a number of problems across all three divisions in respect of inventorycontrol. Poor inventory control has led to high levels of wastage and obsolete inventory

being carried. This has been particularly problematic in respect of perishable ingredients. Inthe case of the Desserts Division, the Divisional Accountant has estimated that 5% of the


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Divisions potential revenue has been lost as a result of not being able to satisfy customerorders on time, due to poor inventory control.

FP plc operates a standard information management system across all the Divisions and atHead Office. The Information Technology in use has been unreliable due to technicalmalfunctions since the information management system was installed in 2004. Monthlymanagement accounts, provided by each division to head office are often late, sometimesnot being made available for up to three weeks into the subsequent month.

Internal auditUntil now, FP plcs Internal Audit function, which is based at Head Office, has tended toconcentrate its efforts on reviewing activities in the Meals and Snacks divisions as they eachproduce lower revenues and net operating profits in absolute terms compared with theDesserts division. The Internal Audit functions approach of applying a light touch to theDesserts Division is also in recognition of the influence exerted by the Divisional Financefunction over the Divisions operational activities.

Strategic developmentThe Board of Directors is now midway through its strategic planning cycle and is consideringhow the company should move forward. There is a proposal to build and operate a factory inWest Africa to reduce air kilometres being flown in supplying the Meals Division with freshvegetables. It is intended that the African factory will freeze the vegetables and thentransport them to the Meals Divisions factory in England by refrigerated ship.

ISSUES OF CONCERN

Moving the Desserts DivisionThe Board of the Desserts Division has decided to investigate the possibility of relocating theDivision to the West of England. The Board of FP plc will approve the relocation providingthe following conditions are satisfied:

1. The relocation produces a positive Net Present Value (NPV). FP plc has instructed theDesserts Division to use a hurdle rate of 15% and to base its evaluation on a 10 yeartime horizon. All the cash flows associated with this project should be regarded as

occurring at the end of the year in which they occur.2. The relocation has a payback period of 3 years or fewer.3. There are no adverse effects on FP plc's public image.4. The relocation makes a positive contribution to FP plc's Corporate Social Responsibility

targets.5. The relocation is consistent with FP plc's mission statement.6. The move contributes towards achieving FP plc's strategic aims.

A commercial property agent has identified a possible suitable site in the West of England.The site is on a newly developed industrial estate and consists of a modern factory, officesand distribution facilities. The costs of relocation, payable in Year 0, will be 1,820,000.Starting from Year 1 of the factorys operations the local taxes in the West of England would

be 75,000 cheaper each year than in the North of England.


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The local government authority in the West of England is keen to attract new investment andhas indicated it would look favourably upon any future plans for expansion. The localgovernment authority will give, in Year 0, an incentive payment to the Desserts Division of1,000 for each job created in the factory and distribution areas and 2,000 for each jobcreated in the offices.

There is a good supply of labour of all types available in the area. As this new site is muchcloser to the Desserts Divisions suppliers and customers there would be, from Year 1,savings in transport costs of 300,000. There will also be a reduction in Road KilometresTravelled equivalent to 15% of FP plcs total Road Kilometres Travelled based on 2013results.

FP plcs Director of Human Resources has forecast that the Desserts Division will employ, intotal, 5,600 people at the new site in the West of England. The mix of Desserts Divisionsworkforce at the new site would consist of 10% in the offices and 90% in the factory anddistribution areas. It should be easy to secure all the labour needed.

However, FP plcs Director of Human Resources is worried that the relocation, if it goesahead, would generate large-scale redundancies amongst the Desserts Divisionsemployees in the North of England, even though they will be offered the opportunity ofrelocating to the new site. She has estimated that as many as 98% of the current workforcewould become redundant and this would cost the Desserts Division 1,000 for eachemployee in redundancy pay in Year 0. There will also be an increased annual cost, startingin Year 1, of 200,000 because labour is more expensive in the West of England.

The Chief Executive of FP plc and the Desserts DivisionThe problems with divisional culture and with inventory and IT have come to the attention ofthe Chief Executive of FP plc. The Chief Executive has told the Desserts Division Board thatthe current situation is unacceptable and that the following goals must be achieved:

Goals

1. The confrontational meetings between the Divisional Accountant and the Marketingstaff must change their character and a constructive working relationship must beestablished between the Divisional Accountant and the Divisional Marketing staff.

The Divisional Marketing staff members have complained to the Divisional Accountant thatthey dont always agree with or understand his figures and that they feel that the DivisionalAccountant is spying on them. As the finance function is the dominant force in the Desserts

Division, the Board has delegated responsibility for the achievement of this goal to theDivisional Accountant. The Divisional Accountant has recognised that he is, in part, thecause of this problem. The Divisional General Manager has told the Divisional Accountantthat a successful resolution of Goal 1 is very important for both of their future careers withinFP plc.

2. The Desserts Division must reduce its levels of wastage of ingredients to 2% ofmaterials usage: these levels are currently 3.8% which cost 7.5 million in 2013. Theremust also not be a difference greater than 1% between the theoretical and actualinventory-counts at any time. Currently, the difference is usually 5.

A large proportion of the wastage is caused by poor storage of food raw materials. Some

raw materials, for example, chocolate, have been subject to theft by warehouse staff. Otherraw materials are wasted because they go bad and become unfit for human consumption.


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The inventory-counts are performed by any staffs who want to earn overtime. Consequently,there is no regular group of people carrying out this work. The warehouse staffs who issueingredients are not required to participate in the inventory-counts although sometimes theydo take part. The results of the inventory-counts have been unreliable and supplementarycounting of high value/large quantity ingredients has been necessary.

3. All customers' orders must be met on time and the Division must achieve 100% ofits potential revenue. Poor inventory control will no longer be tolerated.

Poor inventory control means that some inventory balances are misleading. Some items areshown in inventory when there are none. There are other items which are not shown ininventory even though they are present. This has led to customers orders being deliveredlate, usually by one or two days. This has led to some customers closing their accounts.

4. The Desserts Division's monthly management accounts must be with Head Officewithin three working days after month-end.

The management accounts are often delayed because necessary information is missing orincomplete. The system for ordering and the receipt of goods into the factory is a paper-based one and has often been the cause of discrepancies between theoretical and actualinventory balances. This system is incompatible because its information is not in a formwhich can be directly entered into FP plc's standard information management system. TheChief Executive has told the Desserts Division's General Manager that any expenditurerequired for the implementation of any proposed changes required to achieve the five goalsmust be self-financing.

Investigation by the Food Standards Authority Meals Division

The sale of pre-packaged oven-ready meals to charities and government-fundedorganisations generates 15% of the revenue of the Meals Division. The Division produces arange of frozen meals that are designed to meet the nutritional requirements of elderly andinfirm people. The meals are packaged so that they can be cooked in bulk in catering ovensbefore being delivered as ready to eat meals to the homes of the elderly and infirm.

The Meals Division sells a large quantity of these meals and enjoys significant economies ofscale. Consequently, even though the selling price of these meals is much lower than anyother products, this is a very profitable business segment.

Unfortunately, the Meals Division suffered a significant setback in February 2014. A charitythat works with elderly people received complaints that several cases of severe foodpoisoning had occurred. Eight of the victims were so ill that they had to be admitted tohospital for emergency treatment. Samples of the frozen meals remaining in the charitysfreezer, all of which had been supplied by the Meals Division, were sent to an independentlaboratory for analysis. It was discovered that they were contaminated by bacteria that cancause severe abdominal illness.

The Meals Division conducted its own analysis of the meals purchased by the charity. Thepresence of the bacteria was confirmed, but it was found to be a common organism that ispresent in almost all meat. If the charity had cooked the frozen meals in accordance with theinstructions printed on the packaging then the bacteria would have been killed and the

consumers would not have been harmed in any way. Furthermore, the contamination was


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only very slight. A healthy person who ate a meal containing small quantities of thesebacteria would not become ill because of the bodys immune system.

This case has been reported widely in newspapers and on television. FP plcs directors haveasked for an analysis of the risks to the companys reputation. The Meals Divisionsmanagement team has recommended that FP plcs defence should be based on thefollowing two arguments:

All meat products contain these bacteria. Those manufactured by FP plc contain a lowerconcentration than the industry average and comply with all relevant hygiene regulations.

The frozen meals supplied by the Meals Division should not have caused any harmunless they had been prepared negligently by the charity. The charity should be blamedfor the food poisoning and not FP plc.

Freezer Deals

The Desserts Division has been reviewing its Marketing strategy. One of FP plcs strategicaim is to increase profitability of each of its divisions through increased market share in bothdomestic and overseas markets. The Divisional General Manager is willing to authorise aonce and for all additional expenditure of 2 million to achieve an increase in market share.However, he is very insistent that any spending must have a payback period of 1 year andincrease market share.

The Divisional Accountant does not support the General Manager in these views. TheDivisional Accountant believes that the most appropriate time frame for evaluating thesuccess of the 2 million investment would be three years.

Following several months of research, the Desserts Division Marketing staff has targeted,within the UK, the market segment of ice cream sold by independent retailers as a means toincrease the profitability and market share of the division. An independent retailer is a shopor outlet that is not part of a larger chain. The Desserts Division currently has a 7% share ofthis market. Independent research has estimated that the total size of this market segment is50 million in sales each month.

The Desserts Division Marketing staff has been investigating Freezer deals which meanthat the Desserts Division would supply ice cream freezers to independent retailers. TheFreezer deals offer the independent retailers differing levels of marketing support and eithera free, or discounted, freezer. In return, the independent retailers would be required to give avariable commitment to stock the Desserts Divisions products. The Freezer deals under

consideration are named Exclusive, Half-Way House and Free and Easy. The DessertsDivision intends to offer only one of the Freezer deals to all UK independent retailers.

Freezer deals: key pointsExclusive

Under this deal the independent retailer will be obliged to sell the Desserts Division'sproducts exclusively for a period of three years.

The Exclusive deal will be supported by the Desserts Division which will supply point-of-sale marketing materials. This support will cost the Desserts Division 16 per month perretailer.

Freezer supplied free of charge: the retailer would be limited to one freezer under thisdeal. The Desserts Division is responsible for the maintenance of the freezer but anycosts are expected to be minimal during the freezer's working life.


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Half-Way House

At least 50% of the independent retailers' ice cream products must be Desserts Divisionproducts.

The Half-Way House deal will be supported by the Desserts Division which will supplypoint-of-sale marketing materials. This support will cost the Desserts Division 10 per

month per retailer. Freezer supplied at discounted price: the retailer would be limited to one freezer under

this deal.

Free and easy

No obligation to stock Desserts Division products.

The Free and Easy deal will offer no marketing support from the Desserts Division.

Freezer supplied at a discounted price: the retailer would be limited to one freezer underthis deal.

Based on his own expert knowledge and the results of specially commissioned marketresearch, the Desserts Division Marketing Manager has produced the following information.

Additional informationi. The freezers which will be supplied are all new and come from a reputable

manufacturer. They have been designed to operate in the independent retailers'environment and have a predicted working life of three years.

ii. As the Desserts Division has spare capacity, the implementation of any of theFreezer deals would not cause any incremental spending on Fixed Costs.

iii. Each participating independent retailer will advertise the Desserts Division's productsin its shop.

iv. The Freezer deals enable the Desserts Division to conduct market research directly

with consumers.

Secret Recipe - Meals DivisionOne of FP plcs most popular and profitable products is a steak pie that is flavoured withspecial gravy that was developed by one of FP plcs founding family members in the earlypart of the 20th Century. The gravy is manufactured using a very specific mixture of herbsand spices. FP plcs competitors cannot copy this mixture because the ingredients have tobe combined in a very precise manner and then cooked in a particular way.

The recipe for this herb and spice mix is known only to FP plcs Director of Operations andthe manager of the pie factory. There is no written record anywhere. The factory managerhas worked for FP plc for more than 30 years and he is a trusted member of staff. Twice a


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year, the director and the manager of the pie factory close part of the factory to all other staffand the two of them make sufficient quantity of the mix to last for the next six months.

The factory manager was recently offered a job by one of FP plcs largest rivals. The jobwould double the factory managers salary and he would be guaranteed the opportunity toretire on full pay within two years of taking up the post. He declined this offer and informedthe Director of Operations that he received this approach.

The chief executive of FP plc is concerned that a competitor could have acquired the factorymanagers knowledge of the recipe in such an easy and inexpensive manner. He is alsoconcerned that FP plc does not have a record, other than the memories of two seniormembers of staff. He has asked for recommendations on the most appropriate way tosecure this knowledge.

Internal auditThe external auditor has noted concerns expressed by the management accountant in the

Desserts Division concerning weaknesses in the IT system associated with inventory andthe relative lack of attention paid to the division by the internal audit department. The partnerin charge of the external audit has held a meeting with the finance director and hasrequested that the internal audit department investigates the concerns voiced by themanagement accountant.

The head of internal audit has responded that it is inappropriate for the divisionalmanagement accountant to comment on the allocation of internal audit resources and thatthe external auditor should offer to cooperate more fully with internal audit before makingsuch requests.

Committing to Corporate Social ResponsibilityThe day-to-day responsibility for FP plcs Corporate Social Responsibility (CSR) is carriedout by the Environmental Effects Manager (EEM). The EEM has an annual budget of100,000 which pays her salary and the costs of her office: she has no staff. She reportsdirectly to the Director of Operations (DoO) and part of her role is to report to FP plcs Boardon the progress towards the achievement of FP plcs CSR targets.

However, because the DoO is so busy, the EEM has few opportunities to speak to him. TheEEM never meets FP plcs Board although her CSR report (Appendix 1) is submitted to it.The EEM does not receive any formal feedback from the Board about her report. As the postof EEM was established only two years ago not all managers within FP plc have yet met her.

There is some resistance to the role of the EEM within FP plc as some managers believeCSR is better carried out locally whilst others see CSR as a distraction from their jobs.

The EEM has to respond to an increasing amount of environmental legislation, advice andguidelines coming from national governments and international organisations such as theEuropean Union and the United Nations. Given the complexity of FP plc with three divisions,a head office and 10,000 employees, it is clear that, at times, the EEM has more work thanshe can cope with.

At her last meeting with the DoO, over three months ago, she complained that her role is nottaken seriously by some senior managers, and that her current activities do not help FP plcachieve its CSR targets.


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Required:

1. Desserts Division's proposed relocation:Advise FP plc's Board as to whether or not it should approve the Desserts Division'sproposed relocation to the West of England.Your answer should include an evaluation of the six conditions of approval set by FPplc's Board, including the results of your Net Present Value calculation for condition 1.

2. Divisional culture:Advise the Divisional Accountant how he could deal with any resistance to change hemight encounter when attempting to achieve the Chief Executive's first goal.

3. Inventory and IT:Recommend improvements which would enable the Board of the Desserts Division to

achieve goals 2 to 4 as set by the Chief Executive of FP plc.

4. Food Poisoning:a) Evaluate the risks arising from the outbreak of food poisoning to FP plcs reputation

in terms of their likelihood and impact of occurrence.

b) Advise the directors of FP plc on the suitability of the two arguments proposed bythe managers of the Meals Division for defending the companys reputation.

5. Freezer Deals:Recommend, with reasons, which of the three 'Freezer deals' the Desserts DivisionBoard should offer to the independent retailers.Note: Ignore the time value of money.

6. Secret Recipe:a) Advise the board on the implications of the secret recipe being obtained by a

competitor.

b) Recommend, stating reasons, suitable precautions for preventing the recipe frombeing obtained by a competitor.

7. Internal Audit:a) Evaluate the head of internal audits statement that the divisional management

accountant should not comment on the allocation of internal audit resources.

b) Discuss the validity of the head of internal audits assertion that the external auditorshould be prepared to cooperate with the internal audit department.

8. Corporate Social Responsibility (CSR):Advise the Board of FP plc, giving your reasons:a) whether it should have a strategic aim dealing with Corporate Social Responsibility.

b) whether FP plc should include its internal Corporate Social Responsibility report in itsannual report.

c) how the Environmental Effects Manager could contribute more towards FP plcmeeting its Corporate Social Responsibility targets.


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APPENDIX 1

Extracts from FP plcs internal Corporate Social Responsibility report for the yearended 31 December 2013.

This report was produced by the Environmental Effects Manager and presented to the Boardof FP plc in January 2014.

Fair tradingIn accordance with its mission statement, FP plc is committed to paying a fair price for theingredients it uses in its products, particularly to farmers in the less developed economies ofthe world.

Waste reduction and recyclingFP plc set a target for the financial year 2013 that waste of ingredients should be cut by 2%,measured by weight, from the 2012 levels. The actual ingredient waste was 2.5% lower in2013 than in 2009 as measured by weight.

A target was also set for FP plc to recycle 90% of its used packaging in the year 2013. It wasrecorded that 85% of total used packaging in 2013 was actually recycled.

Food labellingLegal requirements demand accuracy in food labelling, in respect of ingredients, productdescription and cooking instructions in many countries. FP plc employs a ComplianceManager to ensure that relevant labelling laws in each country, with which the companytrades, are adhered to. A target is set for FP plc to justify 100% of its claims in food labelling.Two products manufactured in the Meals Division are currently undergoing investigations bythe Food Standards Authority of a European country following allegations that the labelling isinaccurate.

TransportationFollowing adverse press coverage relating to the high number of kilometres travelled whenimporting and exporting goods from and to overseas countries, FP plc introduced a targetthat its use of air travel should be reduced by 10% in 2013 compared with the amount usedin 2012. FP plc fell short of its target by only reducing air kilometres travelled by 3% in 2013compared with 2012. Road kilometres travelled increased by 5% in 2013 compared with2012.

Efficiency of energy usage in productionIn an effort to reduce carbon emissions from the three divisions and head office, a target was

set that by 2018, FP plc will become carbon neutral in terms of its usage of energy. Energyusage in 2013 was at the same level as in 2012. It has been proposed that energy efficientlighting should replace the current energy inefficient lighting at all three factories and at headoffice in 2014 and smart meters should be installed in all of FP plcs premises to keep thewaste of electricity to a minimum.


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APPENDIX 2

Extracts from FP plcs income statement and statement of financial position

Income statement for the year ended 31 December 2013

million (GBP million)

Revenue 986

Operating costs (938)

Net operating profit 48

Interest income 1

Finance costs (16)

Corporate income tax (10)

PROFIT FOR THE YEAR 23

Statement of financial position for the year ended 31 December 2013

Notes million (GBP million)

ASSETS

Non-current assets 465

Current assets

Inventories 90

Trade and other receivables 112

Cash and cash equivalents 20

Total current assets 222

Total assets 687

EQUITY AND LIABILITIES

Equity

Share capital 1 140

Share premium 40

Retained earnings 61

Total equity 241

Non-current liabilities

Long term borrowings 2 234

Current liabilities

Trade and other payables 212

Total liabilities 446

Total equity and liabilities 687

Notes:

1. There are 560 million ordinary shares of 0.25 each in issue.

2. The long term borrowings comprise 160 million loan for capital expenditure which is

repayable on 1 January 2018 and a 74 million revolving credit facility which expires on 31December 2016.


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APPENDIX 3

Five year forecast of sales revenue and net operating profit for each division and FPplc in total and operating costs for head office:

2013(Actual)

2014 2015 2016 2017 2018

Meals Divisio n

Sales revenue 266 287 310 335 362 391Net operating profit 31 34 40 47 54 63

Snacks Div is ion

Sales revenue 176 194 213 234 258 283

Net operating profit 44 48 53 58 64 71

Desserts Div is ion

Sales revenue 544 571 600 630 661 694Net operating profit 72 80 90 101 112 125

Head off ice

Operating costs (99) (107) (112) (118) (124) (130)

FP plc total

Sales revenue 986 1,052 1,123 1,199 1,281 1,368

Net operating profit 48 55 71 88 106 129

~ End of Material~

Case 1_The Food Pyramid

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