RomaCorral Foods Solution Case CMA

MODULE 3, ASSIGNMENT 5RomaCorral Foods Ltd. (RCFL)

March 9, 2011Marker Assessment Notes and Guide

These notes provide specific details and quantitative analyses pertaining to the RomaCorral Foods case and supplement the Year 1 General Assessment Guide, Marker’s Version available on the Module 1 Home Page. The assessment and solution notes on the following pages provide examples of relevant analyses that may be seen in responses, but they do not include all the valid points that can be made. There are other possible solutions to the case. Markers must use their judgment to objectively assess creative solutions when evaluating candidate responses.

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M3A5 – RomaCorral Foods Ltd. (RCFL) – Marker Assessment Notes and Guide

Table of Contents

Page

Assignment Overview....................................................................................................1Assessment Rubric – By Component............................................................................1Assessment Guidelines.................................................................................................7Overall Assessment.......................................................................................................7

Situational Analysis – Component 1.a)..........................................................................9Application of Quantitative Tools – Component 2.a)...................................................12Systematic Approach for Issue Analysis – Component 4.a)........................................12Systematic Approach for Issue Analysis – Component 4.b)........................................13Application of Quantitative Tools – Component 2.b)...................................................14Application of Quantitative Tools – Component 2.c) ...................................................14Qualitative Analysis and Strategy Formulation – Component 1.b)..............................15Recommendations and Conclusions – Component 5.a)..............................................17Qualitative Analysis and Strategy Formulation – Component 1.c)...............................17Qualitative Functional Concepts – Component 3.a) and b).........................................17Professionalism and Communication – Component 6.a) and b)..................................19

Feedback to Candidates..............................................................................................19Additional References.................................................................................................20

Appendix 1: Financial Assessment..............................................................................21Figure 1: Ratio and Performance Analysis.......................................................21Figure 2: Benchmarks.......................................................................................22Figure 3: Net Income Shortfall for 2012............................................................24

Appendix 2: Analysis of Alternative to Expand Outlets/Roma Only/Corral Only..........25Figure 1: Net Present Value Analysis...............................................................25Figure 2: Financing Required............................................................................26Figure 3: Impact on Net Income........................................................................28Figure 4: Impact on Debt:Equity.......................................................................30

Appendix 3: Analysis of Alternative to Expand Roco Coffee Shops............................32Figure 1: Probability Analysis............................................................................32Figure 2: Net Present Value Analysis...............................................................32Figure 3: Financing Required............................................................................33Figure 4: Impact on Net Income........................................................................34Figure 5: Impact on Debt:Equity.......................................................................34

Appendix 4: Outsourcing.............................................................................................36

Appendix 5: IFRS/ASPE Considerations.....................................................................37

Appendix 6: Dividend Considerations..........................................................................37


Assignment Overview

For reference, markers should refer to the Assignment Overview as provided to candidates.

The RCFL case is based on the August 2009 Case Exam. This case was not published.

If you have any questions or suggestions regarding this material, please contact [email protected].

Assessment Rubric – By Component

Please see the Year 1 General Assessment Guide for details on each Component. The difference between ME+ and ME- depends on the quality of the response.

Component 1. Qualitative Analysis and Strategy FormulationCompetency: F1: Strategic ManagementWeight: 15%

1. a) The qualitative analysis of RCFL’s current situation: 1. Is appropriate for the strategic alternatives and operational issues being addressed; 2. Is of good quality, depth, breadth, and makes sense; 3. Includes internal and external scans, and other relevant data (e.g. mission, stakeholder

preferences, constraints, targets, SWOT points, KSFs/competitive advantages).AE: All three of the above

attributes are present.ME: Includes the internal and

external scan AND one other of the above attributes is present.

BE: Only one of the above attributes is present.

ME+ ME ME-1. b) The analyses of the strategic alternatives, minor issues and implementation issues use a

reasonable scope of the data gathered in the situational analysis (i.e. use all categories of SWOT points, not just the same points repeatedly); and

Integration is demonstrated to a reasonable degree (e.g. considering the cause and effect relationships between SWOT items and strategic alternatives; considering the implications of one issue or alternative on another, and/or indicating how the recommended strategy takes advantage of strengths and opportunities while mitigating or worsening weaknesses and avoiding threats while meeting the goals of the organization within its constraints; integration demonstrated is balanced throughout the analyses).

AE: Uses a balance of categories from the situational analysis; provides more than ten clear integration links balanced amongst the various alternatives and issues.

ME: Uses a balance of categories from the situational analysis; provides seven to ten clear integration links balanced amongst the various alternatives and issues.

BE: Does not use a balance of categories from the situational analysis and/or provides less than seven integration links balanced amongst the various alternatives and issues.

ME+ ME ME-

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1. c) The recommended implementation plan: 1. Includes an action plan that identifies tasks, matches the tasks to the appropriate

individuals, provides realistic timelines for completing these tasks, and considers the monetary implications (what, who, when, costs/revenues);

2. Aligns the organization’s resources and success factors to accomplish the recommended strategy;

3. Resolves problems without causing others (e.g. addresses the minor issues, overcomes cons of recommended strategies); and

4. Considers organizational implications (e.g. change management, organizational structure, pricing, morale, the role of functions such as IT, human resource management, sales, customer relations, etc.).

AE: All four attributes above are included addressing more than six implementation issues.

ME: Action plan addressing four to six implementation issues, PLUS one of the above attributes is included.

BE: Addresses fewer than four implementation issues and/or does not provide an action plan.

ME+ ME ME-

Component 2. Application of Quantitative ToolsCompetencies: F3, F4, F5, F6: Performance Management, Performance Measurement, Financial Management, Financial ReportingWeight: 30%

2. a) The financial analysis of RCFL covers three years, rounded to two decimal places, and includes the following attributes:1. A balance of relevant ratios (liquidity, coverage, activity, etc.) are calculated and interpreted.2. Ratio and trend analysis, common sizing or comparative analysis are applied appropriately

in evaluating RCFL’s performance and risk, and is interpreted.3. Benchmarks provided are used for comparison and are interpreted.

AE: More than four ratios are calculated balanced for three years. All three attributes are addressed and calculations are error free.

ME: Three to four ratios are calculated balanced for three years; two of the three attributes are addressed.

BE: Ratios are calculated, but one or fewer of the attributes are present.

ME+ ME ME-

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2. b) The quantitative analysis of the strategic alternatives demonstrates a reasonable understanding of relevant decision analysis concepts and tools. Appropriate concepts and tools are chosen and applied appropriately (e.g. free of serious errors, reasonable quality). Any assumptions made are reasonable and relevant for the analysis of the alternative. The following are some relevant decision analysis concepts and tools that could be applied if applicable in the quantitative analyses of the strategic alternatives: 1. Cost and revenue analysis,2. Capital budgeting,3. Constraint comparison, and 4. Uncertainty/sensitivity analysis.

AE: Appropriate tools are applied correctly, assumptions are relevant and more than two tools/concepts are used to analyze the strategic issues identified; at least two alternatives are analyzed quantitatively.

ME: Appropriate tools are applied correctly, two tools/concepts are used to analyze the strategic issues identified, at least two alternatives are analyzed quantitatively.

BE: One or fewer tools/ concepts are applied, or only one alternative is analyzed quantitatively.

ME+ ME ME-2. c) Financing, Financial Forecast, Quantitative Analysis of Minor Issues and Application of Other

Quantitative Tools: Financing required and available are calculated and compared, pro forma financial statements are required for at least one year that incorporates the strategic and other recommendations, minor issues are analyzed quantitatively using appropriate tools.

AE: Financing required and available are reasonably calculated and compared for the recommended strategy and a reasonable financial forecast is prepared. The analyses may contain relatively minor errors.

ME: Financing required and available are reasonably calculated and compared for the recommended strategy or a reasonable financial forecast is provided. The analyses may contain relatively minor errors.

BE: Financing required and available are not reasonably calculated and compared for the recommended strategy, a reasonable financial forecast is not prepared or the analyses contain serious errors.

ME+ ME ME-

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Component 3. Qualitative Functional ConceptsCompetencies: F1, F2, F3, F4, F5, F6: Strategic Management, Risk Management and Governance, Performance Management, Performance Measurement, Financial Management and Financial ReportingWeight: 15%

3. a) Strategic Management: The qualitative analyses demonstrate reasonable understanding of relevant concepts pertaining to strategic management. Relevant issues are appropriately used and resolved. Relevant concepts and issues include (but are not limited to) the following: value disciplines, organizational structure, growth strategies, as well as change management, communication and corporate culture (effectively communicating the strategic change to staff to promote smooth implementation, etc.).

Risk Management and Governance: The qualitative analyses demonstrate reasonable understanding of relevant concepts pertaining to risk management. Relevant issues are appropriately used and resolved (e.g. recommend procedures for sharing, transferring and/or reducing risk; prepare contingency plans). Relevant concepts and issues include (but are not limited to) the following: Internal risks (e.g. strategic, reporting, etc.), risk associated with strategic alternatives (e.g. likelihood of success), external/environmental risks (e.g. competition, safety, etc.).

AE: The response identifies and resolves five or more concepts indicated above.

ME: The response identifies and resolves four concepts indicated above.

BE: The response identifies less than four concepts indicated above.

ME+ ME ME-3. b) Performance Management, Performance Measurement, Financial Management and Financial

Reporting: The qualitative analyses demonstrate reasonable understanding of relevant concepts pertaining to performance management, financial management and financial accounting. Relevant issues are identified and appropriately used or resolved. Relevant concepts and issues include (but are not limited to) the following: Cost and revenue management, operations management, information technology, financial management, financial reporting.

AE: The response identifies and resolves five or more concepts indicated above.

ME: The response identifies and resolves four concepts indicated above.

BE: The response identifies less than four concepts indicated above.

ME+ ME ME-

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Component 4. Systematic Approach for Issue AnalysisCompetency: E1: Problem Solving and Decision Making Weight: 15%

4. a) Issue Identification and Prioritization – The breadth and prioritization of issues identified in the response are appropriate. The main alternatives and other minor alternatives are identified and prioritized reasonably (e.g. the main alternatives are analyzed first and in the greatest depth; minor alternatives are analyzed next).

AE: The response identifies, analyzes and adequately prioritizes more than three main strategic alternatives and eight or more important minor issues.

ME: The response identifies, analyzes and prioritizes at least three main strategic alternatives, identifies, analyzes and prioritizes five to seven important minor issues, minor prioritization issues are acceptable.

BE: The response identifies and/or analyzes fewer than two of the main strategic alternatives and/or analyzes fewer than five minor issues.

ME+ ME ME-4. b) The analyses of the individual strategic alternatives include the following attributes:

1. appropriate in depth and breadth, 2. balanced, 3. objective/free of bias, and 4. consider more than one perspective/global view.

AE: The response addresses all four attributes.

ME: The response addresses three of the attributes.

BE: The response addresses less than three attributes.

ME+ ME ME-4. c) Relevant case facts are applied appropriately in the response. Ambiguous and/or missing

information is identified and assumptions are clearly stated.AE: Majority of the case facts are

used appropriately; any ambiguities are clearly identified and dealt with appropriately.

ME: Many case facts are used appropriately; any ambiguities are identified and dealt with appropriately.

BE: Case facts are not used appropriately, ambiguities are not identified.

ME+ ME ME-

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Component 5. Recommendations and ConclusionsCompetencies: E1, E3: Problem Solving and Decision Making, Professionalism and Ethical Behaviour Weight: 13%

5. a) Strategic alternatives are measured in terms of important decision criteria (targets, constraints, funding, KSFs, mission, etc.). Recommendations and conclusions for the strategic alternatives and minor alternatives are logical, feasible, realistic, consistent, supported (e.g. with a decision matrix), and presented in a convincing manner.

AE: The response demonstrates that the recommendation is viable within the constraints presented, meets the targets, has sufficient funding and is consistent with the mission. The recommendations are logical, supported and consistent with the analyses.

ME: The response demonstrates that recommendation is viable within the constraints presented, meets the targets and has sufficient funding. The recommendations are logical and consistent with the analyses.

BE: The response does not compare the recommendations to the decision criteria and the recommendations are not consistent with the analyses.

ME+ ME ME-

Component 6. Professionalism and CommunicationCompetency: E4: Written CommunicationWeight: 12%

6. a) The format and organization of the report are appropriate:1. The elements of an effective business report format are present:

i) cover page/cover memo,ii) executive summary,iii) introduction,iv) body of the report,v) conclusion, andvi) appendices;

2. The executive summary is concise and highlights or summarizes the strategic alternatives, recommendations and other issues that the recipient can act on;

3. The introduction provides the purpose and scope of the report;4. The conclusion brings together the findings and draws the report to a close;5. The appendices contain appropriate content (e.g. SWOT, quantitative analysis); and6. The content of the report is organized appropriately for a business report (e.g. uses

headings and subheadings, is appropriately sequenced, uses lists effectively).AE: All elements are

present and of appropriate quality, the content is organized appropriately, and the report conforms to the format specifications.

ME: All elements are present but two are not appropriate, some minor errors/ problems with organization are evident and the report conforms to most of the format specifications.

BE: An element is missing, more than two elements are not appropriate, some major errors/problems with organization are evident and the report does not conform to many of the format specifications.

ME+ ME ME-

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6. b) The language, style and flow of the response are appropriate:1. The report reflects appropriate, professional tone and tact, and addresses the appropriate

audience. 2. The language used in the narrative is without a distracting number of deviations from

business norms, jargon/slang, or unexplained abbreviations, and has few spelling, grammatical, sentence structure, punctuation and typographical errors.

3. The qualitative and quantitative content is expressed clearly, logically and coherently, and flows well. Repetition is not excessive and is used in an effective manner.

4. References, labels and audit trails are provided where appropriate (e.g. the response is easy to follow; provides direction to the reader).

AE: Few problems with language use and content expression, the response is easy to follow.

ME: Some problems, but they are not distracting and the response is easy to follow.

BE: Major problems, distracting errors, response difficult to follow.

ME+ ME ME-

Assessment Guidelines

The Assessment Rubric, Marker Assessment Notes and Guide, Marking Worksheet, Candidate Assessment Form and Standard Comments are grouped into six components:

Component 1 – Qualitative Analysis and Strategy FormulationComponent 2 – Application of Quantitative ToolsComponent 3 – Qualitative Functional ConceptsComponent 4 – Systematic Approach for Issue AnalysisComponent 5 – Recommendations and ConclusionsComponent 6 – Professionalism and Communication

Judgment must be used in assessing the competencies exhibited in the candidate’s response and assigning an overall assessment: Above Expectations (AE), High Meets Expectations (ME+), Meets Expectations (ME), Low Meets Expectations (ME-), Below Expectations (BE) or Not Attempted (NA). The weights for each component in this assignment are representative of the weights in the Case Exam.

Professional judgment must be used in providing the assessments to the candidates.

Overall Assessment

Candidates should follow the “Steps for Approaching Business Strategy” in answering the case (found in the Reference Material section of the Professional Programs website). Because this is a time-constrained assignment (4 hours) and a high-level SWOT analysis is provided in the Backgrounder (Appendix 1), candidates are not required to repeat these points in the situational analysis presented in the response. As well, some of the steps may not be fully addressed. For example, it may be

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unreasonable to expect candidates to provide a financial forecast that takes into consideration all the candidate’s recommendations (step 7).

The analyses provided in these assessment notes are far more complete and extensive than what can be expected from a candidate during a four-hour examination.

In answering the case in an examination setting, candidates are expected to use their judgment in assessing which issues are the most relevant and to what extent these issues should be analyzed.

Normally, a response that provides the following would deserve an assessment of at least ME:

1. Sufficient depth and breadth of situational analysis (count only new points not in given Backgrounder SWOT).

2. The two main strategic alternatives (expand restaurant chain and diversify by establishing a coffee shop chain) are analyzed, both quantitatively and qualitatively.

3. After-tax net income for 2011 is calculated for the recommended strategy and compared against the target of $42,901,583.

4. Recommendation – viable within constraints, meets targets, sufficient funding, logical and consistent with analysis.

5. Implementation plan addresses 4-6 implementation issues for the recommended alternatives.

6. Adequate financial forecast that takes into account some of the recommendations.

7. Adequate communication skills are demonstrated.8. No “fatal” errors.

In applying the assessment rubric, markers should keep in mind that the quality of responses usually follows a normal curve. It is reasonable to expect the majority of responses to meet expectations and a minority to be below or above expectations.

Some candidates will not limit their response time to four hours. An adequate response will likely be 10-18 pages long, including appendices. Some exceptional candidates who think and type quickly will be able to provide 18-25 pages in their response. Do not allow longer responses submitted by either exceptional candidates, or those who spend much more than four hours on the response, to bias your judgment against those that are only 10-18 pages long. For responses that are exceptionally long, assess them as though they were done in four hours.

Some of the candidates who limit their response time to four hours will submit incomplete reports. These candidates did not properly allocate their time. The assessment guide should be applied as normal.

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Situational Analysis – Component 1.a)

The following tables list the points candidates are expected to present. [Note: The current financial assessment, including the interpretation of the results, is assessed in component 2a).]

Mission: RomaCorral Foods Ltd. provides Canadian consumers with excellent food and refreshments at good value and in comfortable, relaxing surroundings while providing its investors with above-average returns through operational efficiency and selective aggressive growth.

Vision: RomaCorral restaurants are the preferred choice of North American consumers seeking high-quality food and refreshments at affordable prices.

Strategic Goals:

Achieve an after-tax net income growth rate target of 5% over the next two years (i.e. net income of $42,901,583 in fiscal 2012).Pay a dividend of $2 per share annually.Obtain an average return on investment of 10%.

Stakeholders’ Preferences:Singh Indicated that options on 12 parcels of land would be

suitable for opening Roma and Corral outlets.Plante Questioned the feasibility of opening new restaurants

without any financing from EFL.Browne Suggested opening a chain of coffee shops in addition

to, or instead of, new restaurants.Buckner Suggested outsourcing their bread products.Belli Did not like relying on an external supplier for bread.

Key success factors LocationMenuFood and service qualityCapitalizationSupply chain managementScheduling of labour

Constraints The bank is willing to refinance the existing mortgages for up to 75% of fair value of land and buildings of existing restaurants, provided that the ratio of long-term debt to equity does not exceed 2 to 1.

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Environmental Scan/SWOT Analysis:

The following are some additional SWOT points that candidates may provide in their responses. On the assessment worksheet, and below, the SWOT points as provided to candidates in the Backgrounder SWOT are in italics.

Strengths Weaknesses Overall profits increased for RCFL and

all restaurants met the sales target and most met the net profit margin target.

RCFL holds options on 12 parcels of land.

Diners at Roma find the smell of bread appealing.

EFL would be willing to provide staff support to set up a coffee chain.

Bank will refinance the existing mortgages for up to 75% of the fair value of the land and buildings.

Many full-service restaurants with prime costs (direct materials and labour) greater than 65% of sales recorded losses. RCFL prime costs are less than 65%.

Other.

Experience and expertise of parent company and management.

Good reputation for quality food at reasonable prices.

Growth of brand. Consistency in outlet appearance and

menu pricing throughout Canada. Good locations close to target markets. Adequate parking and easy accessibility

via public transit. Reliable supply chain that delivers good-

quality food. Available baking capacity at Roma

outlets to supply fresh bread to Corral outlets.

Preferred client status with bank. Good base of long-term customers.

EFL would not be able to provide financing for three years.

Transfer price of 60% resulting in Roma not meeting profit margin targets.

Baird recommended contractor although not lowest bid and received loan of $100,000.

High turnover of quality servers is related to reporting of gratuities as income on T4 slips.

Corral outlets experience a higher turnover of servers than Roma.

Expenses related to breakage vary significantly from store to store.

Servers are not charged but may be fired if excessive.

Expenses related to cash register and alcohol inventory shortages vary significantly from store to store.

Expenses related to customers leaving without paying their bills vary significantly from store to store. RCFL higher than industry.

Time delay mechanism on safes is rarely activated during day since it is customary to pay local expenses from the cash on hand.

Increase in the number of attempted robberies.

Head office costs are allocated evenly to the individual outlets.

RCFL experienced a 1.5% decrease in average annual sales per restaurant.

Annual management bonuses are based on achieving the target average sales per seat and the target net profit margin; weakness is that there are no qualitative measures for performance evaluation.

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RCFL outlets tend to be quiet on Mondays.

Other.

Inconsistencies in customer service among restaurants.

High turnover of the better servers. High debt load. Room for improvement in operating

volume (as a percentage of practical maximum capacity).

Recent reduction in sales per outlet.

Opportunities Threats Sales at coffee shop chains increased in

the first half of 2010 and are predicted to have an average increase in sales of 2% per year.

Some steak houses went out of business which would reduce the competition for Corral.

Plante indicated that she expects the economy to stabilize soon.

There is room in the market for specialty coffee shops similar to EFL’s.

Other.

Increasing consumer spending in Canadian food service industry.

Shifting demand from fine-dining restaurants to mid-level and fast-food restaurants.

Expected decrease in some food prices (produce, beef, veal) over next nine years.

Restaurant revenues will drop by 2.5% in 2011.

Sales at full-service restaurants are expected to show the largest decline (3%).

Cost conscious consumers are expected to switch to limited-service restaurants.

Sales at limited-service restaurants are only expected to decline 1.5%.

Some steak houses went out of business.

The coffee shop market is currently dominated by a few large chains.

Approximately 60% of new restaurants service past their second year.

Other.

High competition in all food service markets.

High staff turnover in food service industry.

Economic downturn. High price of wheat. Decreasing consumption of beef per

capita in Canada.

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Application of Quantitative Tools – Component 2.a)

Financial Assessment:

The following are some points that may be made in discussing the current financial situation of the company (either in the SWOT analysis or in a separate financial assessment section or in the analysis of the issues).

Ratio Analysis – See Appendix 1:

Liquidity is low (although not completely unexpected given that the majority of restaurant sales would be cash/credit card leaving the receivables lower than in a traditional business which impacts the current assets).

Coverage appears to be adequate, below the bank’s benchmark of 2:1. Inventory turnover has been declining which is a concern in the restaurant

industry where good-quality food is of importance. Accounts receivable turnover is low, staying steady at just over 3.32 days which

is expected due to the cash nature of the business. Revenues are growing, and profitability ratios remain steady.

Benchmarks – See Appendix 1:

Food and beverage cost of sales, restaurant salaries, wages and benefits, facilities expenses, general and administrative expenses and operating expenses are all well in line with the industry benchmarks.

Income before interest, depreciation and tax, and net margin are both well above the industry benchmarks.

Prime costs are lower than the benchmark. Net income and revenue growth both exceed the benchmarks.

Overall, RCFL appears very efficient operationally as compared to industry benchmarks and is growing faster and more profitably than its peers.

Net income shortfall calculation – See Appendix 1

RCFL will need to overcome a $6,106K shortfall to meet its goal of $42,902K net income in 2012.

Systematic Approach for Issue Analysis – Component 4.a)

Identification and Prioritization of Issues and Alternatives

The identification and prioritization of the major issues and strategic alternatives (at the business and functional strategic level) are assessed in attribute 4a). For this case, the expectation to analyze three main alternatives would include the analysis of the first two main alternatives along with the outsourcing alternative. For this case, the most

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important issue is to develop a plan for increasing income and cash flows to meet the requirements of the parent, EFL.

The following indicates alternatives and other important issues:

1. Strategic alternatives: a) Expand restaurant chain.

i) Open 7 more Roma outletsii) Open 5 more Corral outletsiii) Open 7 more Roma and 5 more Corral outlets

b) Diversify by establishing a Roco Coffee Shop chain.

[Note: These alternatives are not mutually exclusive and can be combined (e.g. RCFL can open more Roma outlets and establish a coffee shop chain.]

2. Major operational and implementation issues: a) Outsource bread products versus continue baking in-house and the related

transfer pricing and performance evaluation issues. [Note: Some candidates will categorize this as a major strategic alternative. This is acceptable as long as the issue is analyzed in accordance with its importance to the outcomes for RCFL].

b) Financing issues (requirements and sources, bank constraints).[Note: Financing may be analyzed in the analyses of the individual alternatives or after the strategic recommendations are made.]

3. Other important issues/areas of concern requiring attention: a) Baird’s relationship with a building contractor; potential conflict of interest

situation.b) Shortages in alcohol inventory and cash; use of safe’s time delay mechanism.c) High percentage of customers leaving without paying; not charging servers

for unpaid bills and breakage. d) Risk of bank deposit robberies (timing of bank deposits).e) Operational, human resource and reporting issues (e.g. inconsistent service,

reporting of tips, bonus system, performance measures, training, turnover, excess capacity, head office allocation to profit centres).

f) Risk management and environmental issues (e.g. increasing/decreasing food costs; shift in consumer spending; decrease in beef consumption).

g) Marketing and promotion issues.

Systematic Approach for Issue Analysis – Component 4.b)

ANALYSIS OF ALTERNATIVES

See Appendices 2 to 5 for some examples of relevant quantitative and qualitative analyses of some of the alternatives and issues.

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Application of Quantitative Tools – Component 2.b)

Quantitative Analysis

The following are some relevant decision analysis concepts and tools that could be applied in the quantitative analyses of the strategic alternatives:

1. Cost and revenue analysis: Relevant revenues, costs, contribution margins, opportunity costs, cash flows, break even, and/or net income are appropriately calculated and interpreted for the alternatives or for the recommended strategy. Assumptions are clearly indicated and are reasonable.

2. After-tax net income for 2011: The incremental or total after-tax net income is calculated for the alternatives or for the recommended strategy and compared to the target (i.e. $41,863,800 for RCFL overall). The increase in head office costs is included in the calculation of the required incremental income for 2011 or in the calculation of total 2011 net income for each alternative or for the recommended strategy.

3. Capital budgeting / discounted cash flow analysis: Appropriate capital budgeting or discounted cash flow analysis methods (e.g. net present value, internal rate of return, capital rationing) are applied correctly in analyzing the alternatives. For example, the following are included in the analysis:

i) appropriate operating cash inflows and outflows for each year, capital costs and other one-time cash flows (non-cash items and interest are not included);

ii) consideration of the time value of money using the 10% after-tax rate over 20 years;

iii) after-tax cash flows; andiv) calculation of CCA tax shields on capital cost using a reasonable CCA

rate (e.g. 4% for buildings and 20% for furniture and equipment).4. Uncertainty/sensitivity analysis: The effects of uncertainty are considered in the

quantitative analyses (e.g. calculating expected annual sales per outlet for the Roco alternative using probabilities; calculating high, midpoint and/or low annual sales/net income/cash flows per Roco outlet). Assumptions are clearly indicated and are reasonable.

Note that candidates’ quantitative analyses will be very different, given the different assumptions they will likely make in preparing them (e.g. assumptions regarding prices, sales volumes, etc.). Their assumptions should be clearly stated and generally consistent with the case information.

Application of Quantitative Tools – Component 2.c)

Other quantitative tools are applied appropriately in the response, such as the following:

1. Financing required and available – The financing required for the strategic alternatives [expand the number of restaurants (Roma, Corral, or both); open a

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chain of Roco coffee shops], dividends ($16M) and other financial needs (e.g. install security cameras at outlets), and the financing available [e.g. remortgage current properties (75% x current value – current mortgage outstanding), mortgage of new properties (75% x building and land costs for new outlets), line of credit (50% of accounts receivable and inventory), proceeds from sale of bread-making equipment if recommend outsourcing ($1.3M), cash flows generated from future operations] are calculated and compared for each alternative and/or for the recommended strategy.

2. Financial forecast – A financial forecast for one or more years that incorporates the expected effects of the major recommendations is prepared. This can be in the form of a pro forma income or cash flow statement, or a pro forma balance sheet.

3. Other quantitative tools and quantitative analysis of minor issues – Quantitative analysis of minor issues (e.g. outsourcing of bread products, loss from breakages/shortages/unpaid customer bills, etc.) and any quantitative tools used in the response that are not assessed elsewhere are assessed as part of this attribute.

Qualitative Analysis and Strategy Formulation – Component 1.b)

Under simulated Case Examination conditions, providing 3-4 significant pros and 3-4 significant cons for each major alternative would be considered balanced and would meet expectations. More extensive analysis might be above expectations, depending on the quality of the points. Providing 6 pros and 1 con for an alternative may have enough depth, but would not be balanced and could be evidence of bias.

INTEGRATION

The following are some guidelines for awarding a “link”:

Situational Analysis Point Description No. of Links Allowed*

Mission/Vision Consistent with the mission/vision? 1 to Mission/VisionGoals Meets goals? 1 to GoalsStakeholder Needs/Preferences

Stating if an alternative does or does not meet a specific stakeholder’s need or preference is sufficient for a link.

Maximum three links

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Situational Analysis Point Description No. of Links Allowed*

Constraint Calculating the debt:equity and comparing it to the bank’s constraint of 2:1 is considered a link (maximum of one link). Using the 10% required return as a discount rate in a net present value calculation and clearly indicating whether or not the required rate of return has been achieved is also considered a link.

1

KSFs In order to link to a KSF, it must be valid and considered in the analyses of the alternatives.

1

Strengths Option/issue strengthens or uses a strength. As well, indicating as a con that an alternative will weaken or destroy a strength is a link. Not using a strength is not a link.

No limit

Weaknesses Option/issue must:1. address how the alternative/

action will solve the weakness, or 2. use the weakness for justification

of not doing something, or 3. discuss how the alternative/option

will worsen an existing weakness.

No limit

Opportunities Must indicate how alternative/option takes advantage of the opportunity. Not exploiting an opportunity is NOT a link.

No limit

Threats Must use the threat as a justification for not doing something or must indicate how the option/action would address a threat.

No limit

Financial Assessment

Assessed in Component 2. No link allowed

* Using the same SWOT point in the analysis of multiple issues should be given credit for only one link, but will be considered when assessing the depth of the response.

In Appendices 2 to 5, some of the relevant points that can be made in the analyses of the main alternatives are provided. An indication of possible links (integrative points) is provided.

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Recommendations and Conclusions – Component 5.a)

For this case, support should include quantitative analysis that proves that the recommended actions would provide the following:

1. EFL’s target of a 5% growth in after-tax net income over the next two years (i.e. $42,901,583 in fiscal 2012) will be met.

2. The bank’s constraint that the long-term debt (including the current portion) to equity ratio does not exceed 2 to 1 will be met.

3. RCFL will be able to acquire the financing required to implement the recommended strategy.

4. A 10% after-tax rate of return over 20 years will be achieved for the recommended capital investments.

5. Sufficient cash flows will be generated to enable an annual dividend payout of $2 per share (i.e. $16 million).

Qualitative Analysis and Strategy Formulation – Component 1.c)

IMPLEMENTATION PLAN

This subcomponent is addressed in detail in the Year 1 General Assessment Guide.

Qualitative Functional Concepts – Component 3.a) and b)

Below are some examples of issues that could be addressed in the analysis of the alternatives or in the implementation plan. Note that the issues are sorted in the order in which the functional competencies appear in component 3 of the assessment guide and not in the order of importance for the case.

Component 3.a):

Strategic Management:

1. Analysis of the mission/vision and revisiting them in light of the recommended strategy.

2. Alignment of activities to goals/objectives.3. Assessing the target customers/target market.4. Value chain analysis.5. Corporate social responsibility issues.6. Strategic aspects of the analyses of the issues and alternatives (e.g. impact of

alternatives on quality of product and/or services).7. Recommendation of reasonable business and functional strategies.8. Consideration of competitive business strategies (cost leadership, differentiation).9. Consideration of value disciplines (operational excellence, customer intimacy,

product leadership).10.Matching organizational structure/design to strategy.

CMA Canada 17


11.Alignment of implementation plan to RCFL’s available resources and success factors.

12.Change management issues (effectively communicating changes to staff to promote smooth implementation, corporate culture, EFL support for opening Roco, etc.).

13.The role of various functions on the successful implementation of the recommended strategies.

Risk Management and Governance:

1. Enterprise risks and risks associated with the various strategic alternatives (e.g. economic considerations, pricing/revenue assessments, etc.).

2. External risks and environmental issues (effect of recession on EFL and Canadian market, shift in demand from fine food to mid-level and from full service to limited service, risk of steak houses going out of business (beef consumption decreasing), compliance with CRA rules regarding reporting of tips on T4s, etc.).

3. Internal control (Baird’s relationship with a particular contractor, cash and alcohol inventory shortages, breakage, customers leaving without paying bills (higher percentage than for comparable restaurant chains), infrequent use of safe time-delay mechanism during the day, increase in attempted robberies of employees making bank deposits, etc.).

Component 3.b):

Performance Management:

1. Management of revenues and costs (managing costs for labour, marketing, inventory, equipment, breakage, unpaid bills, facilities, security systems, marketing (e.g. adapt promotion to changes in market and consumer spending, use of coupons, discounts, television advertising and other media), extend Sunday hours of operation, pricing, menu changes, etc.).

2. Operations management (inconsistent service quality, supply chain management, outsource bread products versus in-house production, head office administration, turnover of better servers, etc.).

Performance Measurement:

1. Human resource issues related to incentives and compensation systems (e.g. remuneration, motivation, marketplace advantages/disadvantages, ethical issues related to compensation system, bonuses, tips, etc.).

2. Organizational performance measurement considerations (allocation of head office costs to profit centres, transfer price is causing conflict and goal incongruence (not aligned with performance measurement and incentive systems), performance measures, etc.).

CMA Canada 18


Financial Management:

1. Short- and long-term financing (e.g. determine sources of financing, consider/discuss bank line of credit and bank loans, consider investment in inventory, debt load).

2. Dividend payout.3. Financial forecasting considerations.4. Financial and operating risks. 5. Tax consequences of decisions (no discussion of tax implications is expected

from candidates other than in the capital budgeting calculations).

Financial Reporting:

1. IFRS/ASPE issues (loyalty points). 2. Other financial accounting issues.

Professionalism and Communication – Component 6.a) and b)

Note that, because this is a time-constrained assignment, no penalties are to be assessed for infractions of the standard format specifications (e.g. font size, spacing, margins, etc.). Also note that the Securexam software automatically numbers the pages – in particular, each Excel spreadsheet is automatically numbered as page 1. Therefore, markers should not comment on the page numbering in the feedback to candidates.

Feedback to Candidates

Using the standard comments provided in the document M3A5 RomaCorral Foods Ltd. (RCFL) – Standard Comments, provide developmental feedback directly on the candidate’s response.

After completing the Candidate Assessment Form and the marked candidate’s response, markers are reminded to proofread all feedback comments to ensure that they are grammatically correct and that any highlighting from the standard comments has been removed.

Upload a PDF version of the Candidate Assessment Form and the candidate’s marked copy to the CMA Professional Programs website.

CMA Canada 19


Additional References

1. Business Report Guidelines, located in the Reference Material section of the Professional Programs site.

2. Discussion Board.3. Steps for Approaching Business Strategy, located in the Reference Material section

of the Professional Programs site.4. Year 1 General Assessment Guide, Marker’s Version, located on the Module 1

Marker Home Page, under Marker Material.

SAMPLE ANALYSES

The following appendices provide sample analyses to assist the markers in recognizing valid points and calculations made by candidates.

CMA Canada 20


Appendix 1: Financial Assessment

Figure 1: Ratio and Performance Analysis

Ratios Formula 2010 IFRS 2009 IFRS 2009 C-GAAP 2008 C-GAAP 2007 C-GAAP

Current ratio (liquidity)

current assets / current liabilities

$21,988/ $34,324 = 0.64

$19,008/ $48,883 = 0.39

$19,008/ $48,883 = 0.39

$14,954/ $45,455 = 0.33

$11,413/ $36,389 = 0.31

Quick ratio (liquidity)

(cash + accounts receivable) /

current liabilitiesOR

(current assets - inventory) /

current liabilities

($3,027+ $3,095)/

$34,324 = $6,121/ $34,324 = 0.18

OR($21,988-$14,487)/ $34,324 =

$7,501/ $34,324 = 0.22

($2,692+ $2,778)/

$48,883 = $5,470/ $48,883 = 0.11

OR($19,008-$12,479)/ $48,883 =

$6,529/ $48,883 = 0.13

($2,692+ $2,778)/

$48,883 = $5,470/ $48,883 = 0.11

OR($19,008-$12,479)/ $48,883 =

$6,529/ $48,883 = 0.13

($2,415+ $2,051)/

$45,455 = $4,466/ $45,455 = 0.10

OR($14,954-$9,682)/

$45,455 = $5,272/ $45,455 = 0.12

($1,663+ $1,543)/

$36,389 = $3,206/

$36,389 = 0.09

OR($11,413-$7,533)/

$36,389 = $3,880/

$36,389 = 0.11

LT debt-to-equity (coverage)

LT debt / equity ($274,579+ 8,562)/

$175,300 = $283,141/ $175,300

= 1.62

($258,616+ 6,904)/

$159,587 = $265,520/ $159,587

= 1.66

($258,616+ 6,904)/

$142,797 = $265,520/ $142,797

= 1.86

($213,845+ 6,045)/

$120,641 = $219,890/ $120,641

= 1.82

($169,678+ 4,711)/

$102,949 = $174,389/ $102,949

= 1.69

Total debt-to-equity (coverage)

total debt / equity $318,085/ $175,300

= 1.81

$320,211/ $159,587

= 2.01

$309,011/ $142,797

= 2.16

$260,000/ $120,641

= 2.16

$206,567/ $102,949

= 2.01

Total debt-to-total assets (coverage)

total debt / total assets

$318,085/ $493,385

= 0.64

$320,211/ $479,798

= 0.67

$309,011/ $451,808

= 0.68

$260,000/ $380,641

= 0.68

$206,567/ $309,516

= 0.67

Times Interest Earned (coverage)

Earnings Before Interest and

Taxes / Interest

($64,855+ 17,129)/ $17,129

= $81,984/ $17,129 = 4.79

($59,917+ 14,641)/ $14,641

= $74,558/ $14,641 = 5.09

($56,927+ 17,631)/ $17,631

= $74,558/ $17,631 = 4.23

($42,820+ 14,774)/ $14,774

= $57,594/ $14,774 = 3.90

($30,095+ 11,424)/ $11,424

= $41,519/ $11,424 = 3.63

Inventory turnover (activity)

Food and beverage cost of sales / inventory

$103,475/ $14,487

= 7.14 times (51.12 days)

$93,825/ $12,479

= 7.52 times (48.54 days)

$93,825/ $12,479

= 7.52 times (48.54 days)

$75,640/ $9,682

= 7.81 times (46.73 days)

$57,948/ $7,533

= 7.69 times (47.46 days)

Inventory turnover (activity)

cost of sales / inventory

$207,424/ $14,487

= 14.32 times (25.49 days)

$188,457/ $12,479

= 15.10 times (24.17 days)

$188,457/ $12,479

= 15.10 times (24.17 days)

$152,866/ $9,682

= 15.79 times (23.12 days)

$118,237/ $7,533

= 15.70 times (23.25 days)

Asset turnover (activity)

total revenue / total assets*

$340,095/ $493,385

= 0.69

$308,675/ $479,798

= 0.64

$308,675/ $451,808

= 0.68

$250,067/ $380,641

= 0.66

$192,833/ $309,516

= 0.62

CMA Canada 21


Ratios Formula 2010 IFRS 2009 IFRS 2009 C-GAAP 2008 C-GAAP 2007 C-GAAP

Receivables turnover (activity)

total revenue / acct. receivable*

$340,095/ $3,095

= 109.89 times (3.32 days)

$308,675/ $2,778

= 111.11 times (3.29 days)

$308,675/ $2,778

= 111.11 times (3.29 days)

$250,067/ $2,051

= 121.92 times (2.99 days)

$192,833/ $1,543

= 124.97 times (2.92 days)

Net margin or return on sales (profitability)

net income / sales

$38,913/ $340,095 = 11.44%

$35,946/ $308,675 = 11.65%

$34,156/ $308,675 = 11.07%

$25,692/ $250,067 = 10.27%

$18,057/ $192,833 = 9.36%

EPS (profitability)

net income - preferred

dividends / common shares

($38,913- $2,000)/7,000

= $36,913/ 7,000 = $5.27

($35,946- $1,500)/7,000

= $34,446/ 7,000 = $4.92

($34,156- $1,500)/7,000

= $32,656/ 7,000 = $4.67

($25,692- $1,000)/7,000

= $24,692/ 7,000 = $3.53

($18,057- $1,000)/7,000

= $17,057/ 7,000 = $2.44

Contribution margin % (profitability)

contribution margin / sales

$132,671/ $340,095 = 39.00%

$120,218/ $308,675 = 38.95%

$120,218/ $308,675 = 38.95%

$97,201/ $250,067 = 38.87%

$74,596/ $192,833 = 38.68%

Return on equity (ROE) (profitability)

net income / equity

$38,913/ $175,300 = 22.20%

$35,946/ $159,587 = 22.52%

$34,156/ $142,797 = 23.92%

$25,692/ $120,641 = 21.30%

$18,057/ $102,949 = 17.54%

Return on assets (ROA) (profitability)

net income / total assets

$38,913/ $493,385 = 7.89%

$35,946/ $479,798 = 7.49%

$34,156/ $451,808 = 7.56%

$25,692/ $380,641 = 6.75%

$18,057/ $309,516 = 5.83%

Net income growth

(net income current year - net income prior year) / (net income prior year)

($38,913- $35,946)/ $35,946

= $2,967/ $35,946 = 8.25%

($34,156- $25,692)/ $25,692

= $8,464/ $25,692

= 32.94%

($25,692- $18,057)/ $18,057

= $7,635/ $18,057

= 42.28%

Revenue growth

(revenue current year - revenue

prior year) / (revenue prior year)

($340,095- $308,675)/ $308,675

= $31,420/ $308,675 = 10.18%

($308,675- $250,067)/ $250,067

= $58,608/ $250,067 = 23.44%

($250,067- $192,833)/ $192,833

= $57,234/ $192,833 = 29.68%

* Can also be calculated using average of beginning and ending balances.

Figure 2: Benchmarks

Formula 2010 IFRS 2009 IFRS2009

C-GAAP2008

C-GAAP2007

C-GAAP Benchmark

Food and beverage % of sales

Food and beverage cost of sales / sales

$103,475/ $340,095 = 30.43%

$83,825/ $308,675 = 27.16%

$83,825/ $308,675 = 27.16%

$75,640/ $250,067 = 30.25%

$57,948/ $192,833 = 30.05%

25.00%-40.00%

Restaurant salaries, wages and benefits % of sales

Restaurant salaries, wages and benefits /

sales

$95,390/ $340,095 = 28.05%

$87,098/ $308,675 = 28.22%

$87,098/ $308,675 = 28.22%

$70,935/ $250,067 = 28.37%

$55,279/ $192,833 = 28.67%

25.00%-40.00%

Facilities % of sales

Facilities (excl. amort.) / sales

$13,618/ $340,095 = 4.00%

$12,107/ $308,675 = 3.92%

$12,107/ $308,675 = 3.92%

$10,233/ $250,067 = 4.09%

$8,314/ $192,833 = 4.31%

4.00%-14.00%

CMA Canada 22


Formula 2010 IFRS 2009 IFRS2009

C-GAAP2008

C-GAAP2007

C-GAAP Benchmark

General and administration % of sales

General and admin. / sales

$11,115/ $340,095 = 3.27%

$10,356/ $308,675 = 3.35%

$10,356/ $308,675 = 3.35%

$9,407/ $250,067 = 3.76%

$8,259/ $192,833 = 4.28%

1.00%-5.00%

Operating expenses % of sales

Total expenses - head office expenses /

sales

($67,816-$29,071)/

$340,095 = $38,745/

$340,095 = 11.39%

($60,301-27,456)/

$308,675 = $32,845/

$308,675 = 10.64%

7.00%-14.00%

Income before interest, depreciation and tax % of sales

(Income before tax + interest + depreciation) /

sales

($64,855 +$17,129 +$8,808 +$10,735)/

$340,095 = $101,527/ $340,095 = 29.85%

($59,917 +$14,641 +$7,622 +$9,565)/

$308,675 = $91,745/

$308,675 = 29.72%

($56,927 +$17,631 +$7,622 +$9,565)/

$308,675 = $91,745/

$308,675 = 29.72%

($42,820 +$14,774 +$6,143 +$8,053)/

$250,067 = $71,790/

$250,067 = 28.71%

($30,095 +$11,424 +$4,639 +$6,534)/

$192,833 = $52,692/

$192,833 = 27.33%

(1.50%)-19.00%

Prime costs % of sales

(Food and beverage cost

of sales + restaurant

salaries, wages and benefits) /

sales

($103,475 +$95,390)/

$340,095 = $198,864/ $340,095 = 58.47%

($93,825 +$87,098)/

$308,675 = $180,923/ $308,675 = 58.61%

($93,825 +$87,098)/

$308,675 = $180,923/ $308,675 = 58.61%

($75,640 +$70,935)/

$250,067 = $146,575/ $250,067 = 58.61%

($57,948 +$55,279)/

$192,833 = $113,227/ $192,833 = 58.72%

65.00%

Net margin or return on sales

net income / sales

$38,913/ $340,095 = 11.44%

$35,946/ $308,675 = 11.65%

$34,156/ $308,675 = 11.07%

$25,692/ $250,067 = 10.27%

$18,057/ $192,833 = 9.36%

3.20-4.50%

Net income growth

(net income current year - net income prior year) / (net income prior year)

($38,913- $35,946)/ $35,946

= $2,967/ $35,946 = 8.25%

($34,156- $25,692)/ $25,692

= $8,464/ $25,692 = 32.94%

($25,692- $18,057)/ $18,057

= $7,635/ $18,057 = 42.28%

20.00%

Revenue growth

(revenue current year -

revenue prior year) / (revenue prior year)

($340,095- $308,675)/ $308,675

= $31,420/ $308,675 = 10.18%

($308,675- $250,067)/ $250,067

= $58,608/$250,067

= 23.44%

($250,067- $192,833)/ $192,833

= $57,234/ $192,833 = 29.68%

(3.00%)

CMA Canada 23


Figure 3: Net Income Shortfall for 2012

Net Income for 2011 – No Expansion: Formula/Source Roma Corral Total

2010 income before taxes $656 $799 $64,855

Increase in head office costs1 $31,200-$29,071 21 21 2,129

2011 income before taxes 635 778 65,726

Income taxes (40%) 254 311 26,290

2011 net income $381 $467 $39,436

2010 net income 394 479 38,913

Incremental net income (2011 – 2010) $(13) $(12) $523

Net Income for 2012 – No Expansion:

2010 income before taxes $656 $799 $64,855

Increase in head office costs1 $32,600-$29,071 35 35 A1 3,529

2012 income before taxes 621 764 61,326

Income taxes (40%) 248 306 24,530

2012 net income $373 $458 $36,796

2010 net income 394 479 38,913

Incremental net income (2012 – 2010) $(21) $(21) $(2,117)

Target 2012 net income A2 $42,902

Shortage in 2012 net income (need from expansion) $42,902-$36,796 A3 $6,106

Target 2012 net income Case A2 $42,902 2010 net income Case A4 $38,913

1 Assumes continued equal distribution of head office costs among 100 outlets.

CMA Canada 24


Appendix 2: Analysis of Alternative to Expand Outlets/Roma Only/ Corral Only


Figure 1: Net Present Value Analysis

Incremental Cash Flow from Operations (One Outlet):

Formula/ Source Roma Only Corral Only Both

Net income (assume same as 2010) $ 394 $ 479 Add back tax 262 320 Add back depreciation – building 81 113 Add back depreciation – F&E 98 129 Add back HO allocation 291 291 B1 1,126 B2 1,332 Less tax @ 40% 450 533 Cash flows (not including increase in HO costs*) 676 799 PV factor (10%, 20 years) 8.51356 8.51356 Present value of cash from operations – 1 outlet $ 5,755 $ 6,802 Roma initial promotion ($50K x (1-0.4) x 0.909) (27) - CCA tax shield (Note 1) 746 952 Less investment for capital assets B3&B4 (6,050 ) (7,150 )Net present value 1 outlet $ 424 $ 604 NPV Total New Outlets:NPV one outlet B5 $ 424 B6 $ 604 Number of outlets B7 7 B8 5

Total NPVB5*B7; B6*B8 B9 $2,968 B10 $3,020 $5,988

*Increase in head office costs will be incurred whether or not there is any expansion. Note 1: CCA Tax Shield2 per Outlet:Building (4%) $4913 $5454

2 [(CdT)/(d+k)]*(2+k)/[2*(1+k)]3 [($4,500*0.04*0.40)/(0.1+0.04)]*(2+0.1)/[2*(1+0.1)]4 [($5,000*0.04*0.40)/(0.1+0.04)]*(2+0.1)/[2*(1+0.1)]

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Furniture and equipment (20%) 255 5 407 6 Total CCA tax shield per outlet $746 $952

Figure 2: Financing Required

Financing Required (One Outlet):

Formula/ Source Roma Only Corral Only Both

Land $ 600 $ 600 Building 4,500 5,000 Furniture and equipment 1,000 1,600 Total 6,100 7,200 Sunk cost (50 ) (50 )Cash investment required for capital assets B3 $6,050 B4 $7,150 Total Financing Required:One outlet B3&B4 $ 6,050 $ 7,150Number of outlets B7&B8 7 5Total financing required $42,350 $35,750 $78,100 Financing available:Land $ 600 $ 600Building 4,500 5,000 Base for mortgage $5,100 $5,60075% mortgage available from bank B11 $3,825 B12 $4,200 Cash investment required for one outlet B3&B4 $ 6,050 $ 7,150 75% mortgage available from bank B11&B12 (3,825 ) (4,200 )Required to be financed from other sources B13 2,225 B14 2,950 Number of outlets B15 7 B16 5 Total required to be financed from other sources

B13*B15; B14*B16 $15,575 $14,750 $30,325

Total financing available from remortgaging (Note 1) B17 $20,609 $20,609 $20,609 Total financing available from line of credit (Note 2) f 6,691 6,691 6,691

5 [($1,000*0.2*0.40)/(0.1+0.2)]*(2+0.1)/[2*(1+0.1)]6 [($1,600*0.2*0.40)/(0.1+0.2)]*(2+0.1)/[2*(1+0.1)]

CMA Canada 26


Surplus (shortage) $11,725 $12,550 $(3,025) Note 1: Financing Available from Remortgaging Existing Outlets:Current value of land and buildings $405,000Max total mortgages $405,000 x 75% 303,750Mortgage owing end of 2010 $274,579+$8,562 283,141 Max available from bank from remortgaging B17 $ 20,609 Note 2: Financing Available from Line of Credit:

Accounts Receivable a $ 3,095 Inventory b 14,487

Total a+b c 17,582 Max available from bank @ 50% c*50% d $ 8,791 Less: current balance e $(2,100)Financing available from line of credit d+e f $ 6,691

CMA Canada 27


Figure 3: Impact on Net Income

Net Income for 2011:Formula/ Source Roma Only Corral Only Both

Cash flow from operations before tax – 1 outlet B1&B2 $1,126 $1,332

Depreciation – building (Note 1) c&d 112.5 125

Depreciation – F&E (Note 1) j&k 100 160

Income before tax and HO allocation 913.5 1,047

Number of outlets 7 5

Total income before taxes from new outlets B18 6,395 B19 5,235 B20 $11,630

Income taxes (40%) 2,558 2,094 4,652

Net income from new outlets B21 $3,837 B22 $3,141 B23 $ 6,978

2012 Target Net Income Shortage A3 $ 6,106 $ 6,106 $6,106

Surplus (shortage)

B21-A3; B22-A3; B23-A3 $(2,269) $(2,965) $ 872

Alternative Calculation:

Total income before taxes from new outlets B18 $ 6,395 B19 $ 5,235 B20 $11,630

Incremental head office costs A1 3,529 3,529 3,529

Incremental income before taxes 2,866 1,706 8,101

Income taxes (40%) 1,146 682 3,240

Incremental net income B24 1,720 B25 1,024 B26 4,861

2010 net income A4 38,913 38,913 38,913

Estimated net income for 2012

B24+A4; B25+A4; B26+A4 B27 $40,633 B28 $39,937 B29 $43,774

Target 2012 net income A2 42,902 42,902 42,902

Surplus (shortage)

B27-A2; B28-A2; B29-A2 $(2,269) $(2,965) $ 872

Note 1 – Depreciation per New Outlet:

Building a $4,500 a $5,000

Useful life (years) b 40 b 40

Amortization per year per outlet straight line a÷b c 112.5 d 125

Number of outlets e 7 e 5

Total incremental amortization – building c*e; d*e f $787.5 g $625.0

Furniture and equipment h $1,000 h $1,600

Useful life (years) i 10 i 10

CMA Canada 28


Amortization per year per outlet straight line h÷i j 100 k 160

Number of outlets l 7 l 5

Total incremental amortization – building j*l; k*l m $700.0 n $800.0

CMA Canada 29


Figure 4: Impact on Debt:Equity

Financing Required:Formula/ Source Roma Corral Total

Cash investment required for capital assets per outlet B3 $ 6,050 B4 $ 7,150Number of outlets B7&B8 7 5

Total financing requiredB3*B7; B4*B8 B30 $42,350 B31 $35,750 $78,100

Financing available:75% mortgage available from bank B11&B12 $ 3,825 $ 4,200 Number of outlets B7&B8 7 5

Mortgage financing B11*B7; B12*B8 B32 $26,775 B33 $21,000

Required to be financed from other sources

B30-B32; B31-B33 B34 $15,575 B35 $14,750 $30,325

Current equity as at June 30, 2010 B36 $175,300 B36 $175,300Current long-term debt as at June 30, 2010 (includes current portion) B37 $283,141 B37 $283,141Additional debt B34&B35 $ 15,575 $ 14,750

New long-term debtB34+B37; B35+B37 B38 $298,716 B39 $297,891

New debt:equityB38÷B36; B39÷B36 1.70:1 1.70:1

CMA Canada 30


Qualitative Analysis

Pros Cons This would let RCFL exercise its options

on 12 parcels of land in suitable locations (S).

This would let RCFL spread its growing head office overhead over more locations (W).

Unsuccessful steak houses have closed, reducing competition in the market place for Corral outlets (O – for Corral).

Has a positive net present value over the next twenty years (see Appendix 2, Figure 1) – the expected NPV is $5,988K.

Additional net profit exceeds net income goal by $872K (see Appendix 2, Figure 3) (G).

1.70:1 D:E would not exceed requirement from the bank (Appendix 2, Figure 4) (C).

RCFL has strength in experience and expertise in management and operation of Roma and Corral outlets (S).

Expanding outlets would build upon a recognized strength for a good reputation for quality food at reasonable prices (S/KSF/M).

Expansion could also take advantage of increasing consumer away from fine-dining (O).

High wheat prices increase the cost of pasta, which squeezes margins at Roma outlets (T – for Roma).

Sales at full-service restaurants are expected to show the largest decline (3%) which would impact success (T).

There is a continuing threat of high competition in all food service markets, which is exacerbated by the overall decrease in sales at Canadian restaurants in first half of 2010 and forecast decline in sales at full-service restaurants (T).

Expanding Corral outlets would conflict with a threat that some steak houses in Canada went out of business in 2010 (T).

Seven locations proposed for Roma outlets would not be suitable for steakhouses, indicating that Roma outlets would need to be established independently and could have significant excess capacity in baking.

Beef consumption is declining overall, suggesting that there might be continuing long-term pressure on Corral outlets for diners (T).

RCFL would not be able to immediately undertake a full expansion (12 stores), owing to financing constraints (see Appendix 2, Figure 2).

M: Mission V: Vision G: GoalsC: Constraint K: Key success factor S: StrengthW: Weakness O: Opportunity T: ThreatA1: Alternative 1 A2: Alternative 2 TG: TargetSP: Stakeholder’s preference

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Appendix 3: Analysis of Alternative to Expand Roco Coffee Shops


Figure 1: Probability Analysis

Expected Sales per Outlet Analysis (’000s):Range Mid-point Probability Expected Sales$800 - $950 $875 30% $263$950 - $1,050 $1,000 50% $500$1,050 - $1,200 $1,125 20% $225Expected annual sales per Roco outlet $988

Figure 2: Net Present Value Analysis

Net Present Value Analysis:Formula/ Source

Approach 1 – $1 Million in Annual Sales

% of Sales

Approach 2 – $988K in Expected

Annual SalesSales $ 1,000 $ 988 Direct materials 430 43.0% 425 Salaries, wages and benefits 296 29.6% 292 Local advertising and promotion 20 20 Facilities (excl. amortization) 75 75 Amortization - - General and administration 26 26 Head office costs 50 50 897 888 Before-tax cash flows from operations C1 103 C2 100 Income taxes (40%) 41 40 Annual cash from operations/shop $ 62 $ 60 Present value factor (10%, 20 yrs) 8.51356 8.51356 Present value C3 $ 528 C4 $ 511 Number of outlets in a year C5 30 C6 30 Total present value cash from operations

C3*C6; C4*C6 C7 $ 15,840 C8 $ 15,330

Total investment in 2011 (Note 1) e $(10,000) $(10,000)Total tax shield on investment (Note 1) f $ 2,909 $ 2,909 Net present value – opening 30 outlets in 2011

C7+e+f; C8+e+f $ 8,749 $ 8,239

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Note 1 – Investment Analysis InvestmentTax Shield/

Savings After TaxInvestment in F&E per outlet a $ 250 $ 64 7 $ 186 Investment in F&E for 30 outlets a*C6 b $ 7,500 $1,9098 $5,591Investment in HO systems set-up c 2,000 800*9 1,200Initial promotion and advertising d 500 200 10 300Total investment in 2011 b+c+d e $10,000 f $2,909 $7,091*Assumes HO systems set-up and initial promo are expensed in 2011

Figure 3: Financing Required

Financing Required:Formula/ Source 30 Roco Stores

Furniture and equipment per store $ 250 Total for 30 stores 7,500Investment in HO systems set-up 2,000Initial promotion and advertising 500 Total Financing Required: C9 $10,000 Total financing available from remortgaging B17 $20,609 Surplus (shortage)* $10,609

* Assumes line of credit is not used as remortgaging is sufficient to cover the financing required and the mortgage rate is less expensive thereby making it the better option.

7 [($250*0.2*0.40)/(0.1+0.2)]*(2+0.1)/[2*(1+0.1)]8 [($7,500*0.2*0.40)/(0.1+0.2)]*(2+0.1)/[2*(1+0.1)]9 $2,000*40%10 $500*40%

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Figure 4: Impact on Net Income

Net Income for 2012: Approach 1 – $1 Million in Annual SalesOpen 30 outlets in 2011

and no more in 2012Open 30 outlets in

2011 and 30 in 2012Net income per outlet C9 $ 47 C9 $ 47 Number of outlets C10 30 C11 60 Total net income from new Roco outlets

C9*C10; C9*C11 C12 1,410 C13 2,820

Compare to required incremental income target A3 6,106 6,106

Surplus (shortage)C12-A3; C13-A3 $(4,696) $(3,286)

Figure 5: Impact on Debt:Equity

Financing Required:Formula/ Source Roco 2011

Total financing required C9 $ 10,000 Financing available:Total financing available from remortgaging B17 $ 20,609 Surplus (shortage) B17-C9 $ 10,609 Current equity as at June 30, 2010 B36 $175,300Current long-term debt as at June 30, 2010 (includes current portion) B37 $283,141Additional debt C9 $ 10,000 New long-term debt B37+C9 C10 $293,141New debt:equity C10÷B36 1.67:1

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Qualitative Analysis

Pros Cons It is consistent with Browne’s suggestion

(KSP). EFL would be willing to provide staff

support to help RCFL set up a coffee shop chain and establish the necessary training and support systems (S).

Singh’s research shows that there is room for specialty coffee shops of a style similar to that of EFL’s European chain (O).

Would take advantage of an opportunity given that sales at coffee shop chains increased in the first half of 2009 and are predicted to remain relatively strong (2% forecast growth per year over the next two years) (O).

Would be able to take advantage of existing strength of supply chain that delivers good-quality food (S).

The outlets provide a positive NPV over a 20-year horizon and are almost immediately cash-flow positive.

1.67:1 D:E would not exceed the D:E requirement from the bank (Appendix 3, Figure 3) (C).

The Canadian coffee shop market is currently dominated by a few large chains (T).

No experience running coffee shops. 30% chance targets will not be met with

this strategy alone. Unlike Roma and Corral restaurants,

RCFL does not have an established brand in the Canadian market for coffee.

There will be a challenge arising from the threat of high turnover in the food service industry (W).

There is a threat of high competition in food service markets, particularly the established coffee chains (T).

The target net income cannot be met by opening Roco outlets only. Some more Roma or Corral outlets must also be opened (G).

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Appendix 4: Outsourcing

Outsourcing Bread Products (60% of Market Price)

Current Annual Cost per Outlet:

Formula/ Source Roma Only Corral Total

Direct materials D1 $ 8,000 D4 $ 6,000

Direct labour D2 9,000 D5 6,750

Variable overhead D3 3,000 D6 2,250

D1+D2+D3; D4+D5+D6

D7 20,000 D8 15,000

No. of outlets D9 72 D10 28

Total cost D7*D9; D8*D10 D11 $1,440,000 D12 $420,000 $1,860,000

If outsourced:

Market price D13 $ 30,000 D14 $ 22,500

No. of outlets D9 72 D10 28

Total cost D13*D9; D14*D10

D15 $2,160,000 D16 $630,000 $2,790,000

Incremental annual cost

D15-D11; D16*D12

$720,000 $210,000 $930,000

Sale of bread-making equipment

$1,300,000

In the long term, it is less expensive to bake bread products internally. Because the divisions are treated as profit centres, the transfer price should be negotiated. Each division is required to meet a target sales per seat and a target profit margin. Since Roma outlets have excess baking capacity, any sales price would increase the total sales of a Roma outlet and the total profits of RCFL overall. However, receiving a price that reflects less than the regular profit margin will decrease Roma's total profit margin, which is a performance measure.

The current transfer pricing policy is unfairly favouring the Corral outlets (increases their profit margin). The Corral outlets should be willing to pay any price to Roma that is less than the market price.

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Appendix 5: IFRS/ASPE Considerations

Loyalty Points

New IFRS Issue for 2010 Loyalty Points

To record the provision for loyalty points: The sales must be reduced by $1 million and the liability recorded.

Dr. Sales 1,000Cr. Loyalty points provision 1,000

Taxes will also change as follows:

Dr. Deferred taxes 400Cr. Income tax expense 400

Appendix 6: Dividend Considerations

Candidates should also consider the payment of the dividend in their recommended strategy. A basic calculation showing the cash flow/income generated and comparing it to the $16M dividend required is sufficient. If pro formas are prepared, this dividend payment may/should also be reflected here for reference.

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RomaCorral Foods Solution Case CMA

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