Delfa Printing Ltd. (Delfa) May2009_case Exambook Cma

CASE EXAMINATION

DELFA PRINTING LTD. (DELFA)

MAY 2009

© 2010 The Society of Management Accountants of Canada. All rights reserved. ®/™ Registered Trade-Marks/Trade-Marks are owned by The Society of Management Accountants of Canada.

No part of this document may be reproduced in any form without the permission of the copyright holder.

May 2009 Case Examination

TABLE OF CONTENTS


Page

Case Question:

Backgrounder .................................................................................. 1

Additional Information .................................................................... 19

General Comments on Performance ...................................................... 27

Steps for Approaching Business Strategy ............................................... 34

Assessment and Solution Notes for Markers .......................................... 38

Marker Assessment Guide ...................................................................... 80

Sample Response – Successful Attempt #1 ........................................... 91

Marker’s Comments – Successful Attempt #1 ...................................... 108

Sample Response – Successful Attempt #2 ......................................... 112

Marker’s Comments – Successful Attempt #2 ...................................... 127

Sample Response – Unsuccessful Attempt .......................................... 131

Marker’s Comments – Unsuccessful Attempt ....................................... 150

Supplement of Formulae * .................................................................... 156

*This supplement is provided to all candidates with each part of the examination.


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The Societies of Management Accountants of Alberta, Manitoba, New Brunswick, Newfoundland, Northwest Territories and Nunavut, Nova Scotia, Ontario, Prince Edward Island, Saskatchewan and the Yukon,

Certified Management Accountants Society of British Columbia, Ordre des comptables en management accrédités du Québec

May 2009

Case Examination

Backgrounder The background information relating to the Case Examination (Backgrounder) is provided to candidates in advance of the examination date. The Backgrounder contains information about both the company and the industry involved in the case. Candidates are expected to familiarize themselves with this information in preparation for the analysis that will be required during the Case Examination. Candidates should note that they will not be allowed to bring any written material, including the advance copy of this Backgrounder, into the examination centre. A new copy of this Backgrounder, together with Additional Information about the company and a supplement of formulae and tables, will be provided at the writing centre for the Case Examination. Only the following models of calculators are authorized for use on the Case Examination:

1. Texas Instruments TI BA II Plus (including the professional model) 2. Hewlett Packard HP 10bII (or HP 10Bii) 3. Sharp EL-738C (or EL-738)

Candidates are reminded that no outside research on the industry related to this case is required. Examination responses will be evaluated on the basis of the industry information provided in the Backgrounder and the question paper (Additional Information).


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Delfa Printing Ltd. (Delfa) Backgrounder

Overview Delfa Printing Ltd. (Delfa) is a privately owned, Canadian company that offers commercial printing and warehousing services to businesses of all sizes. Delfa operates from a single location in a major Canadian city and currently caters mainly to insurance and non-bank financial institutions. Company History The company began as a partnership. Tom Delfino and Chris Farugia, who became friends when they both worked for City Printing Inc., decided to pool their resources and start a small printing business. With an initial investment of $50,000 each, they purchased a used hi-speed photocopier, cutting and binding machines, and a second-hand printing press. Renting a small industrial unit on the outskirts of the city, they opened their doors for business on November 1, 1976. Initially catering to small businesses, the company offered printing of business cards, single and multi-part invoices, letterhead, stationery and personalized note pads. Delfa grew quickly and, after four years of operation, the partners decided it was time to expand and incorporate the business under the name Delfa Printing Ltd. Delfino and Farugia were issued 50,000 common shares each and, using the proceeds of a sizable loan from the bank, a larger printing press was purchased. Soon, the company was taking on large-volume jobs ranging in value from $10,000 to $300,000, such as printing multi-part forms for large insurance companies and investment firms. In the early 1980s, the local economy experienced a recession. Three of Delfa’s largest customers and some of its smaller customers went bankrupt, leaving Delfa with more than $600,000 in bad debts. To keep Delfa afloat, Delfino invested $300,000 in exchange for an additional 300,000 common shares, giving him control of the company. As the recession abated, Delfa once again began to grow. To cater to the needs of its larger customers, Delfa’s operations were moved to a new location in 1994 and the company began to offer warehousing services. Some customers wanted shorter, more flexible runs; therefore, in the 1990s, Delfa began to utilize digital printing technology and to offer print-on-demand services. The company became a one-stop printing company that could accommodate any job size and provide a variety of print-related services, including electronic prepress work, forms design, offset printing, digital printing, on-demand printing, binding, warehousing of large amounts of customers’ finished printed goods, inventory management, and


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document distribution. By 2008, Delfa had over 100 employees and annual sales of more than $24 million. Printing Industry Commercial printing is Canada’s longest-established and most widely dispersed information technology-based manufacturing industry. It provides essential services that support other manufacturing industries as well as every other sector of the economy. Canada’s commercial printing industry is primarily made up of owner-managed small and medium enterprises (SMEs) located in every region and community in the country. The industry is the fourth largest manufacturing employer in Canada, with more than 84,000 employees working in more than 5,800 printing establishments.1 Commercial printers tend to compete based on price, quality, range of services offered, distribution capabilities, customer service, availability of printing time, and use of state-of-the-art technology. Over the past decade, the Canadian printing industry has been increasingly faced with major competition from lower-cost countries, the Internet and electronic communications. Imports have grown at a faster rate than exports. China has become a major competitor in this industry, offering prices up to 30% lower than those of Canadian printers. The Internet has had a negative impact on the demand for paper-based catalogues, directories and books. As well, the use of printed business forms has declined as companies have found more efficient digital alternatives. As a result, growth has slowed and run lengths of printing jobs have decreased. To adapt to the changing marketplace, the industry has turned towards offering more technologically advanced printing techniques and equipment, and value-added services (e.g. digital printing, web-to-print, print on demand, document storage, document inventory management, mass mailings of documents, etc.). A few large printing companies have become fully integrated by merging with companies in the pulp and paper industry. Also, there has been a trend in North America towards consolidation whereby larger commercial printers are acquiring medium-sized printers and regional competitors. One relatively new service involves the commercial printer setting up printing equipment on the customer’s premises and providing instant turnaround of orders on site. This service has been well-received in Europe, and large international printing companies are beginning to offer this service in North America. A “U-Print” service is also becoming popular in Europe whereby the commercial printer provides the materials and equipment, and the customer provides most of the labour. For example, a customer would go to the printer’s premises and, with the help of one of the printer’s employees, use the equipment to print the required number of documents. This service reduces both the printer’s labour costs and the customer’s printing costs.

1 http://www.ic.gc.ca/eic/site/cp-ic.nsf/eng/Home, accessed February 6, 2009.


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Overview of Printing Processes The production of printed products includes three processes: prepress, printing and finishing. Prepress Prepress is the stage before actual printing begins that includes such activities as typesetting, graphic design, forms design, page layout, editing, proofreading and plate processing. During this stage, the printer prepares a prepress proof of the images and text in the colours to be printed for review by the customer. Changes are made if required and, once the customer is satisfied that the proof represents the desired content to be printed, the printer begins printing. Although the customer owns the design, printers usually keep the proof on file for potential future reprint orders. With the introduction of digital printing, customers often provide a print-ready digital file to the printer, thereby eliminating the need for the printer to provide prepress services. Printing Two of the most common methods of commercial printing used today are offset and digital printing. Offset Printing Offset printing is a widely used printing method because of its versatility, speed, quality and general cost-effectiveness across a wide range of printed products, and is the most commonly used method for producing large volumes of high-quality documents. It is a technique whereby ink is spread on a printing plate with embossed images, then transferred (offset) to a rubber cylinder and finally applied to paper or other material. The rubber cylinder gives great flexibility, permitting printing on cardboard, cloth, wood, metal, leather and rough paper. Although the equipment and set-up costs are relatively high, the actual printing process is relatively inexpensive. The main advantage of offset printing is its consistently high image quality. There are two main types of offset printing: sheet-fed and web. For sheet-fed offset printing, the paper is fed into the press one sheet at a time at a high speed. For web offset printing, a continuous roll of paper (web) is fed through the printing press at a very high speed and the paper is later cut to size after the printing is completed. Some rolls of paper can weigh many tons. Sheet-fed offset printing is commonly used for small- or medium-volume jobs, such as brochures, letterhead, and small-volume direct mail inserts and advertising flyers. Web offset printing is commonly used for high-volume runs in excess of 10,000 impressions, such as newspapers, books and catalogues.


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Digital Printing Digital printing uses computer-controlled non-impact printing equipment (e.g. ink jet, spray jet, electrostatic, laser). The image to be printed is sent directly to the printer using digital files, thus eliminating the need for a printing plate. Unlike offset printing, every impression made onto paper can be different; therefore, digital printing is used for mail merging and other types of customized printing jobs, such as addressing labels, producing individualized customer statements and personalizing promotional material. Digital printing has made faster turnaround times possible and, instead of having to print large pre-determined runs, requests can be made for as little as one print. The flexibility and lower production costs for small print jobs have resulted in more businesses establishing their own in-house digital printing departments. With the growing use of digital printing, print on demand (POD) has become possible. Rather than printing large runs of books and other documents using offset printing and then storing the documents until needed, businesses are now printing only the number of documents that are immediately required. This allows for making updates and other changes to documents in a timelier manner, which reduces the cost of carrying inventory and significantly reduces the need to dispose of outdated or excess printed materials. Finishing Finishing activities involve a variety of distinct operations, e.g. folding, drilling, trimming, collating, scoring, numbering, laminating, UV coating, saddle-stitching (i.e. folded and stapled along the centre seam), stamping, embossing, binding (e.g. coil, spiral, Cerlox, glue, three-ring). Other Services Many companies found they could no longer afford to store pre-printed documents within their facilities due to increased occupancy costs. As well, inventory was often managed improperly, resulting in unnecessary reprinting and excess inventory. As a result, companies began to outsource their document storage and inventory management requirements. Numerous printers, including Delfa, expanded their offerings to include complete document management services, from production to storage to distribution. Some also began to offer automated tracking and delivery systems as well as summary billing and reporting solutions.


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Delfa Printing Ltd. Management (see Appendix 1 for an organizational chart) Tom Delfino, President and Chief Executive Officer – Delfino began working at City Printing Inc. as a press operator right after graduating from high school. While working there, he attended night classes to gain a better understanding of finance, accounting and operating a small business, although he did not obtain a diploma or degree. When he started the partnership with Farugia, Delfino ran the printing and bookkeeping side of the business. As the company grew, he continued to manage the production and administration functions. He believes printing will always be a major contributor to the Canadian economy and that Delfa should continually strive to find new opportunities to grow within the printing industry. Chris Farugia, Vice President – With an undergraduate degree in marketing, Farugia initially started at City Printing Inc. as a shipper and then a sales representative. At Delfa, Farugia has always been responsible for sales, marketing, packaging and shipping. He also initiated the warehousing operation, which he continues to oversee. Farugia believes that keeping the customers happy is the key to the company’s success and is always looking for new ways to fulfil their needs. He also likes to personally handle two of the large insurance company accounts which have been customers of Delfa for the past 20 years. Simone Joly, Director of Marketing and Customer Service – Joly, who holds an undergraduate degree in marketing and a post-graduate degree in economics, joined Delfa in 1994 as the marketing manager. During her first two years at Delfa, she launched a very successful marketing campaign and set up a company website where potential customers could find information on Delfa’s products and services and request quotes for printing jobs. In 1996, Joly was promoted to her current position, where she has been responsible for the sales, pricing, quoting, customer service and marketing functions. Joly is dedicated and works long hours making sure customers are happy and her staff have what they need to call on new clients and service existing ones. Ajay Singh, Director of Production – Hired 15 years ago, Singh is responsible for the purchasing, prepress, printing, finishing and information technology functions at Delfa. At 57 years of age, Singh has spent his entire career in the printing industry and is considered an expert press operator. He makes sure that he and his employees stay up-to-date on the latest advancements in printing techniques, equipment and technologies by attending seminars and industry trade shows where equipment suppliers demonstrate their new product features. Pat Giani, Director of Warehousing and Distribution – Giani joined Delfa in 1993 and helped Farugia to set up the warehousing and document management operations. Prior to joining Delfa, Giani worked for a consumer goods wholesaler where she gained experience in inventory management as well as shipping and receiving.


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Sue Welsh, Controller – Hired in 2006, Welsh is a CMA with nine years of experience in both the manufacturing and service industries. In addition to the finance and accounting functions, Welsh is also responsible for human resources. Since joining Delfa, Welsh has streamlined the accounting function resulting in quicker monthly and annual financial statement preparation. She has also improved inter-departmental communications by managing monthly information-sharing meetings and created cost-control metrics to better manage the company’s production costs and enable more accurate quotes for new business.

Board of Directors The board of directors is composed of five members: Delfino, Farugia, Erica Ford (the company’s lawyer), Emily Johnstone (a retired executive of a large warehousing and distribution centre) and Brad Phillips (a successful graphic artist). The board meets once per year after the annual audit to review and approve the audited financial statements and the company’s strategic plan. At the board of directors’ meeting in January 2008, a strategic environmental analysis was conducted and the mission statement that has been in effect since 2000 was reviewed and approved (see Appendix 2). Sales Delfa caters mainly to the insurance and financial industries. Since 2004, more than 80% of Delfa’s revenues have been generated from eight large customers: two international insurance companies, three mutual fund companies, one pension plan management firm and two stock brokerage firms. The head offices of five of these customers are located within 60 km of Delfa’s facilities, enabling quick face-to-face communication when necessary. Most of Delfa’s large customers require large volumes of various business forms and personalized documents. For example, the insurance companies require multi-part application and claims forms, insurance policies, and customized statements for each policy holder. In addition to these large customers, Delfa provides services to more than 100 individual manufacturing and service companies in various Canadian provinces. Most of these companies are located in the same city as Delfa. These customers mainly require short- and medium-run printing and direct mail services. Some of them also contract Delfa to handle all of their document storage and inventory management needs. The sales and customer service team at Delfa consists of sales representatives (sales reps), estimators and account managers. This team is overseen by both Joly and Farugia. All members of the sales and customer service team are very knowledgeable in all aspects of the services offered and printing processes used by Delfa.


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The sales reps are responsible for generating business from both current and new customers. This sometimes requires them to make cold calls or to respond to general calls for quotes for large printing jobs. The sales reps work together with the estimators to prepare quotes for jobs. The estimators also provide quotes in response to online requests from potential new customers through Delfa’s website. Once a contract is signed with a new customer, the customer account is assigned to an account manager who oversees the progress of the job and liaises with the customer throughout the various stages (e.g. initial design, proofs, printing, binding, storage, packaging and shipping). The same account manager subsequently manages all of the customer’s future jobs with Delfa. In order to promote growth and stability, Delfino and Farugia have always focused the efforts of the company on forming and maintaining long-term partnerships with large customers. These partnerships have taken various forms, from offering advice on the effective use of print media to totally managing the customer’s printing function. This has contributed to the ongoing success of Delfa’s customers by saving them significant amounts of time, effort and money on the complex tasks of designing, producing, warehousing, updating and distributing thousands of business documents, forms and printed supplies. Because the two insurance companies are Delfa’s largest and most important customers, Farugia has continued to personally manage these accounts with the assistance of senior customer service staff when required. Each account manager is assigned one of the other large customers in addition to a number of the smaller customers. Printing Processes and Services Delfa offers a full range of prepress services. Both web and sheet-fed offset presses are used for large- and medium-volume jobs, and several digital printers (laser and ink jet) are used for smaller-volume and customized jobs. Delfa also provides a wide range of finishing and direct mail services. Warehousing Several large customers and some of the smaller customers utilize the warehousing service. For example, to minimize printing costs, the two insurance companies first order the printing of 6-12 months’ worth of the various forms they require for all their offices, both in Canada and in other countries. Delfa prints the forms, then stores them, tracks the inventory, packages and ships them directly to the insurance company’s branch offices as needed, and informs the company when stocks of certain forms are reaching their predetermined reorder point. Each month, Delfa provides a report that lists the inventory and shows the distribution by product and by destination (e.g. branch office) for the past month and the year to date. Delfa’s customers have found that the


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warehousing service has increased efficiencies, reduced costs and enabled them to invest more time and money on core business activities. The warehouse area of the building is organized into 11 rows of steel shelves. Each row has three shelves and 100 columns, creating 300 individual bins per row for a total of 3,300 bins in the warehouse area. The rows are arranged efficiently to minimize the aisle space required for forklift trucks to carry pallets of materials in and out of the storage bins. Location and Premises (see Appendix 3 for building layout) Delfa Printing Ltd. is located three kilometres from the Trans-Canada Highway and 30 kilometres from an international airport. It is situated in a large urban industrial area that is surrounded by fast-food restaurants, retail stores and service outlets where employees can conveniently take care of all their personal shopping needs before or after work. The building has 18,000 square metres of floor space which is apportioned as follows: Area Square Metres Printing and finishing 9,810 Distribution (packaging, shipping and receiving) 810 Warehouse 5,940 Offices (administration, IT, customer service, prepress, etc.) 900 Records 540 Total 18,000

All areas where paper and paper products are stored must be kept clean and the humidity level must be maintained within a certain range. To keep dust and other debris out of the warehouse area, long thick plastic sheets are hung from the ceiling down to the floor to form a barrier between the printing and warehousing areas. The building is protected with an alarm system that is activated at the end of the day. Only members of the senior management team, the head of IT and the maintenance crew chief have keys to unlock the exterior doors and the code for disarming the alarm system. An extra set of keys for the exterior doors and the keys for the locked interior rooms (e.g. records room, executive office) are tightly controlled by the executive assistant who tracks their use in a log book and keeps them locked in her desk drawer when they are not in use.


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Operations Upon receiving a printing order, the assigned account manager opens a printing docket for the job, which is a large envelope with a preprinted control number. The account manager indicates on the front of the docket all the specific work required to complete the job. The account manager takes the docket to the scheduler, who fills out the scheduled time for each task. Then the docket is taken to the first department on the schedule, usually the prepress department. After each department has completed its task, the docket is signed and a department approval form is inserted into the envelope. Before proceeding to the next department, the work is approved by either the customer or the account manager, depending on the customer’s preference. Then the docket is taken to the next department in time for the next scheduled task. By the end of the job, the docket contains copies of documents, proofs, signatures and customer approvals, which provide an audit trail in case the job ever needs to be revisited or the proofs need to be reused for a reprint order. For example, for a large order of forms requiring offset printing, the docket will be taken first to the prepress department where the forms will be designed. The prepress department will send the proofs to the customer (usually by email or fax) for approval. Once the proofs are approved, the prepress department prepares the necessary printing plates and inserts them in the docket together with the proofs and the customer’s approval. For digital printing jobs, the prepress department sends the electronic proof to the printing department and inserts a hard copy of the proof in the docket. Then the docket is taken to the printing and finishing department. When printing begins, the account manager checks some of the early impressions and the first batch of finished forms to ensure that they meet the customer’s specifications. For each task, the start and finish times are entered on the front of the docket and each employee who worked on the job signs the docket. The printed forms are taken to the warehouse, which is considered the end of the job. The docket is returned to the account manager, who contacts the customer to inform them that the forms are now in the warehouse until they are needed. The docket is then sent to the accounting department, where the invoice is prepared. As well, an electronic inventory file is opened for the warehousing of the forms. Finally, the printing docket is permanently filed in the records room. When the customer places an order for some of the warehoused forms to be sent to its branch offices, the account manager fills out a shipping docket and forwards it to the warehousing department. An employee retrieves the required forms from the warehouse and takes them to the packaging and shipping area where the material is boxed, labelled and shipped according to the instructions on the shipping docket. The person who completes each task signs the docket and inserts any copies of packing slips, waybills or other documentation into the docket envelope. Once the shipment leaves the building, the docket is forwarded to the accounting department where the


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inventory record is updated and an invoice is produced. The docket is attached to the invoice and filed in the accounting department. Invoicing Customers are invoiced according to the contract, which usually stipulates the following: a rate per hour and an estimated number of hours for prepress work; a rate per unit for printing jobs; and a monthly rate for warehousing. The distribution costs are built into the printing and warehousing rates. Rates for printing vary greatly depending on the quality of the paper, the volume, the printing method, and the finishing work required. Because the cost of paper fluctuates in the global market, Delfa negotiates a clause in the customer contracts that allows a portion of increases and decreases in paper costs to be passed on to the customer. The warehousing rate ranges from $70-$80 per bin per month. Competition Although printing provides Delfa with a steady revenue stream, it is a very competitive and price-sensitive segment of the business. Within 25 km of Delfa’s location, there are 3 large printers, 80 small printers and 2 of the same medium size as Delfa. For large contracts such as those with the international insurance companies, Delfa must compete with printers from all over the world. Some competitors offer larger volume discounts and other incentives. To minimize costs, businesses will usually choose a printer and a warehousing service provider that are located close to each other. Although none of the local small- or medium-sized printers offer warehousing services to their customers, Delfa must compete with the local large printers and approximately 20 other local companies that offer warehousing, packaging and shipping services. Accounting and Finance (see Appendix 4 for financial statements) Delfa uses the Princeton Canadian Bank for all its financing needs (mortgage, loan on the printing equipment). The mortgage on the building was renegotiated several years ago when the property (land and building) was appraised at a value of $7 million. The funds were used to renovate part of the production and warehousing facilities and upgrade the equipment.


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Data pertaining to the bank loans as at October 31, 2008, are as follows:

Mortgage Loan Total Amount borrowed $3,420,000 $1,000,000 $4,420,000 Term (years) 25 15 - Years remaining 20 10 - Interest rate* 6% 8% - Current portion of debt $ 83,419 $ 54,115 $ 137,534 Long-term debt payable 2,985,191 729,821 3,715,012 Balance, end of 2008 $3,068,610 $783,936 $3,852,546 Annual payment (blended*) $267,535 $116,830 $384,365

* Long-term loans are compounded annually; debt is repaid in equal annual blended payments (i.e. principal plus interest).

The bank has stipulated that it can demand immediate repayment of the balance of the loans if Delfa’s times interest earned ratio (calculated as earnings before interest and taxes divided by interest expenses) falls below three times. For accounting purposes, revenue is recognized upon shipment of printed materials to the customer if warehousing is not required. When the materials are to be warehoused, Delfa invoices the customer for the printing and recognizes the revenue when the materials are placed in the warehouse. Warehousing revenue is invoiced and recognized monthly. Large offset printing presses have a useful life of 15-20 years, whereas digital equipment becomes obsolete within 3-6 years. The rates used to amortize capital assets for accounting and tax purposes are as follows: Asset

Average Amortization Rate (straight-line)

CCA Rate

Building 4% 4% Equipment 15% 30% Furniture and fixtures 20% 20% Human Resources Many employees have worked for Delfa for many years. They are dedicated and non-unionized. Although they are paid 10% less than the unionized workers of other printers, most enjoy the culture at Delfa and are willing to work overtime to finish rush jobs when required. All Delfa employees participate in setting performance targets that are aligned with the goals of the company and receive a bonus when the targets are met.


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Information Technology Information technology has become increasingly important at Delfa. Computers are available at each station in the office as well as the printing, warehouse and distribution areas. After an incident where information was lost due to a power failure, Delfa purchased a second server to mirror the main server and hold duplicate information. As well, each Friday, a backup copy of the information stored in the server is downloaded to a removable storage device, which is taken to Delfa’s safety deposit box at the Princeton Canadian Bank.


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Appendix 1

Delfa Printing Ltd. Organizational Chart

As at October 31, 2008

Director of Production Ajay Singh

Director of Warehousing

and DistributionPat Giani

Director of Marketing and

Customer ServiceSimone Joly

President and CEO

Tom Delfino

Board of Directors

Finance

Controller Sue Welsh

Vice President

Chris Farugia

Accounting

Human Resources

Purchasing

Prepress

Printing and Finishing

Information Technology

Warehousing

Packaging

Shipping and Receiving

Marketing

Sales and Estimation

Account Management

Administrative Support


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Appendix 2

Delfa Printing Ltd. Environmental Scan – January 2008

Strengths

• Good reputation for high-quality printing and excellent service

• Wide range of document management services (printing, warehousing and distribution)

• Competitive pricing • Good location near major highway and

international airport • Dedicated employees • Good bank relationship • Good base of long-term customers

Weaknesses • Small share of printing business from

small- and medium-sized local businesses • Running out of warehouse capacity • Occasional bottlenecks in production • Occasional late deliveries • High debt load

Opportunities • Increasing technologically advanced

printing techniques and equipment • New services such as setting up printing

operations on customer’s premises and U-Print

• Popularity of print on demand is growing • Increasing demand for document storage

and management services • New automated tracking and delivery

systems

Threats • High local competition • Increasing competition from foreign

printers (e.g. China) – imports are growing faster than exports

• Fluctuations in cost of paper • Decreasing market for printed products

(e.g. forms) as a result of increasing digital alternatives

• Trend towards consolidation in the printing industry

• More companies investing in digital in-house printing facilities

Mission Statement Working in partnership with suppliers and customers, Delfa Printing Ltd. helps Canadian organizations of all sizes succeed by providing them with a wide range of high-quality printing and document management services at competitive prices.


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Appendix 3

Delfa Printing Ltd. Building Layout

Parking

Office and Prepress

(900 m2)

Street

Records (540 m2)

Printing and Finishing (9,810 m2)

Distribution (Packaging, Shipping and Receiving)

(810 m2)

Warehouse (5,940 m2)

Loading Dock


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Appendix 4

Delfa Printing Ltd. Condensed Income and Retained Earnings Statements

For the Years Ended October 31 (’000s)

2008 2007 2006 2005 2004

Revenues: Printing $21,379 $20,166 $20,588 $19,848 $19,154 Warehousing 2,881 2,732 2,643 2,356 2,412 24,260 22,898 23,231 22,204 21,566Cost of sales 16,955 16,148 16,213 15,544 15,039Gross profit 7,305 6,750 7,018 6,660 6,527Expenses: Variable selling and admin. 2,426 2,267 2,346 2,331 2,243 Fixed selling and admin. 2,899 2,788 2,751 2,732 2,699 Amortization 126 125 125 124 122 Interest expense 256 264 271 279 273 5,707 5,444 5,493 5,466 5,337Income before taxes 1,598 1,306 1,525 1,194 1,190Income taxes (35%) 559 457 534 418 416Net income $ 1,039 $ 849 $ 991 $ 776 $ 774

Gross profit percentage of sales 30.1% 29.5% 30.2%

30.0% 30.3%

Net profit percentage of sales 4.3% 3.7% 4.3% 3.5% 3.6% Opening retained earnings $4,609 $4,660 $4,569 $4,593 $4,519Net income 1,039 849 991 776 774Dividends (1,000) (900) (900) (800) (700)Closing retained earnings $4,648 $4,609 $4,660 $4,569 $4,593


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Appendix 4 (cont’d)

Delfa Printing Ltd. Condensed Balance Sheets

As at October 31 (’000s)

Assets 2008 2007 2006 2005 2004

Current Assets:

Cash $ 493 $ 438 $ 401 $ 332 $ 322Accounts receivable 2,205 1,991 1,873 1,882 1,782Inventory 756 700 639 624 625Prepaid expenses 190 189 185 182 180

3,644 3,318 3,098 3,020 2,909Other Assets: Equipment (net) 1,143 1,196 1,283 1,259 1,404 Building (net) 4,184 4,461 4,738 4,914 5,187 Furniture and fixtures (net) 371 349 374 360 315 Land 900 900 900 900 900 Future income tax and other assets 40 55 50 15 10 6,638 6,961 7,345 7,448 7,816Total Assets $10,282 $10,279 $10,443 $10,468 $10,725

Liabilities and Shareholders’ Equity Current Liabilities:

Accounts payable and accrued liabilities $ 1,256 $ 1,157 $ 1,179 $ 1,158 $ 1,245Current portion of long-term debt 138 129 121 113 106

1,394 1,286 1,300 1,271 1,351Long-term Liabilities: Bank loan (net of current portion) 730 784 834 880 923 Mortgage payable (net of current portion) 2,985 3,069 3,147 3,222 3,292 Future income tax and other liabilities 125 131 102 126 166 3,840 3,984 4,083 4,228 4,381Total Liabilities 5,234 5,270 5,383 5,499 5,732Shareholders’ Equity:

Common shares 400 400 400 400 400Retained earnings 4,648 4,609 4,660 4,569 4,593

5,048 5,009 5,060 4,969 4,993Total Liabilities and Shareholders’ Equity $10,282 $10,279 $10,443 $10,468 $10,725


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The Societies of Management Accountants of Alberta, Manitoba, New Brunswick, Newfoundland, Northwest Territories and Nunavut, Nova Scotia, Ontario, Prince Edward Island, Saskatchewan and the Yukon,

Certified Management Accountants Society of British Columbia, Ordre des comptables en management accrédités du Québec

May 2009

Case Examination

Additional Information

(Time Allowed: 4 hours)

Notes:

i) Candidates must not identify themselves in answering the question.

ii) All answers must be written on official answer sheets or in official electronic files. Work done on the question paper or on the Backgrounder will NOT be marked.

iii) Included in the examination envelope is a standard supplement consisting of formulae and tables that may be useful for answering the question.

iv) Examination materials MUST NOT BE REMOVED from the examination writing centre. All used and unused answer sheets, working papers, Backgrounder, Additional Information, the supplement and, if applicable, a USB key containing electronic answer files must be sealed in the examination envelope and submitted to the presiding officer before the candidate leaves the examination room.

v) Only the following models of calculators are authorized for use on the Case Examination: 1. Texas Instruments TI BA II Plus (including the professional model) 2. Hewlett Packard HP 10bII (or HP 10Bii) 3. Sharp EL-738C (or EL-738)


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Delfa Printing Ltd. (Delfa) Additional Information

Update In 2008, Delfa’s printing and warehousing services operated at close to full capacity and customers were satisfied with the quality of Delfa’s products and services. As a result, the organizational performance targets for 2008 (i.e. overall net profit of at least 4.0% of sales; 5% increase in printing revenues; 5% increase in warehousing revenues) were met, and bonuses were paid to all employees. The Canadian economy slipped into a recession at the end of 2008, which continued into 2009. Consumer spending began to slow down and the value of the Canadian dollar decreased. The effects of the recession on the printing industry were mixed. World prices for fuel and paper decreased, thereby reducing the production costs for the printing industry; however, demand for printed material also decreased. A few printers went out of business, and used offset printing presses were becoming available at inexpensive prices. Being cautiously optimistic, the board of directors set the 2009 targets at maintaining revenues at the same levels as in 2008 and achieving a net profit of 4.0% of sales. The recession did not affect demand at Delfa for the first six months of fiscal 2009; however, some customers began to take longer to pay their invoices. International Insurance Corporation (IIC) On May 1, 2009, Chris Farugia received a call from one of Delfa’s large customers, International Insurance Corporation (IIC). He was told that IIC had just been acquired by the Global Insurance Organization (GIO), one of the world’s largest insurance companies, and that, when IIC’s contract with Delfa ends on October 31, 2009, all of IIC’s printing business will be going to American International Printer Inc. (AIPI), which is currently handling all of GIO’s printing needs. AIPI uses leading-edge technology and offers advanced services to its customers. For example, in addition to providing short-run print-on-demand services at costs almost as low as long-run offset print jobs, AIPI offers job tracking, whereby customers can electronically order, proof and track their printing jobs online. This technology is currently not utilized at Delfa. Ready and Able Printing Ltd. (R&A) At a chamber of commerce meeting on April 30, 2009, Tom Delfino was approached by Jacques Perrier, owner of Ready and Able Printing Ltd. (R&A), with an interesting offer. Perrier had decided to sell his business and was looking for a buyer. Although their businesses were located in the same urban industrial area and they competed for the same local printing jobs, Perrier and Delfino had worked together on many community projects and had formed a friendship based on mutual respect. Perrier indicated that he would be willing to sell all R&A’s shares to Delfa for $3.8 million, with $2.3 million due upon closing the deal and the remainder payable at $500,000 per year for three years at


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an annual interest rate of 6%. The next day, Perrier sent Delfino a copy of R&A’s latest condensed financial statements (see Appendix A) and the following information:

1. R&A replaced most of its offset presses with smaller digital equipment over the past few years. This new equipment expanded the company’s operating capacity by 20%, and by 2008 the equipment was operating at 80% of capacity. The expected remaining useful life of the printing and finishing equipment is five years.

2. Approximately 90% of revenues are generated from a base of about 250 regular customers, and the remainder are generated from walk-in customers. It is expected that all customers will continue to do business with the new owner if R&A’s operations stay in the current location.

3. R&A leases an industrial building for $20,000 per month. The lease is renewable every five years and there are currently two years left on the lease. R&A has been considered a model tenant for the past 18 years.

4. All of R&A’s 40 employees are unionized. The switch from offset to digital printing has resulted in significant staff turnover because some workers were not willing to upgrade their skills. About half the current workers are young with little work experience, but are well trained in the newer technologies.

Delfino has always believed that profits are maximized by keeping the high-volume offset printers running continuously on large printing jobs and wondered whether buying R&A would be a good fit with Delfa. Recently, he read an article in the Canadian Printing Industries Association’s journal that indicated one-third of all commercial document print jobs are now being completed using digital equipment — only about 10% of jobs at Delfa use digital equipment. Before Delfino had a chance to talk to anyone about the R&A offer, Farugia brought him the news about IIC and a couple of ideas for minimizing the damage from the loss of business. Northern Complete Insurance Inc. (NCI) Two years ago, Northern Complete Insurance Inc. (NCI), a much larger insurance company than either of Delfa’s current customers, switched from a Canadian printer to one from China. At that time, NCI requested Delfa to store and manage the distribution of the printed documents that were provided by the Chinese printer. Because Delfa’s warehouse was close to full capacity, Delfa had to decline NCI’s offer. After receiving the news from IIC, Farugia immediately contacted NCI and learned that they were still interested in outsourcing their document storage and distribution needs, if they were given favourable rates and privileges. NCI was prepared to sign a five-year contract to rent 1,700 bins in the warehouse at a fee of $70 per month per bin, which is $5 less than the average rent received from other customers. NCI has a good credit rating and usually pays accounts within 30 days. As well, it would be willing to set November 1, 2009, as the effective start date for the contract.


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General Printing Services Inc. (GPS) Simone Joly recently mentioned to Farugia that General Printing Services Inc. (GPS) was searching for a new printer to continuously print large volumes of books and magazines on offset printing machines and mail them to subscribers. Warehousing would not be required. The contract would be for five years, beginning November 1, 2009. Reliable industry sources indicate that GPS requires its long-term suppliers to be ISO 9000 certified or at least in the process of becoming certified, and is willing to pay reasonable prices in return for high-quality products and services. As well, the company has an excellent credit rating but insists on being billed once per month with payment terms of net 60 days. Joly estimates that the contract would generate annual revenues of $6 million at Delfa’s regular rates. Emergency Meeting – May 4, 2009 A senior management meeting was called to discuss the new developments. Sue Welsh indicated that the IIC account currently generates $3.5 million in annual revenues and that the loss of this account would jeopardize Delfa’s ability to meet the bank covenant in fiscal 2010. She provided projected 2009 data by profit centre and by customer group, assuming business continues to operate in the second half as it did in the first half of the year. She also provided estimated 2010 data without the IIC account assuming no further loss of customers. (See Appendix B.) Farugia indicated that, even with the loss of the IIC account, there would be insufficient warehouse space available to accommodate the NCI contract:

Capacity – number of bins 3,300 Projected rentals for 2009 (97% of capacity) 3,200 Free bins in 2009 100 Loss of IIC account 1,300 Projected free bins in 2010 1,400 Bins required for NCI account 1,700 Shortage of bins 300

Therefore, Delfa would have to either refuse business from some of the current small customers to free up 300 bins for the NCI account or expand the warehouse space. Upon reviewing the data provided by Welsh, Pat Giani suggested that Delfa should expand the warehousing side of the business. She indicated that 1,350 square metres of warehouse space has recently become available in a nearby industrial mall which would accommodate 10 rows of 25 columns of bins (i.e. 750 bins). The space could be rented for $72,000 per year and the fixed overhead costs would amount to about $150,000 per year. Variable costs would be the same as Delfa’s current variable warehouse costs of $225 per bin per year. An investment of $60,000 would be required for shelving and equipment that would have a useful life of 15 years. There is sufficient available packaging and distribution capacity at Delfa’s existing facility; therefore, when


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documents need to be moved from storage, they can first be taken to Delfa, where they will be packaged and distributed as required by the customer.

Joly supported Giani’s idea and indicated that demand for warehousing at a $75 monthly fee per bin will remain high even if the NCI contract is accepted at a $70 monthly fee per bin. However, if any customers are refused warehousing services, these customers will likely not renew their contracts for printing services. Joly also indicated that customers were increasingly providing print-ready digital files and that digital printing jobs were often backlogged. She also complained that, on several occasions over the past year, an early, incorrect version of a digital proof was used in the production process. If the account managers had not caught these errors in their inspections of the early copies of the printed product, the entire jobs would have had to be scrapped and rerun. Welsh added that the cost of overtime needed to ensure that delivery deadlines are met is becoming too high. As a result, it is projected that the net profit target for 2009 will not be met (resulting in no bonuses). Also, some employees have complained to her that the overtime is burning them out. Ajay Singh indicated that he would prefer Delfa to focus more on its core business of printing. Currently, there is no available space in the printing and finishing area to add any more equipment. Therefore, to accommodate the GPS order, Delfa would have to expand the printing capacity by removing four rows of warehouse bins (i.e. 2,160 square metres, equivalent to 1,200 bins) and adding more offset printing presses and finishing equipment. The equipment could be leased for five years at $200,000 per year. The layout of the printing and finishing operations would need to be reorganized at a cost of $50,000, and Delfa would need to pursue ISO certification, which would take two years and cost approximately $90,000 per year. The overall variable cost as a percentage of sales would be the same for GPS as for other customers.

Delfino briefed the senior management team about the R&A acquisition opportunity and indicated that the estimated annual cost savings before taxes from synergies (e.g. marketing, administration) will be $250,000. Singh added that R&A is using new software for scheduling digital printing jobs that is more efficient than the software used at Delfa. He feels that using this software at Delfa would eliminate the current bottlenecks. The software costs $100,000 initially plus an annual licensing fee of $30,000 per location for organizations with multiple locations. If R&A is acquired, Delfa can avoid the initial software costs and just pay an additional annual licensing fee for using the software at Delfa’s current facility. Management Report The senior management team decided to ask the new assistant controller, Kim Cheung, to analyze Delfa’s current situation, update the environmental scan, analyze the various issues and alternatives facing Delfa, and make recommendations for dealing with the loss of IIC’s business and resolving any other concerns. Delfino indicated that it is


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imperative to ensure that the times interest earned ratio does not fall below three times as stipulated by the bank. He also asked whether Perrier’s price for R&A’s shares is fair. Additional Information 1. Delfa’s bank is willing to lend up to $2.5 million to Delfa for new growth opportunities.

The loan would be repayable over five years at an annual interest rate of 6%. 2. Each column of three bins requires 5.4 square metres of floor space (i.e. the total

warehouse area is 5.4 square metres per column x 100 columns per row x 11 rows = 5,940 square metres of floor space).

3. In the printing department, the digital printing equipment has been operating at full capacity, whereas the offset printers have been operating at about 80% of capacity. Because of high setup costs, the cost of offset printing is lower per sheet for large runs but higher per sheet for small runs compared to the cost per sheet for digital printing.

4. Joly asked Cheung to consider another option for dealing with the NCI contract. Instead of renting warehouse space or losing the business of current customers, Delfa could shorten print runs for some customers to open sufficient warehouse space for NCI’s needs. The customers would not be told, and Delfa would continue charging them for warehouse bins that are actually storing NCI products. The extra revenues should be sufficient to cover the extra costs of shorter print runs and any overtime required to fulfil these customers’ scheduled deliveries.

5. Delfa expects a minimum after-tax return of 10% on capital investments. 6. There is no resale market for shelving and warehousing equipment. 7. The maintenance crew chief has reported that the alarm system is not always armed

when he arrives with his crew at night, usually two hours after the plant closes. 8. Over the past few months, shortages in warehouse inventory have been discovered

when filling distribution orders. As a result, employees were required to work overtime to reprint the required documents at no extra charge to the customer in order to meet delivery times. It is unknown whether the shortages were caused by theft or by inventory tracking errors.

REQUIRED: As Kim Cheung, prepare a report for the senior management team of Delfa Printing Ltd. advising them on the business and functional strategies to follow in order to deal with the loss of IIC’s business and ensure that the bank will not demand immediate repayment of the loans. In addition, the report should address any other organizational issues and concerns requiring attention. Include details of your analyses, supported recommendations and an action plan to implement your recommendations. In undertaking this task, you will need to take into consideration your background knowledge of the company and industry as well as the additional information provided above.


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Appendix A Ready and Able Printing Ltd.

Financial Statements (in ’000s)

Balance Sheets as at December 31 2008 2007 Assets: Cash and equivalents $ 151 $ 175 Accounts receivable 741 598 Inventory 309 387 Prepaid expenses 70 68 1,271 1,228 Plant and equipment (net) 1,122 1,325 Total assets $2,393 $2,553

Liabilities: Accounts payable and accrued liabilities $ 590 $ 553 Income taxes payable 54 49 Current portion of long-term liabilities 152 149 796 751 Long-term liabilities 748 900 Total liabilities 1,544 1,651 Shareholders’ equity: Common shares 200 200 Retained earnings 649 702 849 902 Total liabilities and shareholders’ equity $2,393 $2,553

Income Statements for the Years Ended December 31 2008 2007 Revenue $9,500 $9,136 Cost of sales* 6,014 5,810 Gross profit 3,486 3,326 Expenses: Variable selling and administration 1,164 1,119 Fixed selling and administration 1,479 1,475 Building lease 240 240 Interest 65 64 2,948 2,898 Income before taxes 538 428 Income taxes (35%) 188 150 Net income $ 350 $ 278

* Variable costs $5,096 $4,900 Fixed costs 636 635 Amortization 282 275 Total cost of sales $6,014 $5,810


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Appendix B Delfa Printing Ltd.

Projected 2009 and 2010 Data by Profit Centre ($ amounts in ’000s)

Projected Net Income for the Year Ending October 31, 2009:

Printing Warehousing Total Revenue $21,400 $2,880 $24,280 Cost of sales: Variable costs 13,980 720 14,700 Fixed costs ($127 per m2) 1,246 754 2,000 Amortization (note 1) 585 117 702 15,811 1,591 17,402 Gross profit 5,589 1,289 6,878 Expenses: Variable selling and administration 2,180 300 2,480 Fixed selling and administration (note 2) 2,556 344 2,900 Amortization (note 2) 111 15 126 Interest (note 2) 218 29 247 5,065 688 5,753 Income before taxes 524 601 1,125 Income taxes (35%) 184 210 394 Net income $ 340 $ 391 $ 731

Gross profit percentage of sales 26.1% 44.8% 28.3% Contribution margin percentage of sales 24.5% 64.6% 29.2% Net profit percentage of sales 1.6% 13.6% 3.0% Capacity utilization 89.2% 97.0%

Notes: 1. Amortization (including a portion of the building) is allocated based on usage. 2. Fixed expenses are allocated based on percentage of sales. Projected Data by Customer Group for 2009 Fiscal Year:

Revenue Number of Bins Printing Warehousing Total

IIC $ 2,330 $1,170 $ 3,500 1,300 Other large customers 14,790 1,278 16,068 1,420 Small customers: With warehousing 1,229 432 1,661 480 Without warehousing 3,051 - 3,051 - Total $21,400 $2,880 $24,280 3,200

Estimated 2010 Data Without IIC Contract Assuming No Further Loss of Customers:

Printing Warehousing Total Revenue $19,070 $1,710 $20,780 Contribution margin $4,672 $1,105 $5,777 Income before interest and taxes $174 $(125) $49 Interest expense $218 $20 $238 Times interest earned 0.8 (6.3) 0.2


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General Comments on Performance Delfa Printing Ltd.

Case Background and Required Element The May 2009 Case Examination focuses on Delfa Printing Ltd. (Delfa), a Canadian-controlled private corporation that offers commercial printing and warehousing services to businesses of all sizes. As the Canadian economy slips into recession, Delfa loses an important contract with International Insurance Corporation (IIC) and faces the possibility of having its bank demand immediate repayment of its loans. The senior management team identifies the following three main alternatives that might address the loss of IIC’s business and ensure the bank will not call the loans:

1. Acquire Ready and Able Printing Ltd. (R&A), provided the asking price is fair. 2. Enter into a contract with Northern Complete Insurance Inc. (NCI) for

warehousing. 3. Enter into a contract with General Printing Services Inc. (GPS) for offset printing.

Within the above alternatives, management also identifies capacity constraints in both the warehousing and printing operations, and suggests the alternative of leasing nearby space to address the warehousing constraint. The Required element of the case is as follows:

As Kim Cheung, CMA, prepare a report for the senior management team of Delfa Printing Ltd. advising them on the business and functional strategies to follow in order to deal with the loss of IIC’s business and ensure that the bank will not demand immediate repayment of the loans.

The examination writer is expected to play the role of Kim Cheung and prepare the requested report. In preparing the report, the writer is expected to demonstrate proficiency in functional and enabling competencies. General Approach and Expectations Throughout Year 1 of the Strategic Leadership Program (SLP), candidates have been taught to apply the Steps for Approaching Business Strategy. They have completed several practice case examinations using these Steps, have received written feedback on their performance, and have revisited the approach repeatedly during their Interactive Sessions. Because of this attention, expectations related to candidates’ general approach and performance are high.


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Recommended Response Approach The examination writer should use a systematic approach to analyze the alternatives and solve the issues in the case. For this case, this approach involves the following elements:

• Review the current situation given the changes in the environment outlined in the Additional Information (e.g. update the SWOT analysis; recognize the objectives, constraints, and preferences; and assess Delfa’s current financial situation). From this review, gain an understanding of the important facts and identify the issues and alternatives that require analysis.

• Analyze the alternatives for dealing with the issues. Analysis should include a

qualitative assessment of the pros and cons and a quantitative analysis of the profitability and feasibility of the alternatives. Appropriate balance and depth are expected in these analyses. Relevant financial and non-financial information documented in the situational analysis and specific facts provided in the Additional Information pertaining to the alternatives should be interpreted and used. As well, appropriate functional tools and concepts should be applied correctly.

• Make supported recommendations and provide evidence that the recommended

strategy meets the bank’s constraint of a times interest earned ratio of at least 3.0.

• Analyze a few minor issues requiring attention and develop an implementation

plan. The analysis of the minor and implementation issues should be appropriately incorporated into the various sections of the report. The implementation plan should include actions to support the major recommendations and address the current weaknesses.

• Prepare the response in the form of a formal report to Delfa’s senior

management. The report should advise its audience of the proposed recommendations and implementation plan.

Responses that Exceed Expectations In general, the best responses show good understanding of the information provided in the case. They draw on this information to provide relevant and useful analysis. They demonstrate sound judgment. They apply an appropriate approach to solving business problems. The following are reflected in these responses: 1. Systematically collecting data relevant to both the internal and external

environments (situational analysis) and recognizing the most relevant changes between the established SWOT in the Backgrounder and the current situation in the Additional Information.


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2. Using this data to analyze the alternatives and minor issues. 3. For each of the alternatives analyzed, providing convincing answers to each of the

following four questions:

a) Is it profitable? (Uses decision and profitability analysis tools—F3)

b) Does it provide an acceptable return on investment? (Uses capital budgeting tools such as net present value—F5)

c) Is there money available to pay for it? (Compares financing required against

financing available—F5)

d) Does it address the constraints/targets set by key stakeholders while managing appropriate risks and organizational issues? (Calculates and compares financial measures, manages risk, and manages organizational resources—F2, F4, F5, F6)

The most convincing proposals are those that are logical, feasible, and supported with accurate quantitative evidence backed by reasonable assumptions, as well as a balanced qualitative analysis that considers a wide scope of factors and perspectives.

4. Providing recommendations consistent with the analyses. 5. Providing a plan that enumerates the what/who/when/how much needed to

implement the recommendations. These responses clearly follow the Steps for Approaching Business Strategy. Responses that Meet Expectations Responses that meet expectations follow a reasonable but often incomplete approach to the case. In particular, these responses reflect the following differences from and similarities to the best responses: 1. Collecting fewer points relevant to the changes that have occurred within both the

internal and external environments (situational analysis). 2. Using some of this data to analyze the alternatives and minor issues. 3. Analyzing fewer alternatives, in less depth, and usually with weaker quantitative

analysis.


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4. Frequently considering each of the issues and alternatives in isolation, without providing a global, comprehensive view (e.g. considering only a few of the environmental factors instead of a wide scope of factors, failing to consider the interrelationships among the issues and alternatives, failing to consider how an alternative affects the functional units within the company).

5. Providing recommendations consistent with the analyses. 6. Providing a limited implementation plan, frequently without addressing all of the

what/who/when/how much questions related to the strategic recommendations. Responses that are Below Expectations In weak responses, the alternatives are not sufficiently analyzed, one or two aspects of the case are overemphasized or, conversely, many aspects are addressed but only at a superficial level. Some weak responses reflect a simple approach that does not place enough focus on the important issues and alternative strategies, and does not effectively address the case in a comprehensive and integrative manner. For example, in analyzing the alternatives, this case requires the use of quantitative analysis to determine profitability, estimate future earnings, and compare these to the bank’s minimum required times interest earned ratio. Specific Comments on Candidate Performance Overall Performance Overall, performance on this examination was acceptable. Most responses

• reflect an effort to use a systematic process for problem solving and decision making,

• focus mainly on the alternatives identified by senior management,

• address the most important minor and implementation issues, and

• present a report in a reasonably acceptable format.

Positive Aspects of the Responses The following aspects were especially well done on this examination:

• SWOT update. Most responses provided a reasonable update of Delfa’s current situation.


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• Integrating the company’s strategic direction. Almost all responses included at least one reference to Delfa’s mission/targets/stakeholder preferences in their analysis of individual alternatives.

• Financial assessment. Most responses provided a reasonable assessment of

Delfa’s financial situation, usually touching on liquidity, coverage, and profitability ratios. Better responses also recognized the importance of accounts receivable turnover in this case.

• Qualitative functional concepts. Most responses addressed at least one or two

qualitative functional concepts, such as strategic management and ethics. Simone Joly’s suggestion for charging customers for unused warehouse space was widely recognized as unethical and potentially damaging to Delfa’s reputation.

• Format and communication. Most responses used an appropriate business

report format. They contained the necessary sections, used a mix of paragraphs and bullet points, and were reasonably articulate for a report written in four hours under examination conditions.

Not surprisingly, these are all areas that are common to the practice case examinations that candidates could “bring in with them” on exam day. For example, in this case, all the information needed to create the current financial assessment was provided in the Backgrounder. Similarly, candidates have learned that making references to the mission, constraints, and stakeholder preferences in the analysis of the alternatives is an easy way to demonstrate integrative thinking. Where Responses Could Improve The following are general suggestions for improvement that can also be applied to future examinations:

• Use all aspects of the current situation. Many responses made repeated references to the mission, constraints, stakeholder preferences, and weaknesses, and made limited use of other relevant factors. While these are relevant points, repeatedly relying on only a few factors shows limited audience awareness and generally results in weak analysis overall.

• Avoid unnecessary repetition and points of limited value in the situational

analysis. Many responses mechanically applied a template to the situational analysis, producing unnecessary repetition and wasting time in the process. Usually, identifying a point once is sufficient—it need not be repeated in a different category. For example, “good customer service” is one of Delfa’s strengths identified in the Backgrounder. Highlighting it again as an “Internal Key Success Factor” adds limited value for the recipient. Likewise, noting that “the bank has a preference for seeing its loans repaid” adds little value. A more


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valuable point is to specify the constraint for a minimum times interest earned ratio of 3 times and the consequences if this constraint is not met.

• Integrate the company’s overall strategic direction in the context of the

recommendations as a whole. This is far more powerful than considering the strategic direction in the analysis of a single alternative in isolation.

• Appropriately use relevant quantitative tools. In many responses, a net present

value analysis including the calculation of capital cost allowance (CCA) tax shields was provided for every alternative in this case—even though most of the alternatives do not require significant capital expenditures. Often, the net present value analysis included a grid that showed the present value for each cash flow item after taxes (thereby using up valuable examination time) rather than arriving at a total before-tax annual cash flow and then applying tax and the present value factor only once to the bottom line amount. As well, many of these responses did not specifically determine whether each of the contract alternatives (NCI and GPS) is profitable.

• Include all relevant inputs in the profitability analysis. In analyzing the profitability

and/or cash flow of the alternatives, many responses considered only revenues and a few specific costs (e.g. $200K equipment lease for GPS), but did not include cost of goods sold, contribution margin and opportunity costs.

• Consider relevant capacity constraints. Many responses recommended

accepting both NCI and GPS—without recognizing that these options cannot be accommodated together (3,300 Delfa bins + 750 from new warehouse - 1,900 required by current customers - 1,700 required by NCI - 1,200 equivalent bins for GPS = 750 short). These contracts together are feasible when a recommendation to turn away warehouse customers is made; or when some creative assumptions are made such as also recommending that Delfa acquire R&A and utilize some of its excess digital printing capacity. However, few responses considered either.

• Focus the response on the audience specified in the examination Required and

refrain from providing comments to markers. Many responses highlighted links for markers rather than arguing pros and cons for Delfino. For example, language like the following was common: “Warehousing is not printing—links to Backgrounder point about declining printing markets.” Delfino would not know about the “Backgrounder,” nor would he understand “links.”

• Show that the recommendations make sense as a package. Unless a response

recommends a single alternative, the recommendations must be considered together. Two common problems were evident here:


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o Responses that relied heavily on the “easy links” to mission, constraints, and stakeholder preferences frequently provided recommendations that were inconsistent with their analyses. For example, responses would argue that R&A was compatible with Delfino’s desire to grow in the printing industry, but NCI was incompatible with Singh’s preference for the core printing business. When such responses recommended both R&A and NCI, they left themselves with an unresolved contradiction.

o For this examination, the most credible recommendation is supported with

quantitative proof that Delfa can meet the bank’s required times interest earned ratio as a whole, including the loss of the IIC contract and adding the contribution from the recommended alternative(s). Most responses did not provide this support for their recommendation.


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Steps for Approaching Business Strategy 1. Overview Quickly read through the information to develop an understanding of the following:

a) Organization on which the case is based; b) Industry in which it operates; c) Major issues and specific opportunities/alternatives that need to be addressed; d) Information included in the exhibits (e.g. quantitative data, organizational charts,

etc.); e) Role that you are required to assume; f) Actions that you are required to perform; and g) Audience of your report (e.g. senior management, board of directors).

2. Situational Analysis

Read through the case in detail and begin developing a situational analysis. As you read, highlight or make notes on key information that will be used in developing a framework or planning structure for your analysis. For example, use a system such as code letters and words in the margins, to categorize the information (e.g. S for strength, KSF for key success factor, TX for tax rate, MI for major issue, O for external opportunity, etc.), or categorize and document the information directly in the response. Within the situational analysis, be sure to do the following:

a) Identify the stated or implied mission, vision, strategic direction, and strategic

goals. b) Determine the key stakeholders’ needs and/or preferences. c) Determine whether there are any constraints that require consideration or targets

that must be met. d) Scan the organization’s internal and external environments, and identify the

strengths, weaknesses, general opportunities, and threats (SWOT). Include an assessment of the organization’s current financial situation. Some tools that will help in identifying SWOT points include Porter’s Five Forces and PESTE, as well as analyses of ratios, trends, profitability, target customers, target markets, variances, etc. In a time-limited situation such as the Case Examination, if the information provided includes a high-level SWOT, it is not necessary to repeat these points or audit them. Focus on identifying new SWOT points based on information not previously available and the results of the financial assessment.

e) Within the SWOT analysis, identify the competitive advantages and the key success factors (KSFs) for the organization and/or industry (i.e. the critical opportunities and strengths of the organization that must be maintained or enhanced in any suggested recommendations). Also identify the key risks (i.e. the critical weaknesses and threats that must be eliminated or mitigated).


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3. Identification of Major Strategic Issues and Alternatives

a) Identify the major strategic issues that need to be addressed (e.g. specific business opportunities that should be considered, critical weaknesses and threats that must be eliminated or mitigated if the organization is going to be successful) and list them in order of importance.

b) Identify the alternatives for addressing the major strategic issues.

4. Analysis of Alternatives for Addressing the Major Strategic Issues

Analyze each strategic alternative both quantitatively and qualitatively, identify the pros and cons, and consider both internal and external factors (i.e. provide a balanced analysis). Demonstrate integrative thinking by considering the cause and effect relationships among the various factors, issues, and alternatives. Within the analyses, be sure to do the following: a) Deal with ambiguous or uncertain information by making reasonable

assumptions based on case facts, applying decision analysis under uncertainty concepts and tools, or performing sensitivity analysis. Clearly state and, if necessary, justify all assumptions made.

b) In the quantitative analyses, apply appropriate functional competency tools and concepts to analyze the relevant information (e.g. profitability analysis, net present value, return on investment, etc.). Interpret the results of all calculations.

c) In the qualitative analyses, provide a balanced discussion of the pros and cons of each alternative using case facts and the results of the quantitative analyses.

d) Identify (usually as a con) any specific risks associated with each alternative. e) Make specific references to the points made in the provided SWOT (in the Case

Examination) and the situational analysis performed in step 2 (e.g. discuss how the alternative uses the strengths, takes advantage of the opportunities, mitigates or eliminates the weaknesses and threats, meets the imposed constraints, etc.).

f) Consider each alternative from the points of view of the various stakeholders, and how it aligns with the organization’s mission, vision, goals, and/or strategic direction. As well, consider the effects of one alternative on another, or on other issues.

5. Recommendations

a) Rank each alternative in terms of important criteria (e.g. goals, important constraints, key success factors, specific targets, profitability, key stakeholders’ preferences, how easily the cons can be resolved, etc.). Consider whether the alternative sufficiently addresses the major strategic issues, is aligned with the organization’s overriding objective, is a good fit with with the internal and external environments, and makes good economic sense.

b) Clearly state your recommendation(s) for resolving the major strategic issues. Briefly support your choice of alternative(s) based on the most important criteria.


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c) Ensure that your recommendations collectively form a cohesive package that is feasible and viable. Provide proof in the report that the necessary aggregate resources (e.g. physical capacity, financing) either are available or can be readily acquired, that constraints are not breached, and that specific targets are met.

6. Implementation Plan

Create a plan for implementing the recommended strategies for resolving the major issues. In developing the implementation plan, be sure to do the following: a) Identify and analyze the implementation issues, such as those concerning

change management, acquiring the required resources (financial and human), and resolving the cons previously identified in step 4 for the recommended strategies.

b) Address the operational and other minor issues (e.g. ethical, internal control). Discuss how solving these problems can affect the implementation of the major recommendations, and/or how they affect other minor issues and weaknesses.

c) Make clear and actionable recommendations pertaining to the implementation issues and minor issues.

d) Provide an action plan to implement the strategic and operational recommendations that clearly defines each action, who is responsible, the critical due dates, and the resources required.

7. Financial Forecast

Prepare an appropriate financial forecast (e.g. projected net income, projected return on investment, projected cash flow, pro forma financial statements, etc.) taking into consideration the financial implications of the strategic, implementation, and operational recommendations made and stating all assumptions. Outline in the body of the report the expected future financial outcomes as a result of implementing the recommendations. Most of the calculations for this step should already have been completed in addressing steps 4, 5 and 6.

8. Written Report

Present your answer in a professional manner using a formal report format consisting of the following components in the following order: cover page, one-page executive summary that represents the “report in short” (i.e. summarizes all the major and most important minor issues and recommendations), table of contents (not required for the Case Examination), introduction, body (including analyses, recommendations, implementation plan, action plan), conclusion, appendices/exhibits, and references/bibliography (not required for the Case Examination). Present the contents of the report in a well-written manner that reflects an appropriate tone for the receivers of the report.


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Present the quantitative analyses in appendices, exhibits or tables, and reference them in the body of the report. Provide labels and audit trails for all calculations. Provide the details of the situational analysis (e.g. SWOT, ratios, benchmarking, etc.) in appendices, and summarize the highlights of the most important factors and issues in the body of the report.


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May 2009 Case Examination – Delfa Printing Ltd. (Delfa) Assessment and Solution Notes for Markers

The assessment and solution notes on the following pages provide descriptions of what the markers look for in the candidate responses and examples of various possible quantitative and qualitative analyses. They also provide indications of which competencies (e.g. E1, F3) are covered and occasionally references are made to the assessment guide components and attributes. The following abbreviations are used throughout to represent the six functional and four enabling competencies: Functional Competencies: F1 – Strategic Management F2 – Risk Management and Governance F3 – Performance Management F4 – Performance Measurement F5 – Financial Management F6 – Financial Reporting Enabling Competencies: E1 – Problem Solving and Decision Making E2 – Leadership E3 – Professionalism and Ethical Behaviour E4 – Communication OVERALL GENERAL EXPECTATIONS The candidates should follow the “Steps for Approaching Business Strategy” in answering the case (found in the Reference Materials section of the SLP website). Because this is a time-constrained assignment (4 hours) and a high-level SWOT analysis is provided in the Backgrounder (Appendix 2), the 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 unreasonable to expect candidates to provide a financial forecast that takes into consideration all the candidate’s recommendations, including those for operational issues (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. On the other hand, these solution notes do not include all the valid points that can be made. The recommendations are based on the analyses presented, which in turn are influenced by the assumptions made. 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. The following describe other general expectations:


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1. A reasonable amount of both quantitative and qualitative analyses of the current situation is provided.

2. The three main alternatives (R&A acquisition, NCI warehousing contract, GPS printing contract) are analyzed, both quantitatively and qualitatively.

3. Assumptions are clearly indicated. 4. Recommendations are clearly stated, supported and convincing. 5. A plan for implementing the recommendations and solving some of the

challenges presented by the recommended strategies is provided. 6. Some of the minor operational issues are analyzed and recommendations are

made to resolve these issues. 7. A financial forecast is provided that considers at least the main

recommendations. The forecast is presented as a calculation of projected income, a calculation of the projected times interest earned ratio, and/or a pro forma income statement.

GLOBAL MARKING A significant advantage of global marking is that the marker has the flexibility to adapt the marking guide to the approach taken by the candidate. There is no “right” answer; therefore, it is not possible (or fair) to favour one set of recommendations over another and, to some extent, one approach over another. However, some structures and processes used in answering the case are better than others. Markers are required to assess the answer as an entire package, focusing on the overall quality of the response and on whether the “Steps to Approaching Business Strategy” are applied effectively and systematically. Judgment must be used in interpreting the meaning of what is written in the response. The response should be read and interpreted from the point of view of the recipients of the report (i.e. senior management). Each point should be viewed in the context in which it is presented, not in isolation. If the meaning of a point is not obvious given the context, markers should not use their own bias as a filter in interpreting what is written in the response (i.e. try not to fill in the blanks with what you think should fill them). Poorly written points will be penalized both in the relevant analysis component and in the communication component. BREADTH, DEPTH AND BALANCE OF ANALYSIS [E1] One particularly challenging aspect of marking a time-restricted examination is in assessing the trade-offs between breadth, depth and balance of analysis. Candidates are expected to provide a balanced report that includes both quantitative and qualitative analyses of a reasonable number of issues and alternatives. Three aspects of breadth, depth and balance are assessed:


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1. Overall response – mainly breadth: An appropriate number of strategic, operational and implementation issues should be identified and analyzed in the response. This is primarily assessed in component 4a.

2. Situational analysis – mainly breadth and balance: An appropriate number and a fairly wide variety of relevant points (goals, preferences, constraints, KSFs, strengths, weaknesses, opportunities, threats, etc.) should be identified in the situational analysis. This is primarily assessed in component 1a. The breadth and balance of the current financial assessment is assessed in component 2a.

3. Issue analysis – breadth, depth and balance: In the analysis of an individual alternative or issue (strategic, operational or implementation), the following are expected to be reasonable given the time limit for the response and the data provided in the case:

a) the balance between quantitative and qualitative analysis, b) the number and variety of points considered in the qualitative analysis

(breadth), c) the balance between pros and cons, d) the depth of the discussion of the points considered, e) the range of relevant organizational functional areas (e.g. marketing,

production, HR, accounting, IT, etc.) considered (breadth and balance), f) the overall amount of quantitative analysis provided (breadth), and g) the amount of detail included in the quantitative analysis (depth – how far

the quantitative analysis drills down).

The breadth, depth and balance of the issue analysis are primarily assessed in component 4b. The reasonableness and accuracy of the analyses are mainly assessed in components 2 and 3. The depth and breadth of the situational analysis are assessed in components 1a) and 2a). The use of the data from the situational analysis in the analysis of the issues and alternatives (i.e. integrative points) is assessed mainly in component 1b, but also contributes to breadth, depth and balance of the issue analysis. Judgment must be used when a response is excessively brief, or when it provides an excessively in-depth analysis of only one or two alternatives, or when it uses the same tool several times. For example, when the same functional tool is applied for more than one alternative (e.g. calculations of times interest earned), there is a higher risk of making mistakes than when the tool is applied only once. Markers are advised to give credit for correct applications of a tool and to seriously consider whether subsequent (or prior) weaker uses of the tool merit a negative adjustment to the assessment. Complete accuracy in the quantitative analyses is not a major consideration – minor flaws caused by the time pressure of the examination may be forgivable. Overall, the marker should be looking for evidence of competencies being demonstrated in the response and a balanced answer.


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SITUATIONAL ANALYSIS (E1, E2, E3, F1, other functional competencies) The assessment of the situational analysis includes the quality, depth and breadth of both the qualitative (component 1) and quantitative (component 2) analyses of the current situation, and the identification and prioritization of strategic (major) and operational (minor) issues (attribute 4a). The major issues for this case can be identified as the need to develop a business strategy for dealing with the loss of a major customer and ensuring that the bank covenant continues to be met. The minor issues are usually identified as weaknesses in the SWOT analysis. The alternatives for addressing the major issues (e.g. acquire R&A, contract with NCI, contract with GPS, expand warehousing capacity) should be listed separately, not as opportunities in a SWOT analysis. Although a common problem in the candidates’ responses, this weakness should not be given much weight in the overall assessment. Prioritization of the issues and alternatives can be indicated clearly in a separate section of the response, implied by the sequence in which the issues and alternatives are addressed within the response, or implied by the relative emphasis placed on the various issues/alternatives. Note that it is acceptable to consider the alternative of expanding the warehouse capacity as a component of the NCI contract alternative or as a separate alternative. A mission statement is provided in the Backgrounder of the case (in Appendix 2). The goal implied in the Additional Information is to stay profitable in light of the loss of a major customer and the changing economic environment (e.g. the performance targets for 2009 are to maintain revenues at the same levels as in 2008 and achieve a net profit of 4% of sales). Candidates should recognize these and keep them in mind in their analyses of the issues and alternatives. Although not necessary, some candidates may propose a vision statement. Changes to the mission should not be proposed unless strong support is provided for doing so. Key stakeholder needs and preferences, as well as important constraints and targets, should be identified in the situational analysis. As well, the internal environment should be examined to reveal the major and minor issues that need to be addressed in order for the mission and goal to be achieved. Objectives and strategies can then be developed that capitalize on Delfa’s internal strengths, overcome its weaknesses, and address or resolve the major and minor issues. A financial assessment of Delfa’s current situation is also considered a component of the internal environmental scan. Various models and types of analyses may be used in conducting an internal scan, including analyses of strengths and weaknesses (in addition to the provided SWOT), ratios, trends, profit centre performance analysis, value chain, core competencies, etc. Internal risks and organizational KSFs are also revealed in the internal scan. Candidates should perform an external environmental scan (in addition to the provided SWOT) in order to reveal the key opportunities and threats (i.e. external risks) that exist or are expected to affect the industry. Once identified, strategies can be formulated that


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take advantage of the opportunities and avoid or reduce the impact of threats. Various models and types of analyses may be used in conducting an external scan, such as SWOT analysis, Porter’s Five Forces, PESTEL, profit pool analysis, stakeholder analysis, etc. Possible industry key success factors (KSFs) are also revealed in the external environmental scan. For ease of reference, the points made in the environmental scan will be referred to as SWOT points, regardless of the model/tool used. The SWOT points provided in Appendix 2 of the Backgrounder should not be considered in the assessment of the quality of the SWOT analysis. Instead of repeating the provided points from the Backgrounder, candidates are expected to mention some of the additional items that are relevant to the case issues in their environmental scan/SWOT analyses. However, the provided SWOT points should be used in the analysis of the issues and alternatives. Note that some of the SWOT points can be appropriate for more than one of the four classifications, depending on how the candidate identifies and justifies the point. For example, the trend towards consolidation in the printing industry can be viewed as an opportunity (given the alternative of acquiring R&A) or a threat (as indicated by the board of directors in the January 2008 SWOT analysis). Professional judgment must be used in determining whether a point is relevant and/or correct. See Appendix 1 for some examples of additional SWOT points in addition to those provided in the case Backgrounder that the candidates may provide in their responses. Financial Assessment (E1, F1, F3, F6): Candidates are expected to calculate four to six ratios for two or three years for Delfa. A good financial ratio analysis would include a balance of relevant ratios that cover the four general areas of financial analysis: liquidity, coverage, activity and profitability. One of the ratios should be times interest earned, which should be compared with the bank constraint of at least 3 times. These ratios should be correctly calculated and appropriately interpreted. See Appendix 2 for calculations and interpretations of many possible financial ratios for Delfa. Note that the interpretation of the ratios may appear in the SWOT analysis or separately in a financial analysis of the current situation. Some candidates may also provide an analysis of the profitability of the two profit centres (warehousing and printing). The better responses will recognize that although warehousing has a higher contribution margin percentage of sales, printing has a higher contribution margin per square metre (i.e. this is the constraining factor at Delfa). Identification of Issues and Alternatives (E1, F1) The identification and prioritization of the major issues and strategic alternatives (at the business and functional strategic level) are assessed in attribute 4a). The major


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overriding issue is the development of a plan for dealing with the loss of a large customer (IIC) and ensuring that the bank’s constraint is met. The loss of IIC results in a significant amount of unused capacity. Possible alternatives for utilizing this capacity and for improving profits and the times interest earned ratio are as follows: 1. Acquire Ready and Able Printing Ltd. (R&A) 2. Accept the Northern Complete Insurance Inc. (NCI) Warehousing Contract 3. Expand the Warehousing Capacity (can be considered an integral component of the

NCI contract alternative or as an implementation issue) 4. Accept the General Printing Services Inc. (GPS) Contract These alternatives are not mutually exclusive. Therefore, candidates may also identify combinations of these alternatives (e.g. acquire R&A and accept the GPS contract). Minor issues are usually identified in the situational analysis (e.g. weaknesses and threats) and are addressed in the implementation plan. Some of the minor issues that could be addressed are as follows:

a) Operational inefficiencies and capacity utilization (e.g. bottlenecks, backlogs, overtime, using incorrect version of digital proof, ISO certification, management of dockets and inventory, late deliveries, lack of digital printing capacity, managing warehouse capacity, lack of space for new printing equipment).

b) Information technology (scheduling software, on-line job tracking). c) Security issues (alarm system is not always armed when it should be, shortages

in warehouse inventory potentially due to theft, security of keys to building and files).

d) Ethical issue of Joly suggesting that customers be charged for warehouse bins that are actually storing NCI products.

e) Performance measurement and bonuses (profit centre targets and profitability, bonuses may not be paid).

f) Change management and human resources (cultural differences between Delfa and R&A, union versus non-union, experience and training of staff, turnover, burnout).

g) Increasing accounts receivable collection period. h) Dependence on a few large customers all operating in a similar industry.

Prioritization (E1) Appropriate emphasis should be placed on the important aspects of the case, in terms of both major and strategic issues/alternatives, and minor operational and implementation issues. For example, major issues and options are fully analyzed and minor issues are addressed in the implementation plan or a ‘minor issues’ section. The order in which the issues are addressed in the response will also provide a clue to the


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prioritization. It is not necessary for prioritization to be spelled out in the situational analysis. The following is evidence of weak prioritization: 1. Failure to consider the bank constraint (times interest earned ratio of at least 3

times). 2. Extensive analysis of matters that do not deal with the organization’s strategic

alternatives for utilizing the capacity freed up by the loss of IIC’s business, increasing profits and meeting the bank’s constraint.

3. Failure to consider major weaknesses and important operational and implementation issues.

4. Equal analysis of each issue with no indication of relative importance (note that options addressing a particular issue may have equal analysis).

5. Not recognizing strategic issues as such. 6. Overemphasis on one strategic alternative. 7. Overemphasis on minor operational issues. ANALYSIS OF ALTERNATIVES (functional competencies, E1, E2, E3) The overall quality of the analyses of the issues/alternatives in terms of depth, breadth, balance, perspective, etc. is assessed in attribute 4b). The quantitative aspects of the analyses are assessed in component 2. The qualitative aspects of the analyses that pertain to using functional concepts and tools are assessed in component 3. Using the information from the situational analysis in the analysis of the alternatives is assessed in attribute 1b). Identifying the ambiguities in the analyses is assessed mainly in attribute 4c), and the quality of the assumptions made to deal with the ambiguities is assessed mainly in components 2 and 3. The quality of the conclusions and recommendations pertaining to the strategic alternatives and issues is assessed mainly in component 5. Note that a good integrative point in the analysis of an alternative can be given credit in the assessment of components 1, 3 and 4. The three main alternatives (R&A, NCI, GPS) should be analyzed in the response. Better responses would also analyze the alternative of leasing additional warehouse space. The analyses should be relevant, consistent with case facts and tied to Delfa’s situation, and should make sense. For each alternative, the analyses should be of reasonable depth and breadth, and reflect an appropriate balance of quantitative and qualitative analyses, as well as an appropriate balance of pros and cons. Depth is demonstrated by the use of relevant case facts in the quantitative and qualitative analyses (e.g. complete and detailed calculation and interpretation of net present value, ratio analysis of R&A and value of R&A; detailed discussion of the pros and cons). Breadth is demonstrated by considering a variety of factors, issues and perspectives in the analyses (e.g. using various categories of SWOT points, addressing the effect of the alternative on various organizational functions).


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The analysis of an alternative should not be completely one-sided (which is evidence of bias) or superficial, or contain serious conceptual errors or unreasonable assumptions. Note that providing conclusions and interpretations of the results of the quantitative analyses is considered in assessing the depth of the qualitative analyses (component 4), whereas the quality of these conclusions and interpretations is assessed in component 2 (quantitative analysis). Throughout the analyses, a good understanding of various functional competencies should be exhibited. Appropriate functional concepts and tools should be applied to the case in an appropriate and accurate manner. As well, in cases of uncertainty, candidates are expected to make the most reasonable assumptions given the case facts. There are several appropriate approaches that candidates can use to develop their reports. Some will analyze the alternative of leasing the extra warehouse independently and others will consider this only as a component of the NCI alternative. Some will consider a combination of alternatives to determine whether there could be enough capacity to accept all the alternatives (e.g. use the excess capacity of R&A to provide digital printing to Delfa’s current customers, move some of the warehousing requirements to the leased warehouse, use the remaining excess space to expand the offset press printing capacity of Delfa to allow for taking on the GPS contract). See Exhibits 3 to 6 for some examples of relevant quantitative and qualitative analyses of some of the alternatives. Quantitative Analysis (F3, F5, F6) The quantitative analyses should include calculation of the impact that each alternative would have on the company’s net income and/or net cash flows. The times interest earned ratio should be calculated for each alternative, and/or for Delfa overall assuming all recommendations are accepted, and compared with the bank’s loan condition that it be at least 3 times. Candidates could attempt to calculate and compare the financing required versus available for the various alternatives (mainly just the R&A alternative) or for the overall recommendations. As well, candidates could consider whether each alternative or combination of alternatives generate a net profit of at least 4% of sales, which is one of the performance targets for 2008 and 2009. For the alternative to lease a warehouse, candidates may apply a capital budgeting tool, such as net present value (NPV) or internal rate of return (IRR). Appropriate application of NPV and IRR would include the following: 1. After-tax cash flows. 2. Appropriate investment/capital cost. 3. A 10% after-tax discount rate for NPV or target rate for IRR. 4. An appropriate time horizon (e.g. 5 years). 5. A CCA tax shield calculation for the investment in shelving and equipment.


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The net present value of the other alternatives may also be calculated. Some major weaknesses in applying NPV and IRR include the following: 1. Using a before-tax discount rate with after-tax cash flows, or some other

inappropriate discount rate (e.g. the 6% loan rate from Perrier and the bank), or applying the discount rate incorrectly.

2. Ignoring significant relevant costs/revenues. 3. Using a present value factor of 1 for all cash flows (i.e. not discounting cash flows). 4. Using an inappropriate number of years for annual cash flows (less than five years). 5. Inappropriate handling of amortization in determining cash flows (e.g. ignoring the

CCA tax shield for the investment in shelving and equipment, including amortization as a cash outflow, double counting the tax effect by calculating tax based on income after amortization and including it in the NPV calculation in addition to the CCA tax shield).

The payback method is acceptable as a supplementary method in addition to NPV or IRR, but it is not sufficient on its own because this approach ignores the time value of money. For the R&A alternative, candidates may provide an analysis of financial ratios and compare them to those of Delfa. As well, candidates should provide a calculation of the value of R&A to Delfa and compare the result against the $3.8 million price requested by Perrier. There are several acceptable methods of calculating the value of R&A (e.g. net asset value method, capitalized earnings method where future expected net income is discounted using the 10% desired rate of return). For the NCI contract alternatives, candidates will have to deal with the potential opportunity cost of turning away orders for 300 bins (assuming no additional warehouse space is rented). An assumption will be required regarding the amount of lost printing business associated with these orders. Candidates need to consider the capacity constraint in analyzing the alternatives of accepting the NCI and GPS contracts. Most candidates will realize that there is insufficient capacity to do both. In some cases, the candidate will attempt to determine whether renting the additional warehouse space and/or acquiring R&A will provide Delfa with sufficient capacity to accept both the NCI and GPS contracts. Most will consider only the capacity of Delfa and the external warehouse because there is no information regarding floor space at R&A – this is quite acceptable. However, some will make assumptions about utilizing the excess capacity at R&A (e.g. assume that R&A has the potential of generating $9.5M/80% = $11.875M of business and that transferring digital printing jobs from Delfa to R&A will free up sufficient capacity at Delfa to generate $11.875M - $9.5M = $2.375M of incremental printing revenues). The alternative of renting the additional warehouse space makes little sense if the NCI contract is not accepted because the loss of the IIC account frees up 1,300 bins. This should be recognized in the responses. Candidates should also make an assumption


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regarding the demand and price for warehouse space ($75 vs $70 per month per bin) if the additional space is rented. Other potential quantitative analyses include pro forma cash flow or income statements, calculation of the impact of the recommendations on financial ratios, and break-even analysis. Note that the candidates’ quantitative analyses will be very different, given the different assumptions they will likely make in preparing them. Their assumptions should be clearly stated and generally consistent with the case information. In assessing the quantitative analysis, markers should not spend a lot of time determining whether the answer is accurate. When the marking guide indicates that the accuracy of applying a functional concept is being assessed, the assessment should focus on the appropriateness of the concept for the issue being analyzed, the accuracy of the formulation of the analyses (does it make logical sense and include the appropriate components), and/or whether the correct values are used in the calculations. Arithmetic errors (e.g. 5 + 6 = 12) are ignored (give credit for the correct formula and substitution of the values, e.g. the “5 + 6”). Errors that are carried forward into other analyses are not penalized (i.e. only penalize once for an error). For example, if the result of one calculation is appropriately used as input into another calculation, credit should be given for the correct formulation and correct value for the second calculation if the error is carried forward correctly. The quality of the calculations and interpretation of the results are assessed in the quantitative analysis component (component 2). Note that the overall quality of the analyses will be affected by the reasonableness of the assumptions made. The assumptions should be clearly stated and generally consistent with the case information. Qualitative Analysis (functional competencies, E1, E2, E3) The qualitative analysis should focus on the advantages (pros) and disadvantages (cons) of the alternative. In assessing the quality of these pros and cons, consideration is given to appropriate use and interpretation of case facts pertaining to the alternative and to the integrative points linked to the situational analysis (see the “Integration” section). Under Case Examination conditions, providing 3-4 unique significant pros and 3-4 unique significant cons for each major alternative would be considered balanced and would likely 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 demonstrate enough depth of analysis, but would not demonstrate balance and could


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be evidence of bias. For this case, there are many more potential pros and cons in the analysis of the R&A alternative than for the other alternatives (see Appendix 3). Note that quantitative pros and cons may be made in the qualitative analysis. Candidates should include in the qualitative analysis the interpretation of the quantitative analyses. For example, indicating that renting the additional warehouse space will have a positive net present value of $X would count as a pro in the qualitative analysis of the alternative. This pro would be considered in assessing the balance, depth and breadth of the analysis. Some of the weaker candidates will simply provide quantitative points drawn from the case and will make no further use of these case facts. For example, for the alternative of accepting the NCI warehousing contract, some candidates will indicate as a con that there is a shortage of 300 bins and Delfa would have to refuse business from some of the current small customers to free up the required bins but will not provide any value-added qualitative discussion or determine the amount of the opportunity cost of turning away this business. These non-value-added quantitative points would not count in assessing the balance, depth and breadth of analysis in component 4b. Points included in the analysis of a particular issue that are not valid are not counted in assessing depth, breadth or balance of analysis. Attribute c) of component 4 assesses the use of case facts. If there are too many non-valid points used in the analyses (e.g. points that are not consistent with case facts), the response would not meet the expectations of this attribute. INTEGRATION (F1, E1, E2) Integrative thinking is demonstrated by discussing the cause and effect relationships among the various factors, issues and alternatives. In the analyses of the strategic and operational issues and alternatives, a superior response would refer back to the mission and goals of the organization; the significant strengths, weaknesses, opportunities, and threats of the organization; the key success factors; and the preferences of the various stakeholders. In the analysis of the issues, the case fact or specific point from the situational analysis (or from the SWOT provided in the case) that is being considered must be clearly specified (i.e. it should be explicit, not implicit, but does not have to be identified as a SWOT point). As well, to be considered a “link,” the point being made must clearly indicate cause and effect relationships, make sense, and be consistent with case facts. Integration may also be demonstrated by revealing links between strategic issues/alternatives, between implementation/operational issues, and between operational and strategic issues/alternatives. A superior analysis would consider many related factors together and reflect them clearly in recommendations that address all issues.


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The assessment for integration should reflect the quantity, quality and variety of the links that are identified in the response. In most cases, using the same SWOT point in the analysis of multiple issues should be given credit for only one link in the assessment of component 1, attribute b). For example, multiple links to the same strength are counted as only one link. However, considering the same SWOT point in the analysis of more than one alternative is considered in assessing attribute b) of component 4 (i.e. the depth and breadth of analysis of the issues and alternatives). The following are some guidelines for awarding a “link”: 1. Mission/Goals/Targets – The analysis of each alternative should indicate whether it

is consistent with the mission and/or whether it meets the goal of maintaining profitability. There is a maximum of one link to mission and one link to the board’s goals/targets (e.g. net profit of 4% of sales, same revenue as 2008).

2. Preferences – Stating if an alternative does or does not meet a specific

stakeholder’s preference is sufficient for a link. To be awarded a link, there must be a clear reference to a significant relevant preference (i.e. do not reward a link if the preference is inferred and not mentioned; the preference must be one of those indicated in Appendix 1). Credit for links to stakeholder preferences is limited to a maximum of three links. Multiple links to the same preference are counted as a single link.

3. Constraints – Calculating the times interest earned ratio and comparing it to the

bank’s constraint of at least 3 times 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 (maximum of one link).

4. Industry KSFs – No links are allowed to industry KSFs. 5. Strengths/Internal KSFs/Competitive Advantages A link to a strength must indicate how the option or issue being discussed would

strengthen or use a strength. As well, indicating as a con that an alternative will weaken or destroy a strength is a link. Indicating that an alternative does not use a strength is not considered a link. There is no limit on the number of links to strengths.

6. Weaknesses, Minor/Operational Issues, and Implementation Issues A link to a weakness/operational issue/implementation issue must a) address how the alternative or action will solve the weakness/issue, or b) use the weakness/issue for justification for not doing something, or c) discuss how the alternative or action will worsen an existing weakness. Using a weakness as a con against an alternative when it is not a reasonable reason

for rejecting the option is not a link. To count as a link from one weakness or issue to another, both must be resolved (e.g. indicate how the suggested solution to one


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issue would also resolve another issue). There is no limit on the number of links to weaknesses, minor/operational issues or implementation issues.

7. Opportunities A link to an external opportunity must indicate how to take advantage of the

opportunity. Indicating that an alternative does not exploit an opportunity is not considered a link. There is no limit on the number of links to general opportunities.

8. Threats/External Risks

A link to a threat must 1) use the threat in the analysis as justification for not doing something, or 2) indicate how the option or action being discussed would address a threat. There is no limit on the number of links to threats.

9. Financial Assessment No links are allowed to financial assessment. Note that for purposes of assessment,

if a candidate analyzes the profitability of the profit centres in the SWOT analysis and then uses the information in the analysis of the options (e.g. choosing between the NCI and GPS contracts), give credit for the analysis in both the SWOT financial assessment and the quantitative analysis of the options (component 2), but do not give credit for an integrative link (attribute 1b).

In Appendices 3 to 5, some of the relevant points that can be made in the analyses of the alternatives are provided. For each point, there is an indication of whether it is a link (integrative point), a valid point and/or a case fact. RECOMMENDATIONS (E1, E2, functional competencies): Conclusions and recommendations are expected to be clearly stated. Although they may appear anywhere in the response, a superior response would provide a conclusion at the end of the analysis of each individual alternative and wait until all alternatives are analyzed before making a final recommendation for resolving the issue. The conclusions and recommendations should make sense considering the situation of the organization and the candidate’s analysis. Recommendations should be logical, relevant to Delfa’s situation, consistent with the analysis, convincing to the reader of the report, and useful in addressing the main issues. Support for the overall recommendation should be provided and should focus on the most important criteria (targets, goals, constraints, KSFs). The support could be presented as a decision matrix or a brief explanation of why one option was chosen over another. It could also include references to the analyses of the alternatives. Candidates will need to choose a combination of recommendations that is feasible for Delfa. For this case, support should include quantitative analysis that proves that the recommended actions would provide a times interest earned ratio of at least 3 times. As


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well, there should be proof that there will be sufficient capacity for the recommended alternatives. Demonstrating that the goals of achieving a net profit of 4% of sales and maintaining revenues at 2008 levels would also be appropriate. IMPLEMENTATION PLAN (E1, E2, Functional Competencies) The implementation plan should address how Delfa should deal with the disadvantages (cons) of the recommended options as well as other implementation issues. In addition, the issues identified in the situational analysis (e.g. weaknesses, threats, risks, uncertainties) that have not been addressed or resolved by the implementation of the recommended alternatives should be addressed. In addressing these issues, the candidate should discuss the implications of the issue and recommend ways to resolve them. These recommendations should be clearly stated and actionable. In most cases, it is insufficient to indicate that an issue “needs to be resolved” or “further investigated.” An exception is the issue regarding the reason for the shortages in warehouse inventory; because the cause is not known, it is acceptable to recommend that the cause be investigated. Note that the identification of the operational weaknesses is assessed in attribute 1a) (e.g. SWOT) and 4a) (issue identification and prioritization). The identification of the implementation issues is assessed in attribute 1c). The quality of the qualitative analyses and the specific recommendations for resolving the weaknesses, operational issues, and implementation issues are mainly assessed in component 3 (i.e. demonstration of appropriate application of functional concepts). If there are any supporting quantitative analyses, they would be assessed in component 2. The overall quality of the recommendations for resolving the operational/minor weaknesses and the implementation issues in terms of being feasible, logical, realistic, supported and convincing is assessed in component 5. Candidates are expected to address the minor issues either in the evaluation of the major issues or in the implementation plan/operational issue analysis section of the response. In most cases, only qualitative analysis will be possible. The analysis should make use of the information provided in the case and should not be based simply on theory. Action Plan (E2) Candidates should provide an action plan that indicates the tasks that need to be performed, who should perform them, and when they should be done. Where possible, the costs of the action should be provided. It is acceptable for candidates to make assumptions regarding the costs; however, these assumptions should be reasonable and consistent with the case facts. The action plan should cover the major recommendations and some of the minor recommendations. A table or chart can be used to effectively present an action plan.


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Financial Forecast (F5, F6) Step 7 of the “Steps for Approaching Business Strategy” is the preparation of an appropriate financial forecast that summarizes the effects of the recommendations on the company’s future financial position. This can take the form of pro forma financial statements, or projected net income, cash flow or times interest earned ratio. Given the four-hour time constraint, it is not likely that candidates will have time to prepare a complete set of pro forma financial statements. Some candidates may provide a calculation of the expected net income or income before interest and taxes for future years based on a clear set of assumptions in the analyses of the alternatives or in the support for the recommendations. APPLICATION OF FUNCTIONAL COMPETENCIES 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. Attribute 3a): Strategic Management (F1): 1. Analysis of the mission and goals/targets, and revisiting them in light of the

recommended strategy. 2. Alignment of activities to goals/objectives. 3. Assessing the target customers/target market (e.g. dependence on few large

customers; geographic markets such as Canada and the U.S.; customer types such as insurance and non-bank financial institutions, small local companies).

4. Value chain analysis. 5. Strategic aspects of the analyses of the issues and alternatives (e.g. impact of

alternatives on quality of product and/or services). 6. Recommendation of reasonable business and functional strategies. 7. Consideration of competitive business strategies (cost leadership, differentiation). 8. Consideration of value disciplines (operational excellence, customer intimacy,

product leadership). 9. Matching organizational structure/design to strategy. 10. Alignment of implementation plan to Delfa’s available resources and success

factors. 11. Change management issues (communication of change, change agents, dealing

with morale issues, merging of different cultures, etc.). 12. The role of various functions on the successful implementation of the recommended

strategies.


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Risk Management, Internal Control, Governance, Environmental and Ethical Issues (F2, E3): 1. Enterprise risks and risks associated with the various strategic alternatives (e.g. risk

of losing another large customer, risks associated with turning away warehousing business to make room for the NCI contract).

2. External risks and environmental issues (e.g. effect of trend of consolidation in the printing industry, reduced demand for printing, environmental concerns re printing industry).

3. Internal control (e.g. alarm system not set after the plant is closed, warehouse inventory shortages, security of building keys).

4. Procedures for sharing, transferring, and reducing risks. 5. Ethical issues and role of management incentives in achieving organizational

strategies/goals (e.g. Joly is motivated to suggest that Delfa charge some customers for renting bins that are actually storing NCI products as a means of creating capacity to accept the contract and increase income such that the target would be met and bonuses would be paid).

6. Governance considerations (e.g. succession planning, infrequency of board meetings and limited scope of responsibilities of the board).

Attribute 3b): Performance Management (F3): 1. Management of revenues and costs (e.g. materials, labour, distribution, high cost of

overtime, cost allocation to profit centres, etc.). 2. Pricing (e.g. discussion of pricing of warehouse bin rentals). 3. Operations management (e.g. production bottlenecks, digital printing backlogs, using

wrong proofs in printing, overtime, burnout of employees, no space for new printing equipment, ISO certification, inventory management, hiring, training and experience of employees at Delfa and/or R&A, impact of alternatives on operations and efficiencies, supply chain management, job tracking technology).

4. Marketing. 5. Management information systems (e.g. printing docket system is highly manual,

electronic inventory file for the warehousing of printed material may not be reliable, information systems requirements for supply chain management, product distribution, customer relationship management, financial accounting).

Performance Measurement (F4): 1. Human resource issues related to incentives and compensation systems (e.g.

remuneration 10% lower than for unionized workers in the industry, motivation, marketplace advantages/disadvantages, ethical issues related to compensation system).


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2. Organizational performance measurement considerations (e.g. industry benchmarks, performance evaluation of responsibility centres, performance targets in light of environmental changes).

Financial Management (F5): 1. Short- and long-term financing (e.g. determine sources of financing,

consider/discuss bank loans, effect of customers’ delay in payment, required increase in working capital resulting from GPS’s policy of paying net 60 days).

2. Financial forecasting considerations. 3. Business valuation (e.g. discuss the fairness of the price for R&A shares). 4. Financial and operating risks (e.g. foreign currency exchange risk, translation risk,

transaction risk, use of hedging to deal with risk). 5. Tax consequences of decisions (no discussion of tax implications is expected from

candidates other than in the net present value calculations). Financial Reporting (F6): 1. Financial accounting issues (discussion of financial accounting issues is not

expected for this case). PROFESSIONALISM AND WRITTEN COMMUNICATION (E3, E4) Candidate responses should be in the form of a formal report. Professional language and tone should be used, and the report should reflect the role the candidate is instructed to assume (i.e. Kim Cheung, the assistant controller, preparing a report for the senior management team). The format of the report should contain the following: cover page or covering memorandum, executive summary, introduction, body of the report (analyses, recommendations, implementation plan), conclusion and appendices. A table of contents, bibliography and references to articles and readings are not required. Note that, because this is a time-constrained examination, 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 consider the page numbering in the assessment. Title Page or Covering Memo (E4): The title page or covering memorandum should clearly indicate the recipients of the report, the report author, the date, and a title or description of the subject of the report.


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Executive Summary (E4): The executive summary should be the “report in short.” It should provide the reader with a one- or two-page summary that highlights the major issues, alternatives and recommendations. As well, it should summarize the conclusions and recommendations pertaining to the most important implementation issues, and attempt to answer the following questions: what, why, when, where, and how. Introduction (E4): The introduction should lay out the purpose and scope of the report (it should answer the questions, “Why should the recipient read the report?” and “What will the reader find in it?”). If the executive summary is really an introduction, credit can be given for the introduction but not for providing an executive summary. The following is an example of an acceptable introduction: “The purpose of this report is to address how Delfa Printing Ltd. can maintain its revenue and net profit levels and meet the bank’s constraint in the face of the economic recession and the loss of one of its largest customers (IIC). To this end, the report includes the following: a situational analysis; analyses of the main alternatives for achieving the corporate goals; major recommendations, analysis of recommendations for the operational and implementation issues; and an action plan for implementing the recommendations.” Body of the Report and Appendices (E4): Overall, the body of the response should flow well and be easy to follow. For purposes of assessing report format, it is acceptable for the SWOT analysis to be provided in the appendices, or in the body of the report, or both. Preference is given to presenting the detailed SWOT in the appendices and providing references to or highlights of the most important factors in the body of the report. The qualitative analyses of the strategic alternatives should be in the body of the report. The quantitative analyses, unless they are very brief, should be provided in exhibits, tables, or appendices. Issue-specific conclusions should be provided at the end of the analysis of each issue or alternative in the body of the report. Recommendations and relevant support should follow the analyses of the strategic alternatives. The implementation plan should follow the recommendations. In this section, the analyses and recommendations for the implementation and operational issues should be provided. Any significant quantitative analysis, such as financing available versus financing required or a financial forecast, should be provided in the appendices.


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Conclusion (E4): The conclusion should be presented at the end of the body of the report and consist of a brief statement or two that summarizes the main points of the report and draws the report to an end. No new information should be provided in the conclusion. Audit Trails (E4): Proper audit trails should be evident in the report, such as the following:

1. providing references to appendices in the body of the report; 2. providing references to tables, calculations, etc. where appropriate; 3. stating any assumptions that were made in the analyses; 4. showing details of all calculations – can be in brackets or as supplementary

notes; 5. labelling all calculations (indicating what is being calculated); 6. labelling all figures (indicating what the figure represents); 7. for calculation of net present value by calculator or by Excel, indicating the

discount rate, number of periods, annuity/payment amount, and/or future value that was used;

8. for other calculations using Excel functions, indicating the formula or at least what variables are used in the calculation, the values of the known (independent) variables, and the result of the unknown (dependent) variable;

Professional Tone, Tact, Audience-Focused (E3): The response is expected to reflect a business tone, as opposed to a colloquial or academic style. It should be written in third person, and should not contain any tactless comments such as insulting or negative characterizations of senior management or the members of the board of directors. The role of Kim Cheung should be reflected throughout the response (e.g. there should be no direct references to the Backgrounder or any part of the case, and there should be no mention of the Steps for Approaching Business Strategy such as “this is a link to …”). Language and Style (E4): The content of the report must be written in a clear and concise manner. The subject of a sentence or point should be clear, and verbs should be used to convey actions. The use of point form is an effective technique for conveying ideas and analyses concisely. However, overuse of point form or providing only brief phrases with no clear subject and/or verb can make the message being conveyed difficult to understand rather than making the point easier to follow. In assessing communication skills for reports written under examination conditions, consideration must be given to the fact that the response was produced under a four-hour time constraint. The general ability to maintain a reasonable level of communication skills throughout the response is the focus of the assessment.


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Consideration should be given to differences in acceptable rules in grammar and punctuation. For example, when using lists and point form, it is acceptable to put a period, comma, semi-colon, or no punctuation at all at the end of a point. Committing only a few (e.g. fewer than 10) grammatical, spelling, sentence structure, punctuation and typographical errors is forgivable in evaluating communication skills. However, committing many such errors can be so distracting that it can significantly affect the overall assessment for the communication component. FEEDBACK COMMENTS TO CANDIDATES Written developmental feedback is provided to candidates who do not receive a passing grade for their responses to the examination. In providing feedback comments to these candidates, markers must appropriately tailor the standard comments for each response. Where possible, examples should be provided to support the general comments. As well, where possible, markers should provide helpful advice on how the response could be improved and what skills need to be developed further in responding to future assignments and examinations. Keep in mind that the feedback is a coaching tool and not just an assessment tool. After completing the feedback, markers are required to proofread all feedback comments to ensure that they are grammatically correct and that any highlighting from the standard comments has been removed. SAMPLE ANALYSES The following appendices provide sample analyses to assist the markers in recognizing valid points and calculations made by candidates. They do not follow the order and format expected of the candidates. For the markers’ convenience, all related quantitative and qualitative analyses are presented together (e.g. all the analyses and the conclusion for an individual alternative are presented together in one appendix – candidates would be expected to provide the qualitative analysis and conclusion in the body of the report and the quantitative analysis in the appendices). Notes to markers and references to where the information can be found in the Backgrounder (BK) and Additional Information (AI) are indicated in square brackets and italics. Such notes should not appear in candidate responses.


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Appendix 1

Sample Situational Analysis Mission, Goals, Targets (E1, E2, F1): Mission Statement Working in partnership with suppliers and customers, Delfa Printing Ltd. helps Canadian organizations of all sizes succeed by providing them with a wide range of high-quality printing and document management services at competitive prices. [BK, p.14] This mission statement indicates who Delfa’s customers are (Canadian organizations of all sizes) and what services Delfa offers (a wide range of high-quality printing and document management services). It indicates that Delfa competes by offering its services at competitive prices; however, the focus the company places on developing long-term partnerships with large customers [BK p. 7] is not indicated (i.e. a customer intimacy value discipline is being followed for the large customers that provide 80% of Delfa’s business). [Candidates are only required to recognize the current mission statement and consider it in analyzing the alternatives. Although not required, some candidates may suggest an improved current mission statement in the situational analysis and/or a revised mission statement in the implementation plan that specifically incorporates the strategies recommended in the report.] Strategic Goals/Targets: It is assumed that the strategic goals are reflected in the performance targets set by the board of directors. These targets for 2009 are as follows [AI, p. 2]:

• Maintain revenues at the same levels as in 2008 (i.e. $24,280 or $21,400 printing revenue and $2,880 warehousing revenue).

• Achieve a net profit margin of 4% of sales. Key Stakeholders’ Needs/Preferences (E1, F1): Delfino - Delfa should continually strive to find new opportunities to grow within the

printing industry [BK p. 5] - Delfino has always believed that profits are maximized by keeping the

high-volume offset printers running continuously on the large printing jobs [AI p. 3]

Giani - Suggested that Delfa should expand the warehousing side of the business [AI p. 4]


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Joly - Supports Giani’s idea of expanding the warehouse side of the business [AI p. 5]

Singh - Prefers Delfa to focus more on its core business of printing [AI p. 5] Constraints (E1, F1, F5, F6): The bank has stipulated that it can demand immediate repayment of the balance of the loans if Delfa’s times interest earned ratio (calculated as earnings before interest and taxes divided by interest expenses) falls below three times. [BK p. 11] [References to the times interest earned ratio throughout the assessment materials may use the acronym TIE.] Delfa expects a minimum after-tax return of 10% on capital investments. [AI p. 6] Industry Key Success Factors (KSFs) (F1, F3, E1, E2): Commercial printers tend to compete based on the following [BK p. 2]:

• price • quality • range of services offered • distribution capabilities • customer service • availability of printing time • use of state-of-the-art technology

Environmental Scan/SWOT Analysis (Functional Competencies, E1, E3): [The following are some additional SWOT points not provided in the case Backgrounder that the candidates may provide in their responses. The SWOT points provided in the Backgrounder are also indicated for reference purposes. On the assessment worksheet, the SWOT points from the Backgrounder are in italics.] External Opportunities: (E1, F1) New Points 1. Work prices for fuel and paper decreased, thereby reducing the production costs for

the printing industry. [AI p. 2] 2. The value of the Canadian dollar decreased, which decreases the price of Canadian

goods in international markets and can lead to more exports. [This can also be considered a threat (increases costs of imported materials).] [AI p. 2]

3. A few printers went out of business [AI p. 2] resulting in a reduction of competition. 4. Used offset printing presses were becoming available at inexpensive prices. [AI p. 2] 5. Demand for warehousing at a $75 monthly fee per bin will remain high. [AI p. 5]


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Opportunities Provided in Backgrounder [Do not give credit for these in component 1a but give credit in components 1b and 3 for using these points in the analyses of the issues and alternatives.]

• Increasing technologically advanced printing techniques and equipment • New services such as setting up printing operations on customer’s premises and

U-Print • Popularity of print on demand is growing • Increasing demand for document storage and management services • New automated tracking and delivery systems

External Threats: (F1, F2, E1, E3) New Points 1. The Canadian economy slipped into a recession at the end of 2008, which continued

into 2009. [AI p. 2] 2. The demand for printing has decreased. [AI p. 2] 3. There is no resale market for shelving and warehousing equipment. [AI p. 6] 4. One-third of all commercial document print jobs are now being completed using

digital equipment. [It is acceptable to consider this point as a weakness instead of a threat if it is pointed out that only about 10% of jobs at Delfa use digital equipment which lags behind the industry trend.] [AI p. 3]

Threats Provided in Backgrounder [Do not give credit for these in component 1a but give credit in components 1b and 3 for using these points in the analyses of the issues and alternatives.]

• High local competition • Increasing competition from foreign printers (e.g. China) – imports are growing

faster than exports • Fluctuations in cost of paper • Decreasing market for printed products (e.g. forms) as a result of increasing

digital alternatives • Trend towards consolidation in the printing industry • More companies investing in digital in-house printing facilities

Internal Strengths/KSFs/Competitive Advantages (E1, F1, F3): New Points 1. Customers are satisfied with the quality of Delfa’s products and services; the

recession did not affect demand at Delfa for the first six months of fiscal 2009. [AI p. 2]

2. Delfa employees are non-unionized. [BK p. 11] 3. Delfa has a strong and competent management team. [BK pp. 5-6; AI general] 4. There is sufficient available packaging and distribution capacity at Delfa’s existing

facility. [AI p. 4] 5. The bank is willing to lend up to $2.5 million to Delfa for new growth opportunities.

[AI p. 6]


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Strengths Provided in Backgrounder [Do not give credit for these in component 1a but give credit in components 1b and 3 for using these points in the analyses of the issues and alternatives.]

• Good reputation for high-quality printing and excellent service • Wide range of document management services (printing, warehousing and

distribution) • Competitive pricing • Good location near major highway and international airport • Dedicated employees • Good bank relationship • Good base of long-term customers

Internal Weaknesses/Operational Issues: (E1, E3, Functional Competencies) New Points 1. When the IIC contract ends on October 31, 2009, all of its printing business will be

going to AIPI (new parent’s printer) resulting in reduced revenue and excess warehousing capacity. [F1] [AI p. 2]

2. Delfa’s dependency on a few large customers (80% of revenues generated from eight large customers) puts it at risk – the loss of a single large customer has a significant impact on profits as seen by the effects of losing IIC. [F2] [BK p. 6 & AI pp. 4 & 8]

3. Joly’s suggestion that Delfa should continue to charge current customers for warehouse bins that are actually storing NCI products is unethical. [F2, E3] [AI p. 6]

4. Shortages in the warehouse inventory have been discovered when filling distribution orders and it is unknown whether the shortages were caused by theft or by inventory tracking errors. [F2, F3] [AI p. 6]

5. The alarm system is not always armed after the plant closes. [F2] [AI p. 6] 6. Leading-edge on-line job tracking technology offered by AIPI is currently not utilized

at Delfa. [F3] [AI p. 2] 7. Some customers are beginning to take longer to pay their invoices. [F5] [AI p. 2] 8. Digital printing jobs are often backlogged. [F3] [AI p. 5] 9. On several occasions, an early incorrect version of a digital proof was used in the

production process. [F3] [AI p. 5] 10. Cost of overtime needed to ensure that delivery deadlines are met is becoming too

high. [F3] [AI p. 5] 11. Some employees are complaining that the overtime is burning them out. [F3]

[AI p. 5] 12. There is no available space in the printing and finishing area to add any more

equipment. [F3] [AI p. 5] 13. Problems with the performance measurement system – bonuses may not be paid

even though employees are working overtime. [F4] [AI p. 5]


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Weaknesses Provided in Backgrounder [Do not give credit for these in component 1a but give credit in components 1b and 3 for using these points in the analyses of the issues and alternatives.]

• Small share of printing business from small- and medium-sized local businesses • Running out of warehouse capacity • Occasional bottlenecks in production • Occasional late deliveries • High debt load


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Appendix 2 Financial Assessment – Delfa Printing Ltd. (F6)

Ratio Analysis: (F6) [Candidates need only provide 4 or 5 ratios; at least one from each of the four categories, and one of the coverage ratios should be the times interest earned. Although the case provides historical data for five years (2004 to 2008), candidates need only calculate ratios for three years in order to determine recent trends. The most common ratios that markers can expect to see, in addition to the net profit margins and gross profit margins provided in the Backgrounder, are the following.]

Ratios Formula 2008 2007 2006 Calculations

Current ratio (liquidity)

current assets / current liabilities 2.61 2.58 2.38

2008 = $3,644 / $1,394 2007 = $3,318 / $1,286 2006 = $3,098 / $1,300

Quick ratio (liquidity)

(cash + acc. rec.) / current liabilities

OR (current assets -

inventory) / current liabilities

1.94

OR

2.07

1.89

OR

2.04

1.75

OR

1.89

2008 = ($493+$2,205) / $1,394 2007 = ($438+$1,991) / $1,286 2006 = ($401+$1,873) / $1,300 OR 2008 = ($3,644-$756) / $1,394 2007 = ($3,318-$700) / $1,286 2006 = ($3,098-$639) / $1,300

Accounts receivable turnover

(activity)

total revenue / total accounts

receivable*

11.0 times(33 days)

11.5 times(32 days)

12.4 times(29 days)

2008 = $24,260 / $2,205 2007 = $22,898 / $1,991 2006 = $23,231 / $1,873

Asset turnover (activity)

total revenue / total assets* 2.36 2.23 2.22

2008 = $24,260 / $10,282 2007 = $22,898 / $10,279 2006 = $23,231 / $10,443

Inventory turnover (activity)

cost of sales / inventory*

22.4 times(16 days)

23.1 times (16 days)


2008 = $16,955 / $756 2007 = $16,148 / $700 2006 = $16,213 / $639

LT debt-to-equity (coverage) LT debt / equity 0.76 0.80 0.80

2008 = $3,840 / $5,048 2007 = $3,984 / $5,009 2006 = $4,083 / $5,060

Total debt-to-equity (coverage) total debt / equity 1.04 1.05 1.06

2008 = $5,234 / $5,048 2007 = $5,270 / $5,009 2006 = $5,383 / $5,060

Total debt-to-total assets (coverage)

total debt / total assets 0.51 0.51 0.52

2008 = $5,234 / $10,282 2007 = $5,270 / $10,279 2006 = $5,383 / $10,443

Times interest earned

(coverage)

income before interest & taxes /

interest 7.24 5.95 6.63

2008 = ($1,598+$256) / $256 2007 = ($1,598+$256) / $256 2006 = ($1,525+$271) / $271

Return on equity (ROE)

(profitability)

net income / shareholders’

equity 20.6% 16.9% 19.6%

2008 = $1,039 / $5,048 2007 = $849 / $5,009 2006 = $991 / $5,060

Return on assets (ROA)

(profitability)

net income / total assets* 10.1% 8.3% 9.5%

2008 = $1,039 / $10,282 2007 = $849 / $10,279 2006 = $991 / $10,443

* can also be calculated using average of beginning and ending balances


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• The times interest earned ratio over the past three years is quite good and

exceeds the limit of 3 times specified by the bank (ranged from 5.95 to 7.24 times).

• Delfa has sufficient liquid assets to cover its immediate debts (current ratio is greater than the benchmark of 2.0, and quick ratio is higher than the benchmark of 1.0).

• Delfa’s customers have been taking longer to pay their accounts, from an average of 29 days to 33 days (see accounts receivable turnover).

• Inventory appears to be under control. On average, Delfa used up its inventory on hand every 16 days in 2008 and 2007.

• The board of directors had indicated in the environmental scan that Delfa has a high debt load. However, when compared to the amount of equity and long-term assets, the debt load appears reasonable. The significant investment in equipment for the printing side of the business appears to be offset somewhat by the low investment required for the warehousing side of the business.

• The returns on assets and equity are quite reasonable and have been increasing. • Revenues have grown steadily in the past; however, the loss of the IIC contract

will decrease revenues in 2010 by $3.5M which represents a 14% drop. • Gross profit has remained fairly steady around 30% over the past five years.

Analysis of Profit Centres

Printing Warehousing Revenue $21,400 $2,880 Variable cost of sales 13,980 720 Variable selling and admin. 2,180 300 Total variable costs 16,160 1,020 Contribution margin $ 5,240 $1,860

Contribution margin % of sales 24.5% 64.6% Square metres of floor space 9,810 5,940 Contribution margin per sq. m. $0.534 $0.313

Gross profit $5,589 $1,289 Gross profit % of sales 26.1% 44.8% Gross profit per sq. m. $0.570 $0.217 The warehousing centre provides a higher contribution and gross profit as a percentage of sales. However, floor space appears to be a constraining factor at Delfa and from the above analysis it appears that the printing centre contributes more per square metre of floor space than the warehousing centre.


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Appendix 3 Analysis of Alternative to Acquire Ready and Able Printing Ltd. (R&A)

Quantitative Analysis: (F3, F6) Ratio Analysis: (F6) [Candidates need only calculate three or four ratios for one or two years.]

Ratios Formula 2008 2007 Calculations Current ratio

(liquidity) current assets / current

liabilities 1.60 1.64 2008 = $1,271 / $796 2007 = $1,228 / $751

Quick ratio (liquidity)

(cash + acc. rec.) / current liabilities

OR (current assets -

inventory) / current liabilities

1.12

OR

1.21

1.03

OR

1.12

2008 = ($151+$741) / $796 2007 = ($175+$598) / $751 OR 2008 = ($1,271-$309) / $796 2007 = ($1,228-$387) / $751

Accounts receivable turnover (activity)

total revenue / total accounts receivable*

12.8 times(28 days)

15.3 times(24 days)

2008 = $9,500 / $741 2007 = $9,136 / $598

Asset turnover (activity)

total revenue / total assets* 3.97 3.58 2008 = $9,500 / $2,393

2007 = $9,136 / $2,553 Inventory turnover

(activity) cost of sales / inventory* 19.5 times(19 days)


2008 = $6,014 / $309 2007 = $5,810 / $387

LT debt-to-equity (coverage) LT debt / equity 0.88 1.00 2008 = $748 / $849

2007 = $900 / $902 Total debt-to-equity

(coverage) total debt / equity 1.82 1.83 2008 = $1,544 / $849 2007 = $1,651 / $902

Total debt-to-total assets (coverage) total debt / total assets 0.65 0.65 2008 = $1,544 / $2,393

2007 = $1,651 / $2,553 Times interest

earned (coverage) income before interest

& taxes / interest 9.28 7.69 2008 = ($538+$65) / $65 2007 = ($428+$64) / $64

Return on equity (ROE) (profitability)

net income / shareholders’ equity 41.2% 30.8% 2008 = $350 / $849

2007 = $278 / $902 Return on assets

(ROA) (profitability) net income / total assets* 14.6% 10.9% 2008 = $350 / $2,393 2007 = $278 / $2,553

Net profit margin (profitability) net income / revenue 3.7% 3.0% 2008 = $350 / $9,500

2007 = $278 / $9,136 Gross profit margin

(profitability) gross profit / revenue 36.7% 36.4% 2008 = $3,486 / $9,500 2007 = $3,326 / $9,136

* can also be calculated using average of beginning and ending balances • The current ratio is less than the benchmark of 2; however, the quick ratio is greater

than 1 (common benchmark). Overall, R&A appears to be able to meet its short-term obligations.

• R&A’s customers pay their bills more promptly than Delfa’s customers (within 28 days versus 33 days in 2008).

• Inventory levels are relatively higher at R&A than at Delfa, but this may be because Delfa’s warehousing side of the business does not require any materials to be inventoried. Overall, the inventory turnover of 19 days seems reasonable.


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• R&A carries relatively more debt than Delfa. • R&A’s times interest earned ratio is higher than Delfa’s in 2008 and higher than the

minimum required by Delfa’s bank. • R&A provides a good return to its shareholders. In 2008, the return on equity of

41% is higher than Delfa’s 21% return, and R&A was able to pay out dividends of $203K (i.e. $702K beginning retained earnings + $350K net income - $649K ending retained earnings).

Estimated Value of R&A ($ in ’000s): (F5) Assumption: The book value of R&A’s assets represents current fair market value. R&A 2008 net book value shares $849 R&A 2008 income before taxes $ 538 Add annual synergistic savings 250 Adjust income before taxes 788 Income taxes @ 35% 276 Adjusted net income 512 Divide by desired return on investment ÷ 10% Value based on capitalized earnings in perpetuity $5,122 The asking price is $3.8 million, which is above the $849K book value and the present value of cash flows for the next 5 years; however, this price is below the more than $5 million value based on capitalized earnings into perpetuity. [It is acceptable to use only one method of determining the value of R&A shares to test whether the price of $3.8 million is fair. Two possible methods are shown above. Some candidates will also determine the goodwill included in the price of the shares (e.g. $3,800K - $849K = $2,951K), which is acceptable. Others will provide the following net present value analysis to determine whether the price of the shares is fair – this approach is acceptable.]


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Net Present Value ($ in ’000s): (F5) Assumptions:

1. A five-year time horizon is used because the company’s assets will need to be replaced at the end of five years. [It would be reasonable for candidates to use a longer period such as 10 years.]

2. The net book value of R&A’s plant and equipment approximate the undepreciated capital cost for tax purposes and that the capital cost allowance rate is 30%.

Before

Tax After TaxPV

Factor Present Value

R&A 2008 income before taxes $ 538 $ 350 3.7908 $1,326Add back amortization 282 183 3.7908 694Add annual synergistic savings 250 163 3.7908 616Annual incremental cash flow 1,070 696 3.7908 2,636Savings in initial computer software costs 100 65 1.0000 65Initial cost of R&A’s shares (3,800) (3,800) 1.0000 (3,800)Present value of incremental cash flows $(1,165) $(3,039) $(1,099)CCA tax shield1 218Net present value of incremental cash flows $ (881)1 CCA tax shield = [($1,122 x .30 x .35) / (.1 + .3)] x (2 + .1) / [2 x (1 + .1)] = $218 Times Interest Earned ($ in ’000s): (F3, F6) Assumptions:

1. R&A’s revenues and expenses will remain the same as for 2008. 2. Delfa’s revenues and expenses will be as estimated by Welsh for 2010. 3. Delfa will finance the purchase of the shares at an annual interest rate of 6%.

Delfa with R&A R&A OnlyDelfa estimated 2010 income before interest

and taxes without IIC

$ 49

R&A income before tax 538 $538 Add back interest - R&A 65 65 Add annual synergistic savings 250 250 Inc. before interest and taxes 902 853 Interest expense* ÷ 531 ÷ 293 Times interest earned 1.70 2.91 * Delfa estimated 2010 interest expense $238 Additional interest (6% x $3.8M) 228 $228 R&A interest 65 65 New interest expense $531 $293

[Candidates need not provide both the above calculations – one is sufficient.]


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Financing: (F5) Now Year 1 Year 2 Year 3Financing required: - for purchasing shares - for software

$2,300 - 2,300

$ 500 30 530

$ 500 30 530

$ 500 30 530

Financing available: - from bank - from R&A operations (see NPV analysis)

2,500 - 1,070

1,070 1,070Excess financing available over required $ 200 $ 540 $ 540 $ 540 Qualitative Analysis: [The following are examples of some of the qualitative and quantitative pros and cons that candidates can make in their analyses. This is a far more extensive list of points than what can be expected from any candidate, but it is not an exhaustive list of all relevant points.] Pros: Qualitative: - R&A’s focus is on digital printing, which takes advantage of the increasing popularity

of print on demand as well as increasing technological advancements in printing. [link to an opportunity – F1]

- R&A has some available capacity that Delfa can use to resolve its digital printing backlogs. [link to a weakness – F3] This could help alleviate the need for Delfa’s employees to work overtime, which would eliminate or reduce overtime costs. [link to a weakness – F3]

- R&A’s printing equipment is relatively new and will not need to be replaced for five years. [F5]

- R&A has a good base of loyal customers (i.e. 90% of revenues are generated from regular customers) who will remain loyal if the operation remains in the same location. [F2]

- Purchasing R&A eliminates a competitor in the local market. [link to a threat – F2] - R&A has leased the same premises for 18 years and is considered a good tenant;

therefore, it is likely that Delfa will have little problem renewing the lease in two years. [F3, F5]

- Delfa’s bank is willing to lend sufficient funds to cover the initial payment for R&A’s shares (i.e. $2.5M is sufficient to cover initial payment of $2.3M). [F5]

- Perrier is willing to finance the balance of the purchase price over three years (i.e. $500K per year for three years). [F5]

- R&A’s staff is well trained in the newer technologies. [F3] - Purchasing R&A will generate synergistic savings of $250,000 per year. [F3]


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- Delfa can adopt the new software for scheduling digital print jobs that R&A is currently using at a lower cost (i.e. Delfa would save the initial $100,000 cost). This software would eliminate the scheduling bottlenecks currently experienced at Delfa. [link to a weakness – F3]

Quantitative: - Revenues from R&A ($9,500) more than offset the $3,500 revenues lost from IIC. [link

to a weakness – F1] Therefore, Delfa will meet the target of at least maintaining the 2008 level of revenues. [link to goals – F1]

- Using the capitalized earnings method of valuation, the $5.1M value of R&A’s shares is greater than the $3.8M cost. [F5]

- The times interest earned ratio (TIE) for R&A in 2008 is 9.28 which is much higher than Delfa’s expected TIE of 0.2; purchasing R&A will increase Delfa’s overall TIE. [F5, F6]

Cons: Qualitative: - R&A’s employees are unionized, which could create problems with morale at Delfa

and possibly cause Delfa’s employees to seek unionization. [link to a strength – F1, F2]

- Many of R&A’s current employees are young and inexperienced. [F3] - Expanding the business is risky, when the country is experiencing a recession and

demand for printing is decreasing. [link to a threat – F2] - Expanding in the digital printing business is not consistent with Delfino’s belief that the

company should focus on high-volume offset printing jobs. [link to a stakeholder preference – F1]

Quantitative: - Net profit as a percentage of sales of 3.7% in 2008 is lower than Delfa’s target of 4%.

[link to goals – F4] - The net present value of investing in R&A is negative using a five-year time horizon.

[F5] - The times interest earned (TIE) would be 1.7, which is below the bank’s requirement

of 3 times. [link to constraint – F5, F6] Conclusion: [Component 5] This alternative will improve Delfa’s revenues, income and times interest earned ratio. However, acquiring R&A alone will not increase Delfa’s times interest earned ratio enough to meet the bank’s constraint of 3 times.


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Appendix 4 Analysis of Alternative to Accept NCI Contract

Quantitative Analysis: (F3, F5) Using Current Delfa Facilities Only: Assumptions:

1. Delfa would turn away business from some of the current small customers to free up 300 bins for the NCI contract. The amount of printing revenue that these customers provide to Delfa would average $1,229,000 / 480 bins = $2,560 per bin per year.

2. The incremental analysis calculates the increases and decreases in cash flows of accepting the NCI contract using the 2010 estimated results provided by Welsh (i.e. without IIC or any new contracts) as a base. [Candidates can take other acceptable approaches such as the total approach (calculating total Delfa cash flows with the NCI contract and comparing them to the estimated total Delfa cash flows without the NCI contract) or incremental analysis using acceptance of one of the other alternatives as a base. There are many acceptable combinations of incremental analysis; however, they should include all the relevant data and use a logical base for comparison.]

3. Variable selling and administration expenses for the NCI contract would vary with the total revenue at the same rate as for other warehouse business. [Other acceptable assumptions can be made about variable selling and administration expenses, e.g. varies on a per bin basis or on a per customer basis.]

4. Interest expense will be $238K per year (the amount estimated by Welsh for 2010).

Net Present Value ($ in ’000s): (F3, F5) Revenue from NCI (1,700 bins x $70 x 12) $1,428 Variable cost of sales (1,700 bins x $225) (383) Variable selling and administration ($1,428 x 10.4%1) (148) Contribution margin 897 Opportunity cost from foregone business2 (363) $534 Taxes (@ 35%) (187) 347 Present value factor (10%, 5 years) 3.7908 Net present value of incremental annual cash flows $1,315 Notes:

1. Variable selling and administration as a percentage of sales for warehousing business = $300 / $2,880 = 10.4%.

2. Opportunity cost related to forgone business from small customers:


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Revenue* Contribution

Margin Warehousing revenue (300 bins x $75 x 12) $ 270 Contribution margin @ 64.6% of revenue $175 Printing revenue ($1,229K/480 bins x 300 bins) 768 Contribution margin @ 24.5% 188 Total opportunity cost $1,038 $363

[*Note: It is not appropriate to use lost revenues for the opportunity cost; this is provided here for reference purposes only and to illustrate how the contribution margin is calculated.]

Times Interest Earned ($ in ’000s): (F3, F6) Delfa estimated 2010 income before interest and taxes without IIC $ 49NCI incremental contribution margin (see NPV calculation above) 534Revised income before interest and taxes 583Interest expense ÷ 238Delfa’s expected times interest earned in 2010 2.45 Net Profit as a Percentage of Sales ($ in ’000s): (F3, F6) All Delfa NCI OnlyDelfa estimated 2010 income before interest and taxes without IIC $ 49 NCI incremental annual cash inflows before taxes

(see NPV calculation above) 534 $534 Interest expense (238) - Revised income before taxes 345 534 Income taxes @ 35% 121 187 Net income $224 $347 Revised sales ($20,780 + $1,428 - $1,038) $21,168 $390 Net income as a percentage of sales ($224 / $21,168) 1.1% 89% [It is not necessary to provide both calculations of the net income as a percentage of sales.] With New Warehouse Space: Assumptions:

1. The incremental analysis calculates the increases and decreases in cash flows of accepting the NCI contract using the 2010 estimated results provided by Welsh (i.e. without IIC or any new contracts) as a base. [Candidates can use the above analysis using the existing space only as a base from which to calculate incremental cash flows; however, care must be taken in interpreting the results when compared with other alternatives. These solution notes use Welsh’s estimated 2010 data as a base for all incremental analyses.]


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2. Variable selling and administration expenses for the NCI contract would vary with the total revenue at the same rate as for other warehouse business. [Other acceptable assumptions can be made about variable selling and administration expenses, e.g. varies on a per bin basis or on a per customer basis.]

3. Interest expense will be $238K per year (the amount estimated by Welsh for 2010). [It would also be reasonable to assume that interest expense will increase if Delfa borrows funds to finance the investment in shelving and equipment for the new warehouse.]

4. In 2009, rental of bins was not at full capacity; therefore, it is assumed that only the 300 bins required for the NCI contract will be rented out at the new warehouse. [Candidates may assume that there is demand for the excess bins available (i.e. 750 - 300 = 450 excess bins) and include cash flows from these additional sales in their analyses.]

Net Present Value ($ in ’000s): (F3, F5) Revenue from NCI (1,700 bins x $70 x 12) $1,428 Variable cost of sales (1,700 bins x $225) (383) Variable selling and administration ($1,428 x 10.4%1) (148) Contribution margin 897 Rent for new warehouse (72) Fixed overhead for new warehouse (150) 675 Taxes 236 Incremental annual cash flows 439 Present value factor (5 years at 10%) 3.7908 Present value of incremental annual cash flows 1,664 Investment in shelving and equipment (60) CCA tax shield from shelving and equipment 15 Net present value $1,619 * Assuming a 30% tax rate, the CCA tax shield from the shelving and equipment for the new

warehouse = ($60K x .3 x .35) / (.1 + .3) x (2 + .1)/[2(1 + .1)] = $15K Times Interest Earned ($ in ’000s): (F3, F6) Delfa estimated 2010 income before interest and taxes without IIC $ 49 NCI incremental annual cash inflows before taxes

(see NPV calculation above)

675 Increase in amortization expense ($60K / 15 years) (4) Revised income before interest and taxes 720 Interest expense ÷ 238 Times interest earned 3.02


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Net Profit as a Percentage of Sales ($ in ’000s): (F3, F6) All Delfa NCI OnlyDelfa estimated 2010 income before interest and taxes without IIC $ 49 NCI incremental annual cash inflows before taxes

(see NPV calculation above) 675 $675 Increase in amortization expense ($60K / 15 years) (4) (4) Interest expense (238) (238) Revised income before taxes 482 433 Income taxes @ 35% 169 152 Net income $331 $281 Revised sales ($20,780 + $1,428) $22,208 $1,428 Net income as a percentage of sales ($331 / $22,208) 1.5% 19.7% [It is not necessary to provide both calculations of the net income as a percentage of sales.] Qualitative Analysis: [The following are examples of some of the qualitative and quantitative pros and cons that candidates can make in their analyses. This is a far more extensive list of points than what can be expected from any candidate, but it is not an exhaustive list of all relevant points.] Pros: Qualitative: - The excess warehouse capacity created by the loss of the IIC contract will be

completely utilized. [link to a weakness – F3] - NCI has a good credit rating and usually pays accounts within 30 days. This will

improve Delfa’s cash flow. [link to a weakness – F5] - The contract starts after IIC no longer needs any of Delfa’s bins. [F3] - Some of the excess packaging and shipping capacity at Delfa will be utilized if the

available warehouse is rented. [link to a strength – F3] - Joly feels that demand for warehousing will remain high at a $75 monthly fee per bin

even if the NCI contract is accepted for a $70 monthly fee per bin. [link to an opportunity – F1, F2]

- If the available warehouse is rented, Delfa may be able to capitalize on the industry trend towards increasing demand for document storage and management services. [link to an opportunity – F1]

- Joly and Giani favour expanding the warehouse side of the business. [link to stakeholder preferences – F1]

Quantitative: - The warehousing side of the business provides a higher contribution margin

percentage of sales than the printing side of the business. [F3]


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- No investment is required if the current facilities only are used; if the available warehouse is leased, the investment of $60,000 is not excessive and financing could be generated from operating cash flows. [F5]

- The times interest earned (TIE) would be 3.02 times if the additional warehouse space is rented, which exceed the bank’s requirement of 3 times. [link to constraint – F5, F6]

- The net present value of accepting the NCI contract is positive using a five-year time horizon and is higher if the available warehouse is rented than if only the current facility is used. [F5]

Cons: Qualitative: - The NCI contract requires more bins than are available within the existing facility. [F3] - NCI is only willing to pay $70 per bin, which is less than the average price paid by

current customers. [F3] Quantitative: - Revenues from the NCI contract ($1,428) do not offset the $3,500 revenues lost from

IIC. Therefore, Delfa will not meet the target of at least maintaining the 2008 level of revenues. [link to a goal – F4]

- Although accepting the contract would increase the net profit as a percentage of sales, it would still be lower than Delfa’s target of 4%. [link to a goal – F4]

- The times interest earned (TIE) would be 2.45 if the additional warehouse space is not rented, which is below the bank’s requirement of 3 times. [link to a constraint – F5, F6]

- There may be some additional costs to transport goods from the rented warehouse to Delfa’s facility for packaging and shipping. [F3]

Conclusion: [Component 5] This alternative will improve Delfa’s revenues, income and times interest earned ratio. However, accepting this contract alone will not increase Delfa’s revenues and profits sufficiently to meet the board’s targets, and the bank’s times interest earned constraint of 3 times will only be achieved if Delfa rents the available warehouse space.


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Appendix 5 Analysis of Alternative to Accept GPS Contract

Quantitative Analysis: (F3, F5) Assumptions:

1. The cost of reorganizing the layout of the printing and finishing operations will be expensed in the first year. [It is acceptable for candidates to assume that this cost will be capitalized, in which case the cash outflow would be $30K in year 1 less a CCA tax shield.]

2. Interest expense will be $238K per year (the amount estimated by Welsh for 2010). [It would also be reasonable to assume that interest expense will increase if Delfa borrows funds to finance the reorganization and the ISO certification expenses.]

3. The incremental analysis calculates the increases and decreases in cash flows of accepting the GPS contract using the 2010 estimated results provided by Welsh (i.e. without IIC or any new contracts) as a base. This can then be compared with the incremental analysis of the other alternatives to see which provides the greatest increase in cash flows. [Candidates can take other acceptable approaches such as the total approach (calculating total Delfa cash flows with the GPS contract and comparing them to the estimated total Delfa cash flows without the GPS contract) or incremental analysis using acceptance of one of the other alternatives as a base. There are many acceptable combinations of incremental analysis; however, they should include all the relevant data and use a logical base for comparison.]

Net Present Value ($ in ’000s): (F3, F5)

Before Tax After Tax PV Factor Present Value

Revenue from GPS $6,000 $3,900 3.7908 $14,784 Variable cost ($6,000 x 75.5%) 4,530 2,945 3.7908 11,162 Contribution margin ($6,000 x 24.5%) 1,470 955 3.7908 3,622 Equipment lease expense 200 130 3.7908 493 Incremental annual cash flows 1,270 825 3.7908 3,129 Reorganize (one-time cost) 50 33 1.0000 33 ISO certification costs (over two years) 90 59 1.7355 102 Net present value $ 2,994


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Times Interest Earned ($ in ’000s): (F3, F6) Delfa estimated 2010 income before interest and taxes without IIC $ 49 GPS incremental annual cash inflows before taxes

(see NPV calculation above)

1,270 Cost to reorganize layout (50) ISO certification costs (90) Revised income before interest and taxes 1,179 Interest expense ÷ 238 Times interest earned 4.95 Net Profit as a Percentage of Sales ($ in ’000s): (F3, F6) All Delfa GPS Only Delfa estimated 2010 income before interest and taxes without IIC $ 49 GPS incremental annual cash inflows before taxes

(see NPV calculation above) 1,270 $1,270 Cost to reorganize layout (50) (50) ISO certification costs (90) (90) Interest expense (238) - Revised income before taxes 941 1,130 Income taxes @ 35% 329 395 Net income $ 612 $ 735 Revised sales ($20,780 + $6,000) $26,780 $6,000 Net income as a percentage of sales ($612 / $26,780) 2.3% 12.2% [It is not necessary to provide both calculations of the net income as a percentage of sales.] Qualitative Analysis: [The following are examples of some of the qualitative and quantitative pros and cons that candidates can make in their analyses. This is a more extensive list of points than what can be expected from any candidate, but it is not an exhaustive list of all relevant points.] Pros: Qualitative: - This alternative focuses on expanding the core business of offset printing at Delfa,

which is consistent with Delfino’s and Singh’s preference to focus on the core business of printing. [link to stakeholder preferences – F1]

- All but 100 bins of the excess warehouse capacity created by the loss of the IIC contract will be utilized (i.e. there would be a total of 200 bins available – the original 100 free bins in 2009 plus 1,300 bins from IIC less the 1,200 bins required for the GPS contract). [link to a weakness – F3]


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- GPS has a good credit rating. [F5] - The contract will not start until after IIC no longer needs any of Delfa’s bins. [F3] - Delfa may be able to buy some of the used printing equipment that is currently

available at a price lower than the cost of leasing the equipment. [link to an opportunity – F5]

- Becoming ISO certified may help attract more business in the future. [F1] Quantitative: - The contribution margin per square metre of floor space is higher for printing than for

warehousing. Therefore, profits will be maximized by utilizing more floor space for printing orders. This is supported by the calculations: net income with GPS would be $612K in 2010 whereas net income with NCI and the additional warehouse would be $331K in 2010. [F3]

- GPS is willing to pay Delfa’s regular rates. [F3] - The times interest earned (TIE) would be 4.95 times, which exceed the bank’s

requirement of 3 times. [link to a constraint – F5, F6] - This alternative has a high net present value (i.e. $2,994K). [F5] - The $6,000 revenue from the contract will more than offset the $3,500 revenues lost

from IIC. Therefore, Delfa will meet the target of at least maintaining the 2008 level of revenues. [F3]

Cons: Qualitative: - Expanding the offset printing capacity is risky when the country is experiencing a

recession and demand for offset printing is decreasing. [link to a threat – F2] - Most of Delfa’s customers are attracted to Delfa because it offers both printing and

warehousing services. Reducing the capacity of the warehousing operation could ultimately reduce the demand for printing services. [F1]

- This option requires Delfa to become ISO certified, which is costly. [F1] - GPS insists on payment terms of net 60 days, which will worsen the current problem

of increasing collection periods and will require Delfa to invest approximately $500K more in working capital (i.e. $6M/12 months). [link to a weakness – F5]

Quantitative: - Although accepting the contract would increase the net profit as a percentage of sales,

it would still be lower than Delfa’s target of 4%. [link to a goal – F1] Conclusion: [Component 5] This alternative will improve Delfa’s revenues, income and times interest earned ratio. The bank’s times interest earned constraint and the board’s revenue target will both be met. However, accepting this contract alone will not increase Delfa’s profits sufficiently to meet the board’s target of a 4% net profit percentage of sales.


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Appendix 6 Quantitative Analysis of Combining Alternatives

Accept Both the NCI and GPS Alternatives [F3] Bins available after loss of IIC 1,400 Additional bins if rent additional warehouse space 750 Total bins available 2,150

Bins required for NCI contract 1,700 Equivalent bins of space required for GPS contract 1,200 Total bins required 2,900

Total shortage of bins 750 Conclusion: It is not feasible to accept both the NCI and GPS alternatives. Acquire R&A and Accept the GPS Contract [F3, F5, F6] Times Interest Earned ($ in ’000s): (F3, F6) Delfa estimated 2010 income before interest and taxes without IIC $ 49 GPS incremental annual cash inflows before taxes (see Appendix 5) 1,270 Cost to reorganize layout (50) ISO certification costs (90) Incremental income before interest and taxes from R&A (see Appendix 3) 853 Revised income before interest and taxes 2,032 Interest expense (see Appendix 3) ÷ 531 Times interest earned (target is 3 times or more) 3.83 Revised income before interest and taxes $2,032 Less interest 531 Revised income before taxes 1,501 Income taxes at 35% 525 Revised net income $ 976 Revised sales ($20,780 + $9,500 R&A revenue + $6,000 GPS revenue) $36,280 Net income as a percentage of sales ($976/$36,280) (target is 4% or more) 2.2% Conclusion: It is feasible to accept the GPS contract and acquire R&A. The times interest earned constraint would be met; however, the target net income as a percentage of sales would not be met.


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Acquire R&A, Accept the NCI Contract and Expand Warehousing [F3, F5, F6] Times Interest Earned ($ in ’000s): (F3, F6) Delfa estimated 2010 income before interest and taxes without IIC $ 49 NCI incremental annual cash inflows before taxes (see Appendix 4) 675 Increase in amortization expense ($60K / 15 years) (4) Incremental income before interest and taxes from R&A (see Appendix 3) 853 Revised income before interest and taxes 1,573 Interest expense (see Appendix 3) ÷ 531 Times interest earned (target is 3 times or more) 2.96 Revised income before interest and taxes $1,573 Less interest 531 Revised income before taxes 1,042 Income taxes at 35% 365 Revised net income $ 677 Revised sales ($20,780 + $9,500 R&A revenue + $1,428 NCI revenue) $31,708 Net income as a percentage of sales ($677/$31,708) (target is 4% or more) 2.1% Conclusion: The times interest earned constraint and the target net income as a percentage of sales would not be met. Quantitative Comparison of Alternatives:

R&A NCI NCI+WHS GPS R&A + NCI + WHS

R&A + GPS

TIE 1.70 2.45 3.02 4.95 2.96 3.83 Revenue $30,280 $21,170 $22,208 $26,780 $31,708 $36,280 Profit % of Sales 0.8% 1.1% 1.5% 2.3% 2.1% 2.2% NPV $(1,165) $1,316 $1,618 $2,994 $151 $1,829 [The statistics that meet the targets are bolded.] Conclusion: Based only on quantitative factors, accepting only the GPS order appears to be the best alternative because it provides the best results for three of the four criteria indicated in the chart. The most heavily weighted of the four criteria is the times interest earned (TIE). Because it results in the highest TIE, the GPS alternative has the least amount of risk of not meeting the bank’s constraint. As well, the equipment required to expand the printing capacity for the GPS order can be leased; therefore, no investment is required. [Candidates should make a recommendation based on both their qualitative and quantitative analyses; however, it should be one that will achieve a TIE of at least 3.]


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May 2009 Case Examination Delfa Printing Limited (Delfa)

Marker Assessment Guide

Markers use a scale of 0 to 10 in assessing the components, according to the following guidelines:

General Assessment Number ScaleAE—Above Expectations 9, 10 ME—Meets Expectations 6, 7, 8 BE—Below Expectations 1, 2, 3, 4, 5 NA—Not Addressed 0

Markers must mark each of the attributes and components globally. Judgment must be used in assessing the competencies exhibited in the candidate’s response and assigning a mark for each component. Guidelines for weighting the various attributes are indicated throughout the assessment guide. Note: In addressing any of the issues, indicating that the issue “needs to be resolved” or “further investigated” is not credited for analyzing and resolving the issue. 1. QUALITATIVE ANALYSIS AND STRATEGY FORMULATION (F1, other

functional competencies, E1, E3) In assessing this component, none of the attributes stand out as being more important than the others. Judgment should be used in assigning an assessment for this component. a) Situational Analysis – Quality of Qualitative Analysis: (F1, other functional

competencies, E1, E3) The analysis of Delfa’s current situation is appropriate for the strategic alternatives and operational issues being addressed (qualitative analysis is of good quality, depth and breadth, and makes sense). It includes internal and external scans (e.g. SWOT, PESTE) and other relevant data not provided in the high-level SWOT in the Backgrounder (e.g. goals, targets, stakeholder preferences, constraints, KSFs, competitive advantages, new SWOT points). [Note: The current financial assessment, including the interpretation of the results, is assessed in component 2a).]


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AE = Good quality – makes sense and includes the main relevant qualitative points. ME = Reasonable quality – includes relevant qualitative data, but may contain some

minor errors (e.g. some irrelevant data are included, some relevant data are excluded, some relevant data are categorized incorrectly).

BE = The quality of the situational analysis is not appropriate. NA = No attempt to scan the environment or analyze the current situation.

b) Issue Analysis and Integration: (F1, E1) Integration is demonstrated to a reasonable degree. The analyses of the strategic alternatives, minor issues and implementation issues use a reasonable scope of the SWOT points provided in the Backgrounder and the data gathered in the situational analysis (i.e. use a variety of SWOT points, not just the same points repeatedly). Examples of integrative thinking include the following (among others):

• Considering the cause and effect relationships between SWOT items and strategic alternatives.

• Considering the implications of one issue or alternative on another. • Indicating how the recommended strategy takes advantage of strengths and

opportunities while mitigating weaknesses and avoiding threats. • Considering whether the recommendations meet the goals, constraints and

key stakeholders’ preferences.

The specific items from the situational analysis that are being considered are clearly and explicitly specified. The points being made clearly indicate the cause and effect relationships, make sense and are consistent with case facts. [For purposes of awarding links, SWOT items include all situational analysis items, such as constraints, KSFs, preferences, etc., but do not include the current financial assessment.] AE = Good scope and quality of integration (11 or more clear and distinct

integrative points in the analysis of all the major alternatives and issues). ME = Reasonable scope and quality of integration (7-10 clear and distinct

integrative points in the analysis of at least 3 alternatives). BE = Unacceptable scope and quality of integration (fewer than 7 integrative

points). NA = No integration attempted.

c) Implementation/Action Plan – Overall Quality: (F1, E1) The recommended implementation/action plan

• identifies tasks, matches the tasks to the appropriate individuals, provides realistic timelines for completing these tasks, and considers the monetary implications (i.e. an action plan that indicates what, who, when, and costs/revenues);

• aligns the organization’s resources and success factors to accomplish the recommended strategy;

• resolves problems without causing others (e.g. addresses the minor issues, overcomes cons of recommended strategy); and


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• considers organizational implications (e.g. change management, organizational structure, the role of functions such as marketing, IT, quality control, human resource management, operational efficiencies, etc.).

AE = Good implementation/action plan – includes a reasonable action plan, and

addresses seven or more implementation or minor issues. ME = Reasonable implementation/action plan – includes an action plan, and

addresses 4 to 6 relevant issues (overcoming cons and other implementation and/or minor issues). May have some minor problems.

BE = Implementation/action plan is not reasonable (too brief, serious problems). NA = No attempt to provide an implementation plan.

2. APPLICATION OF QUANTITATIVE TOOLS (F3, F4, F5, F6) In assessing this component, attributes b) and c) should be weighted more heavily than attribute a). a) Financial and Performance Analysis of Delfa and R&A: (F3, F6)

Appropriate methods of analysis are applied correctly in evaluating performance and financial risk of Delfa and R&A (current financial assessment, effects of recommendations on ratios, etc.). Appropriate application includes correct calculation and interpretation. Appropriate methods of financial and performance analysis include analysis of financial ratios and trends; analysis of the profit centres; and calculation of the times interest earned ratio (TIE) for Delfa (past or expected for the alternatives or the recommended strategy) and comparison of the TIE to the bank constraint of at least 3 times. The ratio analysis in the current financial assessment includes a balance of relevant ratios (liquidity, coverage, activity, profitability). AE = Two or more financial and performance analysis methods are appropriately

applied (e.g. balance of four relevant ratios for three years, comparing Delfa’s and/or R&A’s past or expected TIE against bank constraint, calculating profitability of profit centres, etc.).

ME = One financial assessment method is appropriately applied for Delfa (e.g. balance of three or four relevant ratios for two or three years, calculated and interpreted).

BE = Financial assessment methods are not applied sufficiently or appropriately (e.g. ratios are calculated but not interpreted).

NA = No attempt to apply a financial assessment or organizational performance analysis concept or tool.


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b) Quantitative Decision Analysis of Strategic Alternatives: (F3, F5) 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 should be applied in the quantitative analyses of the strategic alternatives: 1. Profitability analysis and performance indicators: Relevant revenues, costs,

contribution margins, opportunity costs, cash flows, break even, net income, earnings before interest and taxes (EBIT), and/or performance indicators used by Delfa (i.e. revenue level, net profit as a percentage of sales) are appropriately calculated and interpreted for the alternatives or for the recommended strategy.

2. Capital budgeting / discounted cash flow analysis: Appropriate capital budgeting or discounted cash flow analysis methods (e.g. net present value, internal rate of return) 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 an appropriate number of years (e.g. 5 years for the NCI and GPS alternatives);

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

rate (e.g. 30% for shelving and equipment). 3. Capacity analysis: The capacity required and available (in terms of bins or

square metres of floor space) for the various alternatives or for the recommended strategy is analyzed (e.g. determine the shortage of bins, the projected free bins, the opportunity cost of refusing business from current customers as a result of a shortage of bins, the potential incremental contribution that can be generated if the free bins are rented, etc.).

AE = Quantitative decision analysis concepts and tools from the above three

categories are applied appropriately in the analysis of the alternatives (at least three alternatives must be analyzed; there may be some relatively minor weaknesses in the application).

ME = Quantitative decision analysis concepts and tools from the above three categories are applied reasonably in the analysis of the alternatives (at least two alternatives must be analyzed; there may be some relatively minor weaknesses in the application).

BE = The attempt to apply quantitative decision analysis concepts and tools is not reasonable (e.g. there are several major weaknesses, such as omitting two or three key inputs).

NA = No attempt to apply quantitative decision analysis concepts or tools.


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c) Valuation, Financial Forecast, Financing, Quantitative Analysis of Minor Issues

and Application of Other Quantitative Tools: (F3, F5, F6) Other quantitative tools are applied appropriately in the response, such as the following: 1. Valuation – The value of R&A’s shares to Delfa is calculated using a reasonable

valuation method (e.g. capitalization of future earnings, net asset value) and compared to the asking price of the shares (e.g. the amount of goodwill reflected in the purchase price is calculated).

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 pro forma income or cash flow statements, pro forma balance sheet, projected net income or projected TIE.

3. Financing required and available – The financing required for the strategic alternatives (R&A, expand warehousing operation, lease new printing equipment) and other financial needs (e.g. purchase new software) is calculated and compared against the financing available from the bank and operations (e.g. $2.5 million bank loan, cash flows generated from future operations).

4. Other quantitative tools and quantitative analysis of minor issues – Quantitative analysis of minor issues (e.g. quantitative effect of acquiring new scheduling software) and any quantitative tools used in the response that are not assessed elsewhere are assessed as part of this attribute.

The quantitative analyses listed above are reasonable (e.g. free of serious errors, reasonable assumptions, overall reasonable quality). For example, in the financial forecast, omitting a non-material cost associated with a minor issue is a minor error; whereas providing expenses that do not match the level of sales volume is a serious error. Any assumptions made are reasonable and relevant. Whether an unreasonable assumption is a serious or minor error is a matter of judgment (e.g. how significantly the assumption affects the bottom line). AE = The value of R&A’s shares is assessed, a reasonable financial forecast

incorporating the recommendations is provided, and financing required versus available is analyzed for the recommended strategy.

ME = The value of R&A’s shares is assessed, or a reasonable financial forecast incorporating at least one strategic alternative is provided, and financing required versus available are reasonably analyzed for at least one alternative. There may be some relatively minor errors.

BE = None of the other quantitative analysis tools listed above are used in the response in a reasonable manner.

NA = No attempt to provide other quantitative analysis.


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3. APPLICATION OF QUALITATIVE FUNCTIONAL CONCEPTS (F1, F2, F3, F4, F5, F6, E3)

Neither attribute stands out as being more important than the other. Judgment should be used in assigning an assessment for this component. a) Strategic Management, Risk Management, Governance, Environmental and Ethical

Issues: (F1, F2, E3) The qualitative analyses demonstrate reasonable understanding of relevant concepts pertaining to strategic management, risk management, governance, environmental and ethical issues. Relevant issues are identified (anywhere in the response) and appropriately used or resolved (e.g. use appropriately in analysis of an alternative; recommend procedures for sharing, transferring and/or reducing risk). Relevant concepts and issues include (but are not limited to) the following: 1. Value disciplines, target markets/segments, competitive business strategies –

Operational excellence versus customer intimacy versus product leadership, cost leadership versus differentiation strategy and other strategic aspects of the analysis of the issues and alternatives.

2. Change management, communication, organizational structure and corporate culture – Effectively communicating the strategic change to staff to promote smooth implementation, corporate culture, integrating two companies (e.g. union versus non-union), etc.

3. Internal control and ethical issues – Joly’s unethical suggestion, inventory shortages in the warehouse (theft or tracking errors), unarmed alarm system, etc.

4. External/environmental risks, compliance and governance, risks associated with strategic alternatives – Effect of fluctuating paper and fuel costs, industry consolidation, the recession, decreasing demand for printing, increasing popularity of digital printing, etc.

AE = Six or more relevant concepts/issues are identified and at least five of them

are appropriately used or resolved. ME = Four or five relevant concepts/issues are identified and at least four of them

are appropriately used or resolved. BE = Fewer than four relevant concepts/issues are identified or appropriately used

or resolved. NA = No relevant concepts/issues are identified.


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b) Performance Management, Performance Measurement, Financial Management and Financial Accounting Issues: (F3, F4, F5, F6) The qualitative analyses demonstrate reasonable understanding of relevant concepts pertaining to performance management, performance measurement, 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: 1. Cost management – Managing costs for labour, paper, overtime, IT, equipment,

facility, transporting goods between new warehouse and Delfa, software, etc. 2. Revenue management – Marketing (e.g. seek new customers to fill excess

warehousing capacity if additional warehouse space is leased), etc. 3. Operations and capacity management – Bottlenecks, backlogs, lack of digital

printing capacity, warehouse capacity, late deliveries, lack of space for new printing equipment, facility layout, transporting goods from new warehouse to Delfa for packaging and shipping, wrong proofs used in early production, inventory/docket management, employees burning out, unionization, ISO certification, turnover, etc.

4. Information systems and information technology – On-line job tracking, information systems requirements for scheduling and inventory management, etc.

5. Performance measurement – Allocation of costs to profit centres, performance measures, bonuses, motivation, etc.

6. Financial management – Sources of financing, debt load, increasing accounts receivable collection period, working capital management (e.g. investment in inventory and accounts receivable), dividend payout, financial risks, etc.

7. Financial reporting – Financial reporting issues such as revenue recognition, capitalize versus expense reorganization costs, etc.

AE = Eight or more relevant concepts/issues are identified and at least five of them

are appropriately used or resolved. ME = Five to seven relevant concepts/issues are identified and at least four of them

are appropriately used or resolved. BE = Fewer than five relevant concepts/issues are identified or appropriately used

or resolved. NA = No relevant concepts/issues are identified.


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4. APPLICATION OF A SYSTEMATIC APPROACH FOR ISSUE ANALYSIS (E1, E2, E3)

In assessing this component, attribute b) should be given the greatest weight. a) Issue Identification and Prioritization: (E1, E3)

A reasonable number of issues and at least three strategic alternatives are identified and prioritized reasonably (e.g. the most important issues/alternatives are addressed first and in the greatest depth). For this case, the most important issues are to develop a plan for increasing income and cash flows in the wake of the loss of a large customer (IIC) and prevent the bank from calling the loans. The strategic alternatives should focus on these critical issues. An integral component of the main issues is the management of capacity. The following indicates alternatives and other important issues: 1. Strategic alternatives:

a) Acquire Ready and Able Printing Ltd. (R&A). b) Accept the Northern Complete Insurance Inc. (NCI) warehousing contract. c) Expand the warehousing capacity. d) Accept the General Printing Services Inc. (GPS) contract. If the alternative to expand the warehousing capacity is considered as a component of another alternative, credit should be given for recognizing both alternatives.

2. Other important issues/areas of concern requiring attention: a) Financing and financial management issues (financing requirements and

sources, increasing accounts receivable collection period). b) Operational inefficiencies and capacity utilization (e.g. bottlenecks, backlogs,

overtime, using incorrect version of digital proof, ISO certification, management of dockets, inventory management, late deliveries, lack of printing capacity, managing warehousing capacity, lack of space for printing equipment).

c) Information technology issues (e.g. job tracking, scheduling software). d) Strategic management issues (e.g. dependence on a few large customers,

dependence on insurance/financial industry). e) Internal control and ethical issues (e.g. Joly’s suggestion to continue charging

current customers for bins being used for NCI, shortages in warehouse inventory from theft or inventory tracking errors, alarm system not being armed at end of day).

f) Risk management and environmental issues (e.g. fuel costs, market prices, growing popularity of digital printing).

g) Performance measurement (e.g. consequences if bonuses are not paid in 2009).

h) Change management and human resources (e.g. integrating two companies, union versus non-union workforces, burnout).


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AE = The four strategic alternatives and more than fourteen other issues are

identified, and the prioritization of the issues is reasonable. ME = The three main strategic alternatives (R&A, NCI, GPS) and twelve to fourteen

other issues are identified, and the prioritization of the issues is acceptable (there may be minor problems with prioritization).

BE = Fewer than three main strategic alternatives and fewer than twelve other issues are identified, or there are major problems with prioritization.

NA = No alternatives or issues are identified.

b) Analysis of Issues and Alternatives: (E1, E2) The analyses of the issues and alternatives are of appropriate depth and breadth, balanced (pros/cons, quantitative/qualitative), and objective/free of bias. In addition, more than one perspective/a global view is considered (e.g. mission, goals, stakeholder preferences and constraints; effects of alternatives on revenues, income, customers, environment, human resources, operations, other functions). AE = The analyses are of reasonable depth and breadth, balanced and objective,

and more than one perspective/a global view is considered (mission, goals, senior management, customers, and organizational functions).

ME = The analyses are of reasonable breadth and balance, and may have limited depth and/or some bias.

BE = Unacceptable depth and breadth, and inappropriate balance. NA = No issues or alternatives are analyzed.

c) Relevancy: Use of Case Facts and Assumptions: (E1, E3) Relevant case facts are appropriately used and explained in the response. As well, ambiguous and/or missing information is identified and assumptions are clearly stated (e.g. assumptions pertaining to future revenues, demand, expenses, cost behaviour, etc.). [Note: The quality of the use of case facts and of the assumptions is assessed in components 1, 2 and 3. For component 4, clearly stating an assumption in most cases identifies the ambiguous and/or missing information.] AE = Most of the relevant case facts are used appropriately and

ambiguities/assumptions are clearly identified. ME = Many of the relevant case facts are used appropriately and

ambiguities/assumptions are identified. BE = Few relevant case facts or some irrelevant information is used and

ambiguities/assumptions are not adequately identified. NA = No case facts are used and no ambiguities/assumptions are identified.


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5. RECOMMENDATIONS AND CONCLUSIONS (judgment/leadership) (E1, E2)

Strategic alternatives are measured in terms of important decision criteria (e.g. goals, targets, constraints, key success factors, significant risks, etc.). Recommendations and conclusions for the strategic alternatives and minor issues are feasible, logical, realistic, supported, consistent and presented in a convincing manner. For the recommendations to be convincing, the response should demonstrate the following:

1. The bank’s constraint of a times interest earned ratio of at least 3 times would be met.

2. The main issues of increasing profits, cash flows and capacity utilization are sufficiently addressed.

AE = All of the above. ME = The bank constraint is considered and recommendations are convincing.

However, there are some minor problems with recommendations and conclusions (e.g. the ranking of alternatives is reasonable but somewhat arbitrary, profits but not cash flows are addressed).

BE = Serious problems with recommendations/conclusions and/or they are not convincing.

NA = No recommendations or conclusions are made.

6. PROFESSIONALISM AND COMMUNICATION (E3, E4) Neither of the attributes stands out as being more important than the other. Judgment should be used in assigning an assessment for this component. a) Report Format and Organization: (E4)

The format and organization of the report are appropriate: 1. The following components of appropriate long report format are present: i) cover

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

2. The executive summary (ES) is concise (i.e. does not exceed one page) and highlights or summarizes the strategic alternatives, recommendations, and significant 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); 6. The content of the report is organized appropriately for a business report

(e.g. uses headings and subheadings, is appropriately sequenced, uses lists effectively where appropriate).


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AE = All components are present and of appropriate quality, and the content is organized appropriately.

ME = One or two components are missing or are not appropriate, and some minor errors/problems with organization are evident.

BE = More than two components are missing or are not appropriate, and some major errors/problems with organization are evident.

NA = A response is not attempted.

b) Professional Tone, Tact, Language, Style, and Flow: (E3, E4) The tone, tact, language, style and flow of the response are appropriate: 1. The report reflects appropriate professional tone and tact, and addresses the

appropriate audience (e.g. tact is used in any criticism of management’s suggestions, desires and goals; there are no direct references to the case or specific indications to the marker that a point made is a “link”).

2. The language used in the report is without a distracting number of deviations from business norms, jargon, or unexplained abbreviations, and has no more than a reasonable number of spelling, grammar, sentence structure, punctuation, or typographical errors considering the four-hour time constraint and the lack of tools such as spell-checker.

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

4. References, labels and audit trails are provided where appropriate and descriptive titles of appendices and tables are provided (e.g. the response is easy to follow).

AE = Minor problems with tone, tact, language use and content expression, the

response is easy to follow and flows well, and the right audience is addressed.

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

BE = Major problems, distracting errors, and the response is difficult to follow. NA = A response is not attempted.


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Sample Response Successful Attempt #1

To: Senior Management of Delfa Printing Limited From: Kim Cheung Re: Business and functional issues facing Delfa Date: May 31, 2009 Please find the attached report addressing the key strategic and operational issues facing Delfa. Sincerely, Kim Cheung Kim Cheung Assistant Controller


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Executive Summary Delfa has recently lost a contract with a large international customer which has increased capacity and significantly impacted revenue. In addition, the Canadian economy is slumping which has had a positive impact on production costs but the market for printed materials is shrinking. In order to mitigate the financial impact of the lost business and ensure that the bank covenant is met so that it does not demand repayment of the loan and mortgage, several alternatives were assessed. The alternatives include acquiring Ready and Able Printing Ltd, providing document storage services to Northern Complete Insurance, accept a printing contract with General Printing Services Inc and expanding the warehouse space. It is recommended that Delfa pursue the 2 available contracts and expand their warehousing space. The additional contracts will ensure that the lost revenue from the IIC contract is recaptured and that the times interest earned ratio remains over 3. Both contracts bring a large NPV and are aligned with the firm’s mission. The expansion of warehousing space will ensure that a majority of the capacity issues are managed and leaves opportunity for the firm to better leverage their print on demand services.


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Introduction The purpose of the following report is to address the key strategic and operational issues currently facing Delfa Printing Limited (Delfa). Specifically, this report will include an analysis of the current situation, identification of major issues, analysis of alternatives to address the major issues, a recommended course of action and implementation plan. Situational Analysis Mission Statement The mission statement of Delfa was reviewed and re-approved in January of 2008. It is as follows: "Working in partnership with suppliers and customers, Delfa Printing Ltd. helps Canadian organizations of all sizes succeed by providing them with a wide range of high-quality printing and document management services at competitive prices" Stakeholder Preferences Tom Delfino: - believes printing will always be a major contributor to the Canadian economy - believes that Delfa should continually strive to find new growth opportunities in the

printing industry - believes profits are maximized by keeping the high-volume offset printers running

continuously - believes in establishing long term relationships with large customers Chris Farugia: - believes that keeping the customer happy is the key to success and Delfa should

continually look for new ways to fulfill their needs - believes in establishing long term relationships with large customers Ajay Singh: - Believes in staying up to date on the latest advancements in printing technology - Would prefer Delta to focus on printing Bank: - Wants to ensure repayment of loans and mortgage; specified that times interest

earned must remain above 3 Constraints The key constraints facing Delfa include:


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- Times interest earned ratio must remain above 3, otherwise the bank can demand repayment on the outstanding mortgage and loans

- Current capacity of the warehouse is 3300 bins (projected 3200 used in 2009) - Delfa expects a minimum after-tax return of 10% on capital investments - The board of directors defined financial targets for Delfa: increase in printing and

warehouse revenue 5% and achieving net profit of 4.0% of sales Additional SWOT Strengths - knowledgeable sales reps and account managers - employees aligned to organizational goals through target setting process - ability to withstand recession in the first half of 2009 Weaknesses - 8 customers drive 80% of their revenue - Job approval process is very manual and inefficient - Potential for employees to unionize and increase wages by 10% - Some customers are taking longer to pay their invoices - excess capacity and lost revenue due to lost contract with large insurance firm; this

jeopardizes the bank covenant in 2010 - Delfa is below the industry average in terms of the % of jobs completed with digital

equipment - Digital printing capacity is full - Alarm system not always armed - Shortages in warehouse inventory (theft or inventory tracking errors) - overtime is burning out employees and becoming high - digital printing jobs are backlogged - incorrect version of a digital proof was used in the production process Opportunities - World prices for fuel and paper decreased, reducing production costs - Offset printers were becoming available at inexpensive prices Threats - Canadian economy in recession - Value of Canadian dollar decreased - Demand for printed materials decreased - Job tracking offered by competition (AIPI)


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Key Success Factors - Warehousing and inventory management services (value added) - High quality printing - Excellent customer service; particular focus on large customers - Competitive pricing Risks - Warehouse capacity - Demand for printed services is declining - Digital printing is at capacity Financial Analysis After a review of the financial statements for Delfa, the following key points are made (see Appendix 1): - Liquidity is good. The current ratio has been over 2 for the past 3 years and the quick

ratio has been over 1 for the past 3 years, indicating that the firm can easily meet is obligations due in the next 12 months with near cash assets

- The debt to asset ratio indicates that the firm’s funds are approximately 50% financed by debt.

- The times interest earned ratio has remained well above the bank covenant of 3 for the past 3 years, however it is expected to decline from 7.24 in 2008 to 5.55 in 2009. The current projection for 2010 is for this ratio to be 0.2

- Both the AR turnover and inventory turnover ratios show a decreasing trend. This should be monitored as it can lead to cash flow issues.

- The fixed asset turnover ratio indicates that the firm is being more productive in generating revenue with its assets as the ratio has increased over the past 3 years.

- The dividend payout ratio is very high which indicates that the firm does not reinvest its cash back in to the business. This is disconnected to the preferences of the main shareholder, Delfino, as he wants the business to grow. The dividend policy should be reviewed if the firm needs cash to finance future projects.

- Both revenue growth and net income growth show some instability as they have fluctuated over the past 3 years.

- The gross profit and net profit % are projected to decline in 2009 from their stable levels of the past several years of 30% and 4% respectively.

- Warehousing delivers the higher gross and net profit % than printing, however 88% of the revenue is generated from printing indicating mix should be assessed.

Financing Available - bank loan of up to 2.5 million repayable over 5 years at 6% - cash = $493 - cash from operations in 2009 = $1036000 (net income less amortization)


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Major Strategic Issues The major issues facing Delfa including the loss of the IIC contract which reduces revenue and creates excess capacity and to ensure that the bank covenant is achieved so that the bank doesn’t ask for repayment of the current mortgage and loans. The following section will analyze alternatives to address these issue including acquiring Ready and Able Printing Ltd, providing document storage services to Northern Complete Insurance, accept a printing contract with General Printing Services Inc and expanding the warehouse space. Analysis of Alternatives Alternative 1 - Acquire Ready and Able Printing Limited Pros - located in same urban industrial area (maintain strength) - reduce local competition which is a current threat - Delfino has a personal relationship with the owner, reducing the risk of purchase - R&A has newer digital equipment with capacity (address current weakness) - revenue base is much more diversified than Delfa, reducing exposure to customer

power Cons - $2.3 million due upfront - R&A employees are unionized which may mean Delfa has to unionize its workers

which would increase wages by 10% - R&A has significant staff turnover - R&A staff has little experience which is not aligned with Delfa's key success factor of

high quality - The 3 year NPV on the project is -2.1 million indicating that it does not meet the

constraint of 10% after tax return (appendix 1) The fact that this option does not meet the hurdle of 10% after tax return indicates that it is a poor option at this point in time. The large outlay of 2.3 million would increase the firm’s debt and interest which is already a concern. Alternative 2 - Northern Complete Insurance contract Pros - NCI has good credit rating and usually pays within 30 days; AR turnover is an issue so

this would help - Increase in cash flow would help the Times interest earned ratio (assuming no

additional debt) (appendix 3) - Potential future opportunities to grow with the customer with printing services which is

aligned to Delfino’s preferences


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Cons - Delfa would need to refuse business from some current small customers, against

mission of helping businesses succeed - rental rate per month is lower than average which negatively impacts profit and

potential to meet targets set out by board of directors - doesn’t address current weakness of full capacity on warehouse This option provides a large 5 year NPV and requires little upfront outlay. It will help the future times interest earned ratio and has many potential to increase business with this large customer. Alternative 3 - General Printing Services Inc contract Pros - utilize offset printers which is aligned with Delfino’s preference for the firm - warehousing would not be required which helps current weakness of little capacity in

the warehouse - The 5 year NPV of the contact is 3.9 million indicating its potential with this customer

and that it meets the investment constraint of delivering 10% after tax return (appendix 4)

- The increase to times interest earned ratio in 2009 and 2010 is 4.41 and 4.58 - takes advantage of current lower production costs on printing (opportunity) Cons - would need to get ISO certified (2 year process) or be in the process - payment terms of net 60 days would impact AR turnover which is a current weakness - not aligned with Ajay Singh’s preferences - Delfa would need to pursue ISO certification which would take 2 years - would require initial cash outlay of 340,000 This appears to be a good solution for Delfa to make up some lost revenue from the IIC contract. They would need an additional source of warehouse capacity if pursued as it will require them to eliminate 1200 bins. Alternative 4 - Expand warehouse Pros - close to current location which is a strength - offer 750 additional bins to Delfa - NPV on project over 5 years which meets constraint of 10% after tax return on capital

investments (appendix 5) - higher margin business will drive increased profits and help the company achieve its

target set out by the board of directors Cons - not aligned with Singh’s preferences


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- there would still exist excess demand for warehousing needs so this option would mean that Delfa would still need to forgo some business which is not in the preference of Delfino

Recommendation It is recommended that Delfa do not purchase R&A, pursue the contract with NCI and GPS and expand its warehousing. The NCI contract will increase operating profit which will reduce the threat of the times interest earned ratio not being met and the impact of the lost contract and bring future opportunity with this large insurance company which is aligned with Delfino's interests of growth. The GPS contract will bring in business on a highly profitable operation and meets the investment criteria of an after tax return of 10%.This contract also helps mitigate the impact of the lost IIC contract and the additional operating profit will help in increasing the times interest earned ratio. Both of the above contracts do not increase the already large debt load of the firm which is a current weakness and are aligned with the firms current mission. The additional contracts with NCI and GPS will mitigate the impact of the lost IIC contract and will ensure that the 2010 times interest earned ratio remains above 3 as no additional debt is taken on (Appendix 6). The revenue on the GPS contract alone is much greater than the revenue on the lost contract and in combination with the increased focus on warehousing, the higher margin business, the firm will meet the profit targets set out by the board of directors. There will be a slight issue remaining with the warehouse whereby the firm will need to manage their inventory situation. They have the option of temporarily renting out other local warehouses to store the printing jobs or work with the smaller customers to produce to their requirements with their POD feature. The initial outlay for the suggested recommendations can be financed with the operation cash from 2009. Delfino believes in the growth of the firm and should be aligned to reducing the dividend payout to ensure that the growth opportunities can be achieved. The mission of the firm still applies and does not need to be restated at this point in time. Implementation Plan To ensure a successful implementation of the above recommendations, Delfa should act on the following: - contact NCI to solidify agreement starting Nov 1 2009 - contact GPS and discuss the opportunity of a contract beginning Nov 1 2009 - begin process of becoming ISO 9000 certified - communicate the change of additional warehousing services to employees so that

they are aware of the change in business


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To address the cons of the suggested alternatives, Delfa should: - look for additional opportunities to increase warehouse capacity within the current

local area of the Delfa office - allow Singh to be part of a change management team to ensure that his interests are

taken into consideration in the warehousing expansion Appendix 7 outlines specific details regarding the action plan. Operational Issues Operations Management Overtime is currently burning out employees which could impact employee morale which is a current strength. Delfa should look at its scheduling process to ensure that the optimal path is taken to complete each order. Potentially Delfa should look at upgrading its job approval system to be online to ensure efficiency in completing jobs and create some slack in this process. The head of IT and Ajay Singh should investigate this matter in the next few months. Incorrect digital proofs were used in the production process which could have drastically impacted the firm’s key success factor of excellent customer services. The process for sending digital images to the printer should be investigated by Ajay by finding the job records and identifying the employee who is responsible. Delfa seems to have a fairly efficient inventory management process but the recent shortages in warehouse inventory suggests that some problems have occurred. To ensure that costs are controlled and that the service level is not impacted Delfa should have both the account management and the person entering in the electronic inventory file check that the amounts entered are correct. Additionally several security cameras should be installed in the warehouse to ensure that the inventory can be monitored. This should be lead by Pat Giani and should be implemented over the next few months. Revenue Management To combat the risk of having 80% of their revenue with 8 customers the firm should seek ways to diversify their business and establish good relationships with smaller customers in addition to the larger customers. Simone Joly should invite some of the smaller accounts to the office to introduce them to all of the services offered by the firm and increasing the trusting relationships. This should be completed within the next few months. The issue of customers taking longer to pay invoices should be address through reminders sent from the administrative support team to each customer. After the 30 days period if the invoice has not been paid a letter or email should be sent to the customer. This will help ensure that payments are received on time and that cash flow doesn’t become an issue.


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Internal Control The alarm system not always being armed is a very large internal control and impacts the safeguarding of the firms critical assets. Pat Giani should initiate a process whereby the last person leaving the building must sign a sheet indicating that they have set the alarm and locked the building. There needs to be accountability for this process and it needs to be corrected immediately. There should be regular reviews of internal control issues bi monthly to ensure that issues like this are continually monitored. Ethics The suggestion by Joly to shorten print runs for some customers to open sufficient warehouse space for NCI's needs should not be taken. Furthermore this ethical matter should be taken seriously and the HR manager should ensure that a copy of the firm’s code of conduct is given to each employee to enforce that unethical behaviour is not accepted. Sue Welsh should follow up with Joly immediately to ensure that she understands that this type of suggestion is not acceptable. Conclusion By following the recommended course of action, Delfa will ensure that it can handle the impact of the lost contract and that the times interest earned ratio will remain over 3 to ensure the firm remains viable and successful.


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Appendix 1 Financial Analysis

Liquidity 2009 2008 2007 2006Current Ratio =current assets/current liabilities 2.61 2.58 2.38Quick Ratio =cash+AR+marketable securities/

current liabilities 1.94 1.89

Coverage Times Interest Earned

=EBIT/Interest payment 5.55 7.24 5.95 6.63

Debt to Asset =Total debt/Total Assets 0.51 0.51 0.52

Activity AR Turnover =Credit Sales/AR1 5.50 5.75 6.20Inventory Turnover =COGS/Inventory 22.43 23.07 25.37Fixed Asset Turnover

=Sales/Total Fixed Assets 3.65 3.29 3.16

Profitability Dividend Payout Ratio

=Dividends/Net Income 0.96 1.06 0.91

ROA =Net Income/Total Assets 0.10 0.08 0.09

Revenue Growth % =(Rev2-Rev1)/Rev1 0.06 -0.02 0.05NI Growth % =(NI2-NI1)/NI1 0.22 -0.14 0.28

1 Assumes 50% sales are on credit


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Appendix 2 Purchase Ready and Able Printing

Financing Required (@10%)

Year 0 Year 1 Year 2 Year 3 Initial Payment 2,300,000 Subsequent Payments 500,000 500,000 500,000 PV(@ 10%) 2,300,000 454,545 413,223 375,657 PV of purchase price 3,543,426

Incremental Savings

Year 1 Year 2 Year 3 Year 4 Year 5Synergies (after tax @ 35%) 162,500 162,500 162,500 162,500 R&A cash flow generated 705,000 705,000 705,000 Total 867,500 867,500 867,500 After tax total 563,875 563,875 563,875 PV (@10%) 512,614 466,012 423,648 1,402,274 Total PV 1,402,274 Purchase Price 3,543,426 NPV -2,141,152

Cash Flow of R&A 2,008

Income Before Tax 538,000 Amortization 282,000 Chg in Working Capital: Chg in current assets -160,000 Chg in current liabilities 45,000

Total FCF 705,000

Impact on Times Interest Earned Ratio Additional Capacity


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Appendix 3 Contract with Northern Complete Insurance

Capacity Available 2009 2010

Total 3,300 3,300IIC 1,300 0Large customers 1,420 1,420Small customers 480 480Available 100 1,400Required 0 1,700Opportunity cost of other customers -300

NPV Before Tax Per Year

After Tax (35%)

PV (n=5, i=10)

Warehouse Revenue (1700*70*12) 1,428,000 928,200Warehouse Costs (225*1700) -382,500 -248,625Opportunity cost of 300 bins (-75*300+225*300)

-202,500 -131,625

Total 843,000 547,950 2,077,162

Impact on Times Interest Earned 2009 2010

NCI - operating cash flow 1,045,500 1,045,500Lost profit from 300 bins -202,500 -202,500

843,000 843,000

Interest Expense 247,000 237,497 (see aside) Increase in Times interest earned 3 4

Aside: 2010 Interest Expense: Mortgage Loan

2008 Balance 3,068,610 783,9362009 Principal Pmt 83,419 54,1152009 Balance 2,985,191 729,8212010 Interest 179,111 58,386 237,497


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Appendix 4 Accept Contract with General Printing Services Inc.

NPV (5 years) One Time Per Year PV

Annual Revenue 6,000,000 Variable Costs (65% based on 2008) 3,900,000 Increase in contribution margin 2,100,000 Lost profit on bins(75*12-225)*1200 -810,000 Equipment -200,000 Total annual cash flow change 1,090,000 4,131,958 (n=5, i=10%)

Reorganization of layout -50,000 -50,000 ISO Certification -90,000 -156,198 n=2, i=10%

NPV 5 years 3,925,760

Financing Required Year 1 Reorganization of layout 50,000 ISO Certification 90,000 Equipment 200,000

340,000

Impact on Times Interest Earned 2009 2010

Interest 247,000 237,497

Increase in operating earnings 1,090,000 1,090,000

Increase in times interest earned 4.41 4.59

Warehouse capacity 2009 2010

Available (ex IIC) 100 1400 Removed 1200 +/- 200


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Appendix 5 Expand Warehouse Space

Per Year One Time PV (n=15)

Rent on building -72,000 Fixed overhead -150,000 Add'l profit 506,250 Incremental profit 284,250 1,077,531 n=5, i=10% Shelving -60,000 -60,000

Total NPV 1017531

Warehouse Capacity 2009 2010 bins 3,300 3,300 add'l capacity 750 750 Total 4,050 4,050 Large and small cust 3,200 1,900 +/- 850 2,150 NCI contract 1,700 GPI contract 1,200 +/- -750

Profit per Bin Per Month Per Year Revenue 75 900 Cost 225

675 # of bins 750

506,250


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Appendix 6 Resource Analysis

Financing ('000) NCI contract 0 GPS Contract 340 Warehouse 60 Total 400

Available 2009 Est Cash flow 1,559

Warehouse Space 2010

Total 3,300 IIC 0 Large customers 1,420 Small customers 480 NCI contract 1,700 GPS Contract 1,200 Warehouse 750 +/- -750 Therefore some small customers revenue must be forgone

Times Interest Earned Ratio

( in '000) 2010

Delfa

NCI Contract

GPS Contract Warehouse Total

Revenue 20,780 CM 5,777 EBIT 49 843 1,090 284 2,26

6

Interest 238 0 0 0 238

Times interest earned

0.21 9.52

EBT -189 843 1,090 284 2,02

8 NI -123 548 709 185 1,31

8


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Appendix 7 Action Plan for Recommendations

Who What When Resources Ajay Singh Get ISO certified immediately $90,000 per year Sr account management contact GPS immediately cost of business Chris Farugia sign agreement with GPS 1 month cost of business Sr account management contact NCI immediately cost of business Chris Farugia sign agreement with NCI 1 month cost of business Pat Giani, real estate agent research available warehousing 1 month $200 fees HR manager, Pat Giani communicate warehouse

expansion change immediately email employees


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Marker’s Comments Successful Attempt #1

Introduction to the Feedback

The feedback is designed to

1. clarify what was expected of the response, 2. describe what it does well, and 3. highlight areas for improvement on specific components where the response does

not meet expectations.

Required Element of the Case

The May 2009 Case Examination focuses on Delfa Printing Ltd. (Delfa), a Canadian-controlled private corporation that offers commercial printing and warehousing services to businesses of all sizes. As the Canadian economy slips into recession, Delfa loses an important contract with International Insurance Corporation (IIC) and faces the possibility of having its bank demand immediate repayment of its loans.

The Required element of the case is as follows:


The senior management team identified the following three main alternatives that might address the loss of IIC’s business and ensure that the bank will not demand immediate repayment of the loans:

1. Acquire Ready and Able Printing Ltd. (R&A), provided the asking price for R&A’s shares is fair.

2. Entering into a contract with Northern Complete Insurance Inc. (NCI) for warehousing.

3. Entering into a contract with General Printing Services Inc. (GPS) for offset printing.

The report should also address capacity constraints in both the warehousing and printing operations, including the alternative of leasing nearby warehouse space.

General Reasons the Response is Successful

The response is successful because it reasonably resolves the Required element of the case.


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• The recommendations, conclusions, and solutions are logical, feasible, realistic, and supported. The alternatives recommended are those that are shown to meet the target times interest earned ratio. As well, there is an attempt to prove that adequate financing is available and many operational issues are sufficiently addressed.

• All elements of a systematic approach are present in a good form within the response. The extent of the data gathering is appropriate for the case issues and problems being addressed, the major alternatives and many of the minor issues are identified and analyzed using the relevant data collected, recommendations are clearly stated, and an implementation plan is provided.

• The response appropriately prioritizes issues and alternatives. The analyses of the issues and alternatives are objective, reasonably balanced, free of bias, and of appropriate breadth and depth.

Positive Aspects of the Response

Some aspects of the response are well done.

• The quality of the situational analysis is good. New SWOT points are identified, as well as the mission, stakeholder preferences, constraints, risks and key success factors. The main issue of the loss of the IIC contract, resulting in excess warehouse capacity and the times interest earned falling below the bank constraint, is also recognized.

• Integration is reasonably demonstrated by identifying connections between related elements of the case and how one element affects another. Many of the points made in the situational analysis are used in the analysis of the alternatives.

• Overall, the implementation plan is well done. The implementation plan appropriately identifies some tasks, matches the task to appropriate individuals and provides timelines for completing these tasks. Additionally, the major con of the recommended strategy is addressed (e.g. look for additional warehouse capacity or work with smaller customers to produce their requirements with print on demand services) and some of the minor issues are addressed (e.g. operations management, revenue management, internal control). As well, financing required for the recommendations is considered (Appendix 6).

• Relevant concepts and issues pertaining to strategic management, risk management, governance environmental or ethical issues, performance management and measurement, financial management or financial accounting are appropriately used or resolved in the response.


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• Many elements of a well-formatted report are present. The body of the report is well organized and makes good use of headings, subheadings, and lists. The language, style, tone, grammar, and sentence structure used in the response are reasonable. In most cases, the audit trail is reasonable in the quantitative analysis.

Feedback on Components that did not Meet Expectations

The remaining feedback highlights areas for improvement on specific components where the response does not meet expectations.

Please refer to the Marker Assessment Guide for more information about the attributes assessed for each component.

The attributes and components have different weights in determining the overall grade.

Please note that the response meets or exceeds expectations for any attributes and components listed in the Marker Assessment Guide but not described below. The comments below focus only on the attributes and components where the response does not meet expectations or barely meets expectations.

2. APPLICATION OF QUANTITATIVE TOOLS

2b) Quantitative Decision Analysis of Strategic Alternatives: Appropriate decision analysis tools (e.g. profitability analysis, capital budgeting and capacity analysis) are applied in the analysis of all alternatives. Overall, the application of quantitative tools is well done; however some errors are made. For example: In the analysis of “Contract with Northern Complete Insurance” (Appendix 3):

• The calculation of cash flows do not consider warehouse variable selling and administration costs, and the opportunity costs do not consider lost printing revenue related to turning away customers.

In the analyses of “Accept Contract with General Printing Services Inc.” (Appendix 4) and “Expand warehouse space” (Appendix 5):

• After-tax cash flows are not used.

2c) Valuation, Financial Forecast, Financing, Quantitative Analysis of Minor Issues and Application of other Quantitative Tools:

The partial forecast and calculation of the “Times Interest Earned Ratio” in Appendix 6 incorrectly adds the earnings before interest and taxes from the warehouse alternative versus decreasing the overall earnings before interest and taxes for 750 bins and


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related printing revenue for customers that must be turned away, due to limited capacity (as a result of accepting both the NCI contract and the GPS contract). The value of R & A’s shares to Delfa is not calculated using a reasonable valuation method (e.g. capitalization of future earnings, net asset value) and compared to the asking price of the shares. The financing required and financing available for implementing the recommended alternatives are identified in the response (Appendix 6); however, the response would be improved if it provided an audit trail for the “2009 Est cash flow”.

5. RECOMMENDATIONS AND CONCLUSIONS (judgment/leadership) The recommendations are not adequately presented in a convincing manner. For example, the response could be improved by calculating the impact of turning away customers since there is no clear option for renting out other warehouses. Alternatively, the response could assume costs to rent an additional warehouse and calculate the profitability in doing so. Additionally, the implementation plan could be improved by considering actions and resources required to prepare Delfa’s facility for the GPS contract, and the potential loss in revenue if Delfa has to turn some small customers away.


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Sample Response Successful Attempt #2

DELFA PRINTING LTD

MANAGEMENT REPORT


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Executive Summary

Delfa and the printing industry has been affected by the Global recession in 2008. One

of their 8 major customers has been bought over and will be cancelling a $3.5MM

annual contract. Dalfino is presented with 3 different strategies in order to grow and

maintain the strength of their business.

a) Purchase R&A

b) Obtain GPS Contract

c) Provide Warehousing to NCI

It is recommended that Delfa purchase R&A as it will increase their market share and

bring them more digital printing business as it is the current trend in the market place. It

is also recommended that GPS contract be obtained as it also fits in with their long term

strategic success strategy by maintaining success with high volume offset printing jobs.

The will be able to significantly increase their revenue and NI, and meet the ROI of 10&

by BOD and the bank covenant. It is also suggested NCI contract not be taken

immediately as there is lack of capacity but it is suggested that a larger warehouse be

found to obtain this profitable business.


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Introduction

Delfa has been experiencing successful growth up to 2008. Due to the global recession

in 2008, the printing industry has been negatively affected. Delfa has lost one of their

major customers and is beginning to start having trouble collecting payment for

customers. Delfa needs to address how to strategically continue to grow their business

into the future and face the current tough economical environment. This report will

outline the current situation analysis, alternative analysis, recommendations and finally

an an implementation plan.

Mission

Working in partnership with suppliers and customers, Delfa helps Canadian

organizations of all sizes succeed by providing them with a wide range of high quality

printing and document management services at competitive prices.

Constraints/Goals

• Bank Covenant- Times interest rate must be greater then 3

• After tax return on investment of 10%

• Warehouse capacity of 3300 bins

Strategic Goals

• Become further technologically advanced and offer more digital printing

• Increase market share

• Stay true to core competancy by taking advantage of high volume offset printing jobs

• Stay profitable during economic downturn


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Stakeholder Preferences

BOD -

• Maintain revenues at same level as 2008

• Achieve net profit of 4% of sales

Dalfino

• continually strive to find new opportunities to grow within the printing industry

• Believes profits are maximized by keeping the high volume offset printers running

continuously on large printing jobs

Farugia

• Keep customers happy and always look for way to fulfil their needs

Joly

• Keep customers happy

Giani

• Expand warehousing side of business

Singh

• Focus on core business of printing

Employees

• Continue to be a part of setting performance targets in order to achieve annual

bonus

Bank

• Keep bank covenant

• Dalfino Able to repay loans on time


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KSF

• Obtain greater market share

• Increase technological capabilities to compete in the market place

• Keep bank covenant to remain operational

Core Competencies

Customer Intimacy - Delfa provides a custom made product for their individial

customers and strives for customer excellence.

Financial Analysis

Appendix 1

• Current ratio is increasing year over year and is above 2

• Quick ratio is increasing year over year and is above 1

• Total debt to equity is decreasing as mortgage and loan is payed out

• Total income times interest is at 7 way above covenant of 3

• ROA is increasing year over year

• Gross profit margin is steady at 30%

SWOT

Strength

• Customers are currently satisfied with the quality of products and services provided

• 2008 Performance targets were met

• Bonuses were paid out to employees- ensuring continued dedication

• Delfa was not impacted by the recession in the first 6 month of 2008

• Bank is willing to lend up to $2.5MM for growth opportunities


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• Delfa does not use state of the art technology like AIPI, that allows pricing for on

demand jobs same as for long run offset jobs

Weakness

• Printing and warehousing services currently operating at full capacity

• Customers may be going out of business- risk of increased bad debt

• Customers are taking longer to pay invoices - negatively affects cash flow

• Major customer 1/8 will be terminating their contact October 31,2009

• By losing the IIC account Delfa is in jeopardy of not meeting the bank covenant

• Industry is moving towards using digital equipment - Delfa only uses this equipment

10% of the time

• Digital jobs were often backlogged

• Overtime costs to meet delivery deadlines is becoming too high, burning out

employees

• Projected that 2009 profit margins will not be met, bonus will not paid, decrease in

motivation of staff

• There is a lack of space in the finishing and printing area to add any more equipment

Opportunity

• The value of the Canadian dollar has decreased- able to compete more on exports,

not a deterrent for foreign companies to buy Canadian goods

• World prices for fuel and paper decreased- reducing production costs

• Competition is going out of business- used offset printers available at discount prices


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Threat

• The Canadian economy in a recession in 2008 and will continue into 2009

• Consumer spending began to slow down

• Demand for printing material is decreasing

• Threat of internet - company uses webbased

Alternative Analysis

Alternative A) Buy Ready and Able Printing LTD

Pros

• Located in the same urban area as Delfa

• Mutual trust between owners

• Have worked together in past on community projects

• R&A has replaced its offset presses with smaller digital equipment over that past few

years ( increased capacity by 20%) - addressing weakness of lack of state of the art

technology

• Operating at 80% capacity - strong customer base

• 90% of revenue is generated by 250 regular customers who are expected to stay

with R&A even after ownership transfer

• R&A has been a model tenant of their facility for the past 18 years

• Current staff- well trained with newer technologies

• Annual cost savings due to synergies are $ 250K/year

• Uses a more advanced scheduling software which will reduce bottlenecks, will avoid

initial cost of $100K, only pay annual license fee of $30K/ per year per location.


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• Positive incremental CM of $ 4 MM, NPV of $7.02 (Appendix 3)

• Trend to merge is in the marketplace

Cons

• Staff is unionized - threat of regular wage increases, may be difficult to mix the

culture with Delfa current employees who are not unionized

• Significant staff turnover because workers were unwilling to upgrade their skills

• Highly volatile times to purchase new business - high risk

• Requires a significant cash outlaw

• Customers of R&A may not stay or even stay in business

• The financial statement of R&A do not appear to be audited

Alternative B) NCI

Pros

• NCI is willing to sign a 5 year deal to rent 1,700 bings at the warehouse at a fee of

$70 per bin

• Has good credit rating

• Will sign deal starting November 1,2009 - right after the contract with IIC expires

• Positive CM of $ 823K, Positive NPV of $1.9MM (Appendix 4)

• Warehousing has high profit margins of 65%

Cons

• Do not require printing services because outsourced in China

• Not a core competancy of Delfa


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• Limited capacity - will have to eliminate other customers warehouse space to make

space for this contract even if new building is purchased

Alternative C) GPS

Pros

• Requires large volumes of books and magazines on an offset printing machine and

mail distribution service

• Warehousing would not be required

• Willing to sign a 5 year contract starting Nov 1,2009 - right after the contract with IIC

expires

• Willing to pay reasonable prices in return for high quality products and services

• Has a good credit rating

• Potential Revenue of $6MM per year

• Positive incremental effect on Revenue of $4.9 MM, Positive Incremental effect on

NI $518K (Appendix 2)

Cons

• Requires long term suppliers to be ISO certified- which is an extensive ( 2 years)

and expensive ($90K/year) process

• Payment terms of 60 days- risk to cash flow for Delfa

• In order to accommodate volumes Delfa would have to remove 1200 bins to make

more room for offsetting and printing presses and finishing equipment ($1.08MM

revenue lost)


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Recommendations

Please see decision matrix - Appendix 5

It is recommended that Dalfino purchases R&A because it:

• R&A has a high gross profit margin of 36% (3486/9500) in 2008

• Has a NPV of $7MM and a positive impact on CM of $ 4.4MM (meets goals, and

BOD requirements)

• Will address weakness that Dalfino currently does not utilize state of the art

technology

• Will be able to obtain digital printing market share (addresses weakness)

• The company is profitable with Net Income of $350K in 2008

• Times interest earned is 9.27 which will bring the consolidate # up to be able to meet

back covenant (Appendix 6 ) (meets constraint)

• Increases market share (link to KSF)

• Financing available (A 7)

It is recommended that Delfa pursues the GPS contract as it is:

• Alligned to Delfino preferences and motivations that high volume offset print jobs are

vital to success (stakeholder preference)

• Has a positive impact on revenue of 4.9MM and incremental impact on NI of $ 518K

annually ( ROI - Bod requirements)

• Will increase market share (KSF)

• Low initial investment

• Does not utilize warehouse capacity (constraint)

• Dalfa has successful experience in providing this service (strength)


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• Financing available (A 7)

It is not recommended that Delfino takes on the NCI contract because:

• It is not aligned to their core competancy

• It does not focus on their core business of printing

• There is not enough capacity to take on the whole order when the GPS contract is

taken

2150 - 1200 = 950 - 1700 (NCI) = 750 shortage

Conclusion: It is recommended that Dalfino goes ahead with the purchase of R&A and

takes the GPS contract. The time interest earned will be at 4.93 which is way above the

bank requirement of 3.

(Appendix 6 - Proforma statements)

Implementations

Short Term

• Present idea of Buying R&A to the BOD - who - Delfino,

• When approved - buy R&A (BOD)

• Consolidate Financial statement (Accounting)

• Update scheduling software at Dalfino current location (singh)

• Contact GPS (joly) and provide pricing that will need their requirements in order to

gain the business

• Start the ISO roll out (Operations and Delfino)

• Make arrangement to fit in new equipment at the plant (Giani)


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• Arrange lease of machinery for the GSI (singh)

Long Tem

• Look into buying a large warehouse in order to accommodate NCI requirements as it

is profitable (Falugia)

• Increase technological advancement by staying up to date on machinery

requirements to maintain market share

Other Operational Issues

Quality Control

To make sure current digital proof are used in production - the account rep should be

present at the start of the job or notified via blackberry.(send PDF copy to confirm)

Overtime

Hire on call contract workers that are available on call when staffing is required. Use a

temp agency as skills required is relatively low.

Ethics

Joly idea to falsify records should be brought to the board and Dalfino. HR issue.

Security

Ask security monitoring company to automatically engage the alarm of the plant once

the doors have been locked.

Install cameras in the warehouse in order to control for shortage and deter theft.

HR

Hire a consultant to understand how to best merge unionized and non - unionized environments.


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Appendix 1 2008 2007 2006

Current Ratio CA/CL 2.61 2.58 2.38Quick Ratio Cash+AR/CL 1.94 1.89 1.77Total Debt to Equity TD/TE 1.04 1.05 1.06Times Interest Earned NIBT&Intrst/interest 7.24 5.95 6.63Return on assets Rev/Total assets 2.36 2.23 2.22Gross Profit Margin 30.10% 29.5 30.2Dividend Payout div/NI 0.96 1.06 0.91

Appendix 2 - GPS

Potential Annual Revenue $6,000,000 G Variable costs (74%) of rev $4,440,000Gross Profit (26%) $1,560,000 A

Loss of 1200 bins x $75 ($1,080,000) F lost CM (65 %) ($702,000) B Equipment lease ($200,000) C

Reorganizations ($50,000) D

ISO ($90,000) x 2 E

Incremental effect on revenue $4,920,000 F+G

Incremental effect on NI $518,000 A+B+C+D+E Appendix 3 - R&A

After Tax 35%

PV Factor (N 5,I 10) PV

Initial Investment ($3,800,000) $1 ($3,800,000)

Incremental CM (9500-5096) $4,404,000 $2,862,600 3.79 $10,852,117

Building Lease ($200,000) ($130,000) 3.79 ($492,830)

Cost Savings Due to Synergies $250,000 $162,500 3.79 $616,038

Annual Software cost for Dalfino Location ($30,000) ($19,500) 3.79 ($73,925)

Interest (500 000 x 6%) ($30,000) ($19,500) $4 ($73,905)

Total $10,827,495

NPV $7,027,495Appendix 4 - NCI


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Projected Free bins in 2010 1400If buy new warehouse 750Total Available 2150

Bins required for NCI contract 1700

Excess Capacity 450

Potential Revenue from NCI (1700 X 70 X 12) $1,428,000

Lease cost of new facility $72,000Fixed Overhead $150,000VC $225 x 1700 $382,500

Incremental NI $823,500

BF taxAfter Tax

35% PV Factor

n5,i10 PV Investment in shelving ($60,000) ($60,000)incremental CM $823,500 $535,275 3.79 $2,028,692CCA (20%) FIXTURES $13,363 $13,363

NPV $1,982,055

Appendix 5 - Decision Matrix

R&A NCI GPS Aligned with Stakeholder Preference/ Goals/KSF high low high

Profitability high medium low

Ease of Implementation low high low

Financing Available medium high high

Available capacity high low high

Return on investment high low medium RANK 1 3 2


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Appendix 6 - Proforma Statements Given R&A Impact GSP Impact Total Projected Delta

Revenue* $20,780,000 $9,500,000 $4,920,000 $35,200,000 $14,420,000CM $5,777,000 $4,404,000 $2,262,000 $12,443,000 $6,666,000Incremental expenses $1,420,000 $1,420,000 $1,420,000Income bf interest and taxes $49,000 $603,000 $842,000 $1,494,000 $1,445,000Interest Expense $238,000 $65,000 $0 $303,000 $65,000Times Interest Earned 0.20 9.28 4.93 4.73

* 6MM (GPS) - 1.08 (lost warehouse rev) = 4.92 MM net impact on revenue CM lost on warehouse $1,080,000 * 65% = 702,000 CM from GPS at 30% 6MM X .26= 1,560,000

Appendix 7 - Available Financing

Appraisal of Property $7,000,000Appraisal of property used for collateral of mortgage & loan $3,852,546Available $3,147,454

Required for purchase of R&A $2,300,000GSP reorganization cost $50,000ISO annual cost $90,000Total Required $2,440,000

Dalfino can obtain financing of $2.5


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Marker’s Comments Successful Attempt #2


The feedback is designed to









2. Entering into a contract with Northern Complete Insurance Inc. (NCI) for warehousing. 3. Entering into a contract with General Printing Services Inc. (GPS) for offset printing.


General Reasons the Response is Successful

The response is successful because it reasonably resolves the Required element of the case.


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• The recommendations, conclusions, and solutions are logical, feasible, realistic, and supported. The alternatives recommended are those that are shown to meet the target times interest earned ratio. As well, there is an attempt to prove that adequate financing is available and many operational issues are sufficiently addressed.

• Most elements of a systematic approach are present in a good form within the response. The extent of the data gathering is appropriate for the case issues and problems being addressed, the major alternatives and many of the minor issues are identified and analyzed using the relevant data collected, recommendations are clearly stated, and an implementation plan is provided.





• Many elements of a well-formatted report are present. The body of the report is well organized and makes good use of headings, subheadings, and lists. The language, style, tone, grammar, and sentence structure used in the response are reasonable. In most cases, the audit trail is reasonable in the quantitative analysis.





Please note that the response meets or exceeds expectations for any attributes and components listed in the Marker Assessment Guide but not described below. The comments below focus only on the attributes and components where the response does not meet expectations or barely meets expectations.


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1. QUALITATIVE ANALYSIS AND STRATEGY FORMULATION

1a) Situational Analysis – Quality of Qualitative Analysis: The quality of the situational analysis adequate; however, the response could be improved by the following:

• Consider industry key success factors (i.e. the key success factors identified on page 7 appear to be goals for Delfa);

• Avoid providing non-value added or irrelevant SWOT points, for example: o The strength, “Bonuss were paid out to employees – ensuring continued

dedication”, is not relevant in the current situation (i.e. “it is projected that the net profit target for 2009 will not be met (resulting in no bonuses) is a case fact from the Additional Information and the response subsequently states this issue under weaknesses);

o The weakness, “warehousing services currently operating at full capacity”, does not add value in the situational analysis (i.e. due to the loss of the IIC contract, there will be excess capacity in the warehouse).

1c) Implementation Plan: The implementation plan does not sufficiently address how some of the weaknesses of the recommended strategies can be overcome. For example, the cons related to acquiring Ready and Able Printing and accepting the GPS contract (unionized staff, requires a significant cash outflow, GPS payment terms of 60 days) are not sufficiently discussed. The analyses of operational issues could also be improved. For example, the recommendation to bring Joly’s suggestion to falsify records to the Board and Delfino is not reasonably resolved, considering the report is written by Kim Cheung and this issue was brought to Cheung’s attention for analysis.


2b) Quantitative Decision Analysis of Strategic Alternatives: Appropriate decision analysis tools (e.g. profitability analysis, capital budgeting and capacity analysis) are applied in the analysis of all alternatives; however, the analysis is not consistently applied for all alternatives and some errors are made. For example:

• Incremental net income is considered for the GPS and NCI alternatives but not for the R & A alternative.

• The GPS alternative considers opportunity costs of turning away customers due to losing 1,200 warehouse bins; however, the NCI alternative does not consider opportunity costs for turning away customers (i.e. the NCI alternative without leasing the warehouse results in 300 bins over capacity).

• The net present value calculation for the R & A alternative is overstated. For example, the cash inflows only consider incremental contribution margin and cost


CMA Canada 130

savings due to synergies (cash flows which include all operating expenses less amortization should be used). Additionally, the analysis includes annual software for Delfa’s operations, which is independent to this alternative. Furthermore, the analysis incorrectly includes financing costs (interest at 6%).

• The analysis of the NCI alternative does not include variable selling and administration expenses in the determination of cash flows for the net present value.

2c) Valuation, Financial Forecast, Financing, Quantitative Analysis of Minor

Issues and Application of other Quantitative Tools: The response appropriately includes a financial forecast (Appendix 6); however, the income before interest and taxes does not include an audit trail (and the numbers do not match previous analysis). Additionally, the interest expense does not include the new interest related to the balance payable to Jacques Perrier related to the purchase of R & A. The value of R & A’s shares to Delfa is not calculated using a reasonable valuation method (e.g. capitalization of future earnings, net asset value) and compared to the asking price of the shares. The financing required and financing available for implementing the recommended alternatives are identified in the response (Appendix 7); however, the scheduling software is not included. 4. APPLICATION OF A SYSTEMATIC APPROACH FOR ISSUE ANALYSIS

4a) Issue Identification and Prioritization: The analyses of the issues and alternatives could be improved. For example, the quantitative analysis could be of greater depth. As well, the analyses of some minor operational issues are of limited breadth and depth. Additionally, the analyses of the alternatives are not completely objective (e.g. inconsistent quantitative analysis among alternatives). 5. RECOMMENDATIONS AND CONCLUSIONS (JUDGMENT/LEADERSHIP) The recommendations are not adequately presented in a convincing manner because of the limited depth and errors in the quantitative analyses. Furthermore, the final recommendations are not consistent with the quantitative analysis for the alternatives. For example, the analysis of NCI reflects that the incremental income will be $823,500 (the alternative which is not recommended), whereas only $518,000 in incremental net income is calculated for the GPS alternative and no calculation of incremental net income is calculated in the analysis of the R & A alternative (both alternatives are recommended).


CMA Canada 131

Sample Response Unsuccessful Attempt

BUSINESS REPORT

TO: Senior Management Team of Delfa Printing Ltd. (Delfa)

FROM: Kim Cheung, CMA

RE: Strategic Direction of Delfa

DATE: May 14, 2009


CMA Canada 132

EXECUTIVE SUMMARY

Delfa, a printing company that has been in business since 1976, is facing some

challenges. It has lost a lucrative client and will be in breach of its bank covenants if

nothing is done. In order to solve the problem, and to grow the business several

strategic alternatives are offered. Each is analyzed both quantitatevely and

qualitatevely, making sure the bank covenant will be met.

At the end a detailed recommendation and implementation plans are presented,

incouding some pressing operational issues facing Delfa.


CMA Canada 133

Table of contents

1. INTRODUCTION

2. SITUATIONAL ANALYSIS

a) Current Mission Statement

b) SWOT analysis, including KSF

c) Stakeholder preferences

d) Constraints

e) Assumptions

3. STRATEGIC ISSUES AND ALTERNATIVES

• Purchase Ready and Able Printing Ltd. (R&A)

• Invest in extra warehousing space

• Bid for General Printing Services Inc. (GPS) contract

4. RECOMMENDATIONS

I. Purchase Ready and Able Printing Ltd. (R&A)

II. Invest in extra warehousing space

III. Bid for General Printing Services Inc. (GPS) contract

5. IMPLEMENTATION PLAN - STRATEGIC





CMA Canada 134

5a) IMPLEMENTATION PLAN - OPERATIONAL

i) ERP

ii) Inventory control

iii) Internal controls - implementation at R&A

iv) New Staff

v) IT issues

vi) Internal controls - improvements

6. CONCLUSION


CMA Canada 135

1. INTRODUCTION

Delfa is a printing company that has been in business for over 30 years. It is

facing tough competition both locally and internationally. In order to overcome some of

the difficulties it is currently facing a detailed analysis of the environment and current

strategic issues was done. This report looks at potential business oppotunities, growth

opportunities and some HR and IT issues Delfa is facing.

2. SITUATIONAL ANALYSIS

a) Current Mission Statement

Delfas's current mission statement is as follows:

Working in partnership with suppliers and customers, Delfa printing Ltd. helps Canadian

organizations of all sizes succeed by providing them with a wide range of high-quality

printing and document management services at competitive prices.

b) SWOT analysis, including KSF

Comprehensive SWOT analysis is presented in EXHIBIT A, the main points are

repeated below:

STRENGTHS

Delfa is known for its high quality printing and document management service (KSF). It

is located in a good location and has dedicated employees (KSF), that will work

overtime to deliver products on schedule. Delfa is faced with a decision to expand it's

document management service, which will strengthen it's competitive value even further

(Issue II).


CMA Canada 136

WEAKNESSES

There are some capacity issues in the warehouse and printing bottleneck problems.

Both could be improved through Alternatives II and III below.

OPPORTUNITIES

ERP systems for the printing business that offer automated tracking and delivery

systems are here to stay, and Delfa has a chance to utilize these new technologies to

advance the business in (Issue I).

THREATS

Local competition is high, more companies are using in house printing service and

international lower cost supplier. In order to overcome these threats Delfa can focus on

document management business (Issue II)

c) Stakeholder preferences

• Board of directors - want to keep 2009 recession profits at 2008 levels.

• Tom Delfino, CEO - believes profits are maximized by keeping high-volume

offset printers running continuously.

• Chris Farugia, VP - wants the company to grow

• Aja Sigh, Director of Production - wants to focus on printing, rather than

warehousing & distribution.

• Customers - want high quality, low cost printing.

• IIC - want up to date ordering and tracking software for their printing needs.


CMA Canada 137

• NCI - want privileged service and low prices on storage and distribution services.

• GPS - looking for large volume, quality offset print job. Willing to pay a

reasonable price.

d) Constraints

• Organizational Performance targets:

• Achieving net profit of 4% of sales

• Maintain printing & warehousing revenue at 2008 levels

• After tax return on capital investments should be at least 10%

• Capacity (Delfa is currently operating close to full capacity)

• Bank Covenant: times interest earned ration must be 3x or time

e) Assumptions

• Income taxes are 35% and will remain constant for the next years

3. STRATEGIC ISSUES AND ALTERNATIVES


Investing $3.8M in a business during economic recession is a step that must be

thoroughly analyzed. Below is a pro/con list; a financial analysis is presented in

EXHIBIT A.


CMA Canada 138

Pros

1) Customer base - R&A's customer base is very diversified (90% revenue from 250

regular customers), shielding the company in an event any one client walkes out.

2) Capacity - Delfas's current capacity for digital printing is full, but R&A is at 80%

capacity. By purchasing the business DELFA will be able to take on more clients for

digital printing and increase revenue. Demand for digital printing is increasing and as

a result current digital printing jobs are often backlogged resulting in employee

stress and overtime costs. Addid R&A's capacity would ease the current situation.

3) Competition - by buying R&A Delfa will not only eliminate it's competition, but will

also have access to facilities virtually in the same location they are currently in. In

addition, only 10% of Delfa's orders are for digital equipment, while the industry

norm is 30%. Purchasing R&A will improve this flaw and benefit Delfa in the long

run, as digital technology is here to stay.

4) New software - Delfa has lost IIC contract partially due to lack of innovative software.

Purchasing R&A will result in $100,000 software savings costs and will make Delfa

more competitive in the long run.

Cons

1) Labour force - R&A has a unionized workforce that are getting paid 10% more than

non-unionized Delfa employees. Combining the two companies would cause 10%

increase in wages.

2) Product quality - with high staff turnover and a lot of young inexperienced workers

there is a potential for lower quality end product. Funds would have to be invested in


CMA Canada 139

internal control measures and training/learning initiatives.

3) Labour relations - existing staff at Delfa have been working as a group for years and

enjoy the culture, bringing new staff on board may jeopardize the existing balance.

4) New software aquisition will require additional training for existing staff to familiarize

themselves with it and higher interest expense may jeopardize bank covenant.


Delfa is currently operating the warehouse at almost full capacity. In order to

accomodate new customers and increase warehousing revenue in the long run, R&A

would need to either invest in additional warehouse space, or to decline some

customers. Detailed profit-loss and break-even analysis are presented in EXHIBIT C.

Below is a pro and con analysis of investing in new warehouse space for 2009:

Pros

1) Warehouse revenues - strong demand and increased warehouse revenues in the

long run. Contribution margin from warehousing is higher than the contribution

marging from printing (64.6% vs. 24.5%).

2) Printing revenue and customer loyalty - 300 bins of existing customers at risk of

being declined their contract will hurt the printing side of Delfa by not renewing their

contract. Accomodating these smaller customers will keep printing revenue stable.

3) Staying competitive - only 23 competitors remain equally attractive as Delfa as long

as warehousing service is offered; reducing the warehousing option will increase


CMA Canada 140

competition to 85 companies.

Cons

1) Potential cost increase - additional distriubution costs will be incurred when

distribution is needed, and a move from new warehouse to the old warehouse has to

be performed.

2) Excess capacity - at the current moment only 300 bins are needed, but 750 bins will

be available - future demand for this space is uncertain and Delfa could risk

decreasing it's net profit line if there is not sufficient revenue to cover the cost.

3) Security concerns - Delfa will not be on site of the new warehouse at all times, thus

there is a security concern. Some materials may contain confidential information and

if the security is breached a potential lawsuit could hit Delfa.


Delfa will be loosing IIC's contract on October 31, 2009 and has an opportunity to

bid for a larger contract with GPS commencing November 1, 2009. bank covenant is

assumed to be met (larger revenue, same interest expense). Pro and cons are listed

below:

Pros

1) Bank covenant - by loosing IIC contract Delfa will breach bank covenant,

successfuly bidding for GPS contract will keep the covenant unbreached.

2) Offset printing utilization - GPS contract will utilize offset printing technoilogy, which

is in line with owner's wishes.


CMA Canada 141

3) Long term revenue - most print shops switch away from offset printing, leaving Delfa

to be a unique provider. As a result GPS may extend their contract beyond the first 5

years with delfa.

Cons

1) ISO 90000 - getting certified is pricy, and Delfa must evaluate whether the time and

money investment are feasible and worth it.

2) Credit terms - net 60 days is a risky endeavour during economic recession. GPS

might be a reliable company, but they are not bancrupcy-proof.

3) Warehouse space - although GPS does not require any storage/distribution

services, their order is large enough to disturb the warehousing business, which

brings Delfa higher CMs.

4. RECOMMENDATIONS

I. Purchase R&A

Although R&A requires additional loans and may jeopardize the current work

culture at Delfa, it is a wise strategic invstment for the long term. The price offered is

attractive enough causing a positive NPV (EXHIBIT B). This aquisition will also achieve

several non quantittive advantages: it will make Delfa more competitive by providing

them with a new software. Lacking such software was one of the resons IIC contract

was lost. It will eliminate the current bottleneck in the digital printing area. It will bring

enough capacity to get new digital printing business in. R&A has a solid customer base

that will diversify Delfa's current customer risk.


CMA Canada 142


Delfa should invest in extra warehousing space and add additional 750 bins to it's

capacity. Only 335 bins are required for a break-even point (EXHIBIT C) and Delfa

already has requests for 300 bins. Although this results in a $23,500 loss; this will keep

the current customers happy and will not decrease printing revenue by loosing those

customers; it will allow to stay competitive in the long run and give an opportunity to

expand the printing side of business by partially moving existing warehouse to the new

facility. Furthermore, it is indicated that the demand is strong and thus finding customers

for additional 35 bins or more, should not pose a problem.

Additional 1200 bins required to take on the GPS project are to be allocated

between the new warehouse. Contracts for remaining bins should be rewritten so that

the customer will not see a total increase in price, but Delfa will be allowed to run shoter

print jobs with proper documentation and paper trail.

III. Pursue GPS contract

GPS's contract seems lucrative enough for Delfa not to pass it on. It will prevent

it from breaching the bank covenant and will allow to utilize offset printer's excess

capacity. There are some difficulties in achieving this, relating to space in general and

getting ISO certified. However, to be successful and grow in the long run this would be a

wise decision to make.


CMA Canada 143

5. IMPLEMENTATION PLAN - STRATEGIC

I. Purchase R&A

Delfino and Farugia to prepare bank and legal documents for R&A acquisition.

Commjunicate the change to senior management.

Timeline: by September 1, 2009

HR to communicate this change to current and future staff, provide sufficient training

and education

Timeline: ongoing, starting as soon as acquisition documents are signed

IT to renew software license and schedule training for Delfa's employees

Timeline: by October 2009


Management to prepare legal lease documents and necessary funding for the new

warehouse.

Timeline: immediately

Pat Giani to organize the space to accomodate the 300 bins needed for NCI and move

450 existing bins there. She is to talk to existing customers and sign contracts to allow

for shorter print runs with less warehoiusing space for the same cost to the customer.



CMA Canada 144

III. Pursue GPS contract

Senior management to prepare legal documents


Production and warehousing managers to start reorganizing the space

Timeline: within the next month

Management to start pursuing the ISO 90000 certification


5a) IMPLEMENTATION PLAN - OPERATIONAL

Delfa faces a few operational issues, they are listed in order of importance

i) A new ERP system is to be implemented as soon as possible. Based on the new

software system at R&A it should keep track of orders, prices, employee hours,

internal control procedures and issues.

ii) Warehouse inventory control systems are to be implimented ASAP to reduce

repprinting and overtime costs and protect Delfa from potential lawsuits due to

compromised information.

iii) Implement same internal control at the new R&A location as are currently used at

Delfa. This includes the docket envelope and approval by various management

throughout the process.

iv) New staff should be hired to ease off overtime on the current workforce. This would

eliminate stress and increase employee morale.


CMA Canada 145

v) IT issues: Delfa should invest in either online data storage facility, or move its

existing servers to a co-hosted rack at a data center. It is an inexpensive and a very

secury way to store data and not worry should something happen to the building.

The two additional locations (R&A and warehouse) could be connected to those

servers as well to keep everything updated.

vi) Internal procedures should be imporoved so that management will not question

whether doing something behind a customer's back is right or not. Procedures

should follow existing contracts, and if a change has to be made it has to be

documented properly.

6. CONCLUSION

Delfa can become a healthier company by reorganizing some of it's operations. It

should aquire R&A and move as much digital printing as possible there. This will

diversify their customer base and decrease bottleneck related costs such as overtime

and employee stress. The new warehouse facility should be invested in and by moving

some shelves out of the existing warehouse there, new space would be made to

accomodate GPS contract.

In addition to these strategic issues some IT and HR, including internal controls

operational recommendations were provided.


CMA Canada 146

EXHIBIT A

SWOT ANALYSIS

STRENGTHS

• Reputation for high quality prints and good service

• Wide range of document management services (KSF)

• Good location and dedicated employees (KSF)

• Good bank relationship

• Good internal control measures for work in progress

WEAKNESSES

• Capacity issues - warehouse

• Printing bottlenecks in production

• High debt load

• Occasional bad deliveries

• Current software is not up to date with comptition (risk)

OPPORTUNITIES

• Increasing technologically advanced printing techniques and equipment

• Setting up printer operations on customers premises and U-print

• Print on demand popularity is growing

• Demand for document storage and management services is growing

• New automated tracking and delivery systems


CMA Canada 147

THREATS

• High local competition

• Increased price competition from foreign printers

• Decreasing market for printed products

• More companies investing in digital in house printing

• trend towards consolidation in the printing industry


CMA Canada 148

Exhibit B

R&A investment analysis

Additional Expenses Purchase Price, 6% interest expense ** note 3 $3,800,000

Software License costs (x2 locations) $30,000

Costs Savings and Revenue Savings from synergies $250,000 Tax savings (@35%) $87,500 Software savings ** note 1 $100,000 R&D income before tax ** note 2 $538,000 less: tax @35% ($188,300) Total cash inflows $787,200 Total cash inflows less software fee $687,200

NPV Calculation (discount rate 6%) now year 1 year 2 year 3 year 4 year 5 inflows $100,000 $687,200 $687,200 $687,200 $687,200 $687,200outflows: additional software fee ($30,000) ($30,000) ($30,000) ($30,000) ($30,000)outflows: annual payments ($2.3M loan) ** note 4 ($598,000) ($570,400) ($515,200) ($515,200) ($487,600)outflows: 500K/year+6% interest ** note 5 ($590,000) ($560,000) ($530,000) total $100,000 $59,200 $86,800 $142,000 $142,000 $169,600Discounted to PV $100,000 $55,849 $77,252 $119,226 $112,477 $126,735

Total Discounted NPV $591,539

note 1: it is assumed that Delfa will invest in current software to keep up with market demand and prevent a customer like IIC switching to a company that has such capabilities.

note 2: it is assumed the financial statements provided are correct and that future revenue will grow at 4% (the growth rate for R&A was 3.8% for 2007 to 2008)

note 3: 5 year bank loan @ 6% and 3 years R&A loan @ 6% in 2 years from now = 5 years @6% for easy of calculation

note 4: although the bank offers $2.8m in loan, Delfa only needs $2.3M for the R&D purchase interest is calculated as indicated in note 5, principal payments are $2,300,000/5=$460,000 per year

note 5: Interest is calculated as 6%*remaining balance, year one 500K payment incurs 6% interest on the full $1.5M balance year 2 payment has only $1M 6% interest to pay, and year 3 only 6% on the remaining $500K


CMA Canada 149

Exhibit C

New warehouse analysis

Additional bins 750Average rent per bin per month $75 Forecasted revenue per month $56,250

Forecasted revenue per year $675,000

Rent (per year) ($72,000)Fixed costs (per year) ($150,000)Variable Costs (per bin) ($225)Variable Costs (per year) ($168,750)

Shelving - total $60,000Shelving - depreciation per year (15 years) ($4,000)Forecasted expenditures per year ($394,750)

Net profit (loss) per year $280,250

ASSUMING ONLY 350 BINS ARE UTILIZED revenue per year ($75*12*300) $270,000Variable cost per year ($225*300) ($67,500)Contribution Margin $202,500Less fixed costs (including depreciation) ($226,000)Net Profit ($23,500)

BREAK EVEN ANALYSIS revenue per bin per year $900variable cost per bin per year ($225)CM $675Total fixed costs ($226,000)Total fixed costs / CM 335**335 bins are required to be rented for a net effect on profit of $0


CMA Canada 150

Marker’s Comments Unsuccessful Attempt


This feedback is provided because your response to the May 2009 Case Examination was unsuccessful. The feedback is designed to









2. Entering into a contract with Northern Complete Insurance Inc. (NCI) for warehousing.

3. Entering into a contract with General Printing Services Inc. (GPS) for offset printing.


General Reasons the Response is Unsuccessful

The response is unsuccessful because it does not reasonably resolve the Required element of the case.


CMA Canada 151

• It does not demonstrate that the times interest earned ratio will stay above three times as stipulated by the bank.

• It does not show numerically (quantitatively) that the recommendations are feasible, logical, and realistic.

• It does not sufficiently identify and use information in a systematic approach to problem solving and decision making.





• Some elements of a well-formatted report are present. The body of the report is well organized and makes good use of headings, subheadings, and lists. The language, style, tone, grammar, and sentence structure used in the response are reasonable. In most cases, the audit trail is reasonable in the quantitative analysis.





Please note that the response meets expectations for any attributes and components listed in the Marker Assessment Guide but not described below. The comments below focus only on the attributes and components where the response does not meet expectations.

The numbers associated with each attribute within the component below map back to the corresponding section of the Marker Assessment Guide.


CMA Canada 152

1. QUALITATIVE ANALYSIS AND STRATEGY FORMULATION

1a) Situational Analysis – Quality of Qualitative Analysis:

The quality, depth and breadth of the situational analysis are not appropriate. The response can be improved by identifying the following in the situational analysis:

• Key industry success factors. • More new strengths and weaknesses (i.e. those not specified in the Backgrounder

SWOT).


A reasonable understanding of quantitative tools is not demonstrated. Significant problems and suggestions for improvements are indicated below.

2a) Financial and Performance Analysis of Delfa and R&A:

Financial and performance analysis methods are not sufficiently applied in the response. The following could be calculated and discussed in this case:

• liquidity, activity, profitability, and debt-to-equity ratios for Delfa and R&A • times interest earned ratio for the alternatives and comparison to the bank constraint • accounts receivable turnover • analysis of the profit centres • revised ratios based on the overall recommendations.

2b) Quantitative Decision Analysis of Strategic Alternatives:

Decision analysis tools are not reasonably applied in the quantitative analysis of the alternatives.

The following describes some of the weaknesses in the analyses.

R&A

• The following errors are made in determining the incremental earnings from acquiring R&A: o The estimate of possible software efficiencies. o Interest expenses are incorrectly calculated.

• The following errors are made in calculating the net present value of the R&A alternative: o Interest payments on the loan are inappropriately included. o An inappropriate discount rate/present value factor is used (the 10% required rate

of return should be used). o The cost of the shares are not considered.


CMA Canada 153

NCI and Rent Additional Warehouse Space

• No attempt is made to calculate the profitability of the NCI alternative under the assumption that additional warehouse space would be rented.

GPS

• No attempt is made to calculate the profitability or net present value of the GPS.

Capacity Analysis

• The capacity constraints are not considered in the analyses of the alternatives.

2c) Valuation, Financial Forecast, Financing, Quantitative Analysis of Minor Issues and Application of other Quantitative Tools:

The value of R&A’s shares to Delfa is not calculated using a reasonable valuation method (e.g. capitalization of future earnings, net asset value) and compared to the asking price of the shares.

No 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, projected net income, or projected times interest earned ratio.

The financing required for different alternatives is identified, but not compared to the financing available.

4. APPLICATION OF A SYSTEMATIC APPROACH FOR ISSUE ANALYSIS

The response does not contain the major elements of a systematic approach for problem solving and decision making. The qualitative analysis is of unreasonable breadth and depth, and the quantitative analysis contains major weaknesses or errors such that recommendations are not convincing.

4a) Issue Identification and Prioritization:

The prioritization of alternatives and minor issues in the case is not reasonable. For example • Minor issues are analyzed in more depth than some of the major alternatives (e.g.

NCI).

4b) Analysis of Issues and Alternatives:

The analyses of the alternatives and minor issues:

• are not of reasonable depth (limited qualitative and quantitative analysis).

• are not of reasonable breadth (insufficient alternatives and minor issues are analyzed).


CMA Canada 154

• are not reasonably balanced o there is an unreasonable balance of pros and cons in the analysis of alternatives. o the analyses are mostly qualitative.

4c) Relevancy: Use of Case Facts and Assumptions:

Some of the case facts are not used appropriately (e.g. some of the points identified in the response are too brief and unclear such as the implementation statement that presents Pat Giani with the task of organizing the space to accommodate 300 bins needed for NCI when this alternative was neither analyzed qualitatively nor quantitatively).

Few ambiguities are recognized and few assumptions are clearly stated.

5. RECOMMENDATIONS AND CONCLUSIONS (judgment/leadership)

The recommendations for the alternatives and minor issues are not convincing because they do not demonstrate that:

• the bank’s constraint of maintaining a times interest earned ratio of at least three times is met.

• warehousing and printing capacity constraints can be met or sufficiently adjusted.

The recommendations are not adequately supported or presented in a convincing manner. For example,

• No supporting qualitative and quantitative analysis is provided for NCI which is an alternative that requires analysis and a recommendation.

• No supporting quantitative analysis is provided for GPS.

6. PROFESSIONALISM AND COMMUNICATION

6a) Report Format and Organization

The executive summary is incomplete. It should identify the significant issues and provide recommendations on major and operational issues.

The introduction is not appropriate. It does not clearly outline the purpose of the report.

Some analysis of issues is provided in the recommendations (e.g. allocating 1,200 bins required to take on GPS). It would be better to include this analysis under the applicable section of the report.

6b) Professional Tone, Tact, Language, Style and Flow

Points in the analysis are not always clear (e.g. points are too brief to explain what is intended – improving internal procedures so that management will not question whether doing something behind a customer’s back is right or not).


CMA Canada 155

Some of the quantitative analyses are difficult to follow. For example, 1. audit trails are not provided for all calculated amounts. 2. the numerical figures in the calculations, appendices or tables are not always clearly

labelled or explained.

Significant information provided in the exhibits should be included or referred to in the body of the report (e.g. there is a positive NPV for alternative X).


CMA Canada 156

Supplement Containing Formulae and Present Value Tables

1. CAPITAL STRUCTURE

a) After-Tax Marginal Cost of Debt:

( )k k T or T I

Fb = −−

11( )

where k = interest rate T = corporate tax rate I = annual interest payment on debt F = face value of debt

b) Cost of Preferred Shares:

kDNPp

p

p=

where Dp = stated annual dividend payment on shares NPp = net proceeds on preferred share issue

c) Cost of Common Equity:

i) Cost of Common Shares (Capitalization of Dividends with Constant Growth Rate):

kDNP

gee

= +1

where D1 = dividend expected for period 1 NPe = net proceeds on common share issue g = annual long-term dividend growth rate

ii) Cost of Retained Earnings:

k rDP

gre ee

= = +1

where Pe = market price of a share re = expected return on common equity

iii) Capital Asset Pricing Model: ( )R R R Rj f j m f= + −β

where Rj = expected rate of return on security j Rf = risk-free rate Rm = expected return for the market portfolio

βj = beta coefficient for security j (measure of systematic risk)


CMA Canada 157

d) Weighted Average Cost of Capital:

k BV

k PV

k EV

kb p e= ⎛⎝⎜

⎞⎠⎟

+ ⎛⎝⎜

⎞⎠⎟

+ ⎛⎝⎜

⎞⎠⎟

where B = amount of debt outstanding P = amount of preferred shares outstanding E = amount of common equity outstanding V = B + P + E = total value of firm

2. PRESENT VALUE OF TAX SHIELD FOR AMORTIZABLE ASSETS

a) Present Value of Total Tax Shield from CCA for a New Asset

Present Value = ( ) ( ) ( ) ⎟⎠⎞

⎜⎝⎛

++

+=⎟⎟

⎠

⎞⎜⎜⎝

⎛++

+ k10.5k1

kdCdT

k12k2

kdCtd

b) Present Value of Total Tax Shield from CCA for an Asset that is Not Newly

Acquired

Present Value = ⎟⎠⎞

⎜⎝⎛

+ kddTUCC

c) Present Value of Total Tax Shield Lost From Salvage

Present Value = ( ) ( )

,⎟⎠⎞

⎜⎝⎛

++⎟⎠⎞

⎜⎝⎛

++ − kddT

k1kddT

k1S

1nn

nn Sor depending on cash flow

assumptions

Notation for above formulae: C = net initial investment UCC = undepreciated capital cost of asset Sn = salvage value of asset realized at end of year n T = corporate tax rate k = discount rate or time value of money d = maximum rate of capital cost allowance n = total life of investment


CMA Canada 158

Table 1 Present Value of One Dollar Due at the End of n Years

( )P

i n=+

1

1

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

01 02 03 04 05

0.990 .980 .971 .961 .951

0.980 .961 .942 .924 .906

0.971 .943 .915 .888 .863

0.962 .925 .889 .855 .822

0.952 .907 .864 .823 .784

0.943 .890 .840 .792 .747

0.935 .873 .816 .763 .713

0.926 .857 .794 .735 .681

0.917 .842 .772 .708 .650

0.909.826 .751 .683 .621

06 07 08 09 10

.942

.933

.923

.914

.905

.888

.871

.853

.837

.820

.837

.813

.789

.766

.744

.790

.760

.731

.703

.676

.746

.711

.677

.645

.614

.705

.665

.627

.592

.558

.666

.623

.582

.544

.508

.630

.583

.540

.500

.463

.596

.547

.502

.460

.422

.564

.513

.467

.424

.386 11 12 13 14 15

.896

.887

.879

.870

.861

.804

.788

.773

.758

.743

.722

.701

.681

.661

.642

.650

.625

.601

.577

.555

.585

.557

.530

.505

.481

.527

.497

.469

.442

.417

.475

.444

.415

.388

.362

.429

.397

.368

.340

.315

.388

.356

.326

.299

.275

.350

.319

.290

.263

.239 16 17 18 19 20

.853

.844

.836

.828

.820

.728

.714

.700

.686

.673

.623

.605

.587

.570

.554

.534

.513

.494

.475

.456

.458

.436

.416

.396

.377

.394

.371

.350

.331

.312

.339

.317

.296

.277

.258

.292

.270

.250

.232

.215

.252

.231

.212

.194

.178

.218

.198

.180

.164

.149 21 22 23 24 25

.811

.803

.795

.788

.780

.660

.647

.634

.622

.610

.538

.522

.507

.492

.478

.439

.422

.406

.390

.375

.359

.342

.326

.310

.295

.294

.278

.262

.247

.233

.242

.226

.211

.197

.184

.199

.184

.170

.158

.146

.164

.150

.138

.126

.116

.135

.123

.112

.102

.092


CMA Canada 159

Table 1 (cont’d) Present Value of One Dollar Due at the End of n Years

( )P

i n=+

1

1

n 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 01 02 03 04 05

0.901 .812 .731 .659 .593

0.893 .797 .712 .636 .567

0.885 .783 .693 .613 .543

0.877 .769 .675 .592 .519

0.870 .756 .658 .572 .497

0.862 .743 .641 .552 .476

0.855 .731 .624 .534 .456

0.847 .718 .609 .516 .437

0.840 .706 .593 .499 .419

0.833 .694 .579 .482 .402

06 07 08 09 10

.535

.482

.434

.391

.352

.507

.452

.404

.361

.322

.480

.425

.376

.333

.295

.456

.400

.351

.308

.270

.432

.376

.327

.284

.247

.410

.354

.305

.263

.227

.390

.333

.285

.243

.208

.370

.314

.266

.225

.191

.352

.296

.249

.209

.176

.335

.279

.233

.194

.162 11 12 13 14 15

.317

.286

.258

.232

.209

.287

.257

.229

.205

.183

.261

.231

.204

.181

.160

.237

.208

.182

.160

.140

.215

.187

.163

.141

.123

.195

.168

.145

.125

.108

.178

.152

.130

.111

.095

.162

.137

.116

.099

.084

.148

.124

.104

.088

.074

.135

.112

.093

.078

.065 16 17 18 19 20

.188

.170

.153

.138

.124

.163

.146

.130

.116

.104

.142

.125

.111

.098

.087

.123

.108

.095

.083

.073

.107

.093

.081

.070

.061

.093

.080

.069

.060

.051

.081

.069

.059

.051

.043

.071

.060

.051

.043

.037

.062

.052

.044

.037

.031

.054

.045

.038

.031

.026 21 22 23 24 25

.112

.101

.091

.082

.074

.093

.083

.074

.066

.059

.077

.068

.060

.053

.047

.064

.056

.049

.043

.038

.053

.046

.040

.035

.030

.044

.038

.033

.028

.024

.037

.032

.027

.023

.020

.031

.026

.022

.019

.016

.026

.022

.018

.015

.013

.022

.018

.015

.013

.010


CMA Canada 160


( )P

i n=+

1

1

n 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%

01 02 03 04 05

0.826 .683 .564 .467 .386

0.820 .672 .551 .451 .370

0.813 .661 .537 .437 .355

0.806 .650 .524 .423 .341

0.800 .640 .512 .410 .328

0.794 .630 .500 .397 .315

0.787 .620 .488 .384 .303

0.781 .610 .477 .373 .291

0.775 .601 .466 .361 .280

0.769 .592 .455 .350 .269

06 07 08 09 10

.319

.263

.218

.180

.149

.303

.249

.204

.167

.137

.289

.235

.191

.155

.126

.275

.222

.179

.144

.116

.262

.210

.168

.134

.107

.250

.198

.157

.125

.099

.238

.188

.148

.116

.092

.227

.178

.139

.108

.085

.217

.168

.130

.101

.078

.207

.159

.123

.094

.073 11 12 13 14 15

.123

.102

.084

.069

.057

.112

.092

.075

.062

.051

.103

.083

.068

.055

.045

.094

.076

.061

.049

.040

.086

.069

.055

.044

.035

.079

.062

.050

.039

.031

.072

.057

.045

.035

.028

.066

.052

.040

.032

.025

.061

.047

.037

.028

.022

.056

.043

.033

.025

.020 16 17 18 19 20

.047

.039

.032

.027

.022

.042

.034

.028

.023

.019

.036

.030

.024

.020

.016

.032

.026

.021

.017

.014

.028

.023

.018

.014

.012

.025

.020

.016

.012

.010

.022

.017

.014

.011

.008

.019

.015

.012

.009

.007

.017

.013

.010

.008

.006

.015

.012

.009

.007

.005 21 22 23 24 25

.018

.015

.012

.010

.009

.015

.013

.010

.008

.007

.013

.011

.009

.007

.006

.011

.009

.007

.006

.005

.009

.007

.006

.005

.004

.008

.006

.005

.004

.003

.007

.005

.004

.003

.003

.006

.004

.003

.003

.002

.005

.004

.003

.002

.002

.004

.003

.002

.002

.001


CMA Canada 161


( )P

i n=+

1

1

n 31% 32% 33% 34% 35% 36% 37% 38% 39% 40%

01 02 03 04 05

0.763 .583 .445 .340 .259

0.758 .574 .435 .329 .250

0.752 .565 .425 .320 .240

0.746 .557 .416 .310 .231

0.741 .549 .406 .301 .223

0.735 .541 .398 .292 .215

0.730 .533 .389 .284 .207

0.725 .525 .381 .276 .200

0.719 .518 .372 .268 .193

0.714 .510 .364 .260 .186

06 07 08 09 10

.198

.151

.115

.088

.067

.189

.143

.108

.082

.062

.181

.136

.102

.077

.058

.173

.129

.096

.072

.054

.165

.122

.091

.067

.050

.158

.116

.085

.063

.046

.151

.110

.081

.059

.043

.145

.105

.076

.055

.040

.139

.100

.072

.052

.037

.133

.095

.068

.048

.035 11 12 13 14 15

.051

.039

.030

.023

.017

.047

.036

.027

.021

.016

.043

.033

.025

.018

.014

.040

.030

.022

.017

.012

.037

.027

.020

.015

.011

.034

.025

.018

.014

.010

.031

.023

.017

.012

.009

.029

.021

.015

.011

.008

.027

.019

.014

.010

.007

.025

.018

.013

.009

.006 16 17 18 19 20

.013

.010

.008

.006

.005

.012

.009

.007

.005

.004

.010

.008

.006

.004

.003

.009

.007

.005

.004

.003

.008

.006

.005

.003

.002

.007

.005

.004

.003

.002

.006

.005

.003

.003

.002

.006

.004

.003

.002

.002

.005

.004

.003

.002

.001

.005

.003

.002

.002

.001 21 22 23 24 25

.003

.003

.002

.002

.001

.003

.002

.002

.001

.001

.003

.002

.001

.001

.001

.002

.002

.001

.001

.001

.002

.001

.001

.001

.001

.002

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001


CMA Canada 162

Table 2 Present Value of One Dollar Per Year — n Years at i%

( )P

i

in

n

=

−+

⎛

⎝

⎜⎜

⎞

⎠

⎟⎟

1 1

1

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 01 02 03 04 05

0.990 1.970 2.941 3.902 4.854

0.980 1.942 2.884 3.808 4.713

0.971 1.914 2.829 3.717 4.580

0.962 1.886 2.775 3.630 4.452

0.952 1.859 2.723 3.547 4.330

0.943 1.833 2.673 3.465 4.212

0.935 1.808 2.624 3.387 4.100

0.926 1.783 2.577 3.312 3.993

0.917 1.759 2.531 3.240 3.890

0.909 1.736 2.487 3.170 3.791

06 07 08 09 10

5.796 6.728 7.652 8.566 9.471

5.601 6.472 7.325 8.162 8.983

5.417 6.230 7.020 7.786 8.530

5.242 6.002 6.733 7.435 8.111

5.076 5.786 6.463 7.108 7.722

4.917 5.582 6.210 6.802 7.360

4.767 5.389 5.971 6.515 7.024

4.623 5.206 5.747 6.247 6.710

4.486 5.033 5.535 5.995 6.418

4.355 4.868 5.335 5.759 6.145

11 12 13 14 15

10.368 11.255 12.134 13.004 13.865

9.787 10.575 11.348 12.106 12.849

9.253 9.954

10.635 11.296 11.938

8.760 9.385 9.986

10.56311.118

8.306 8.863 9.394 9.899

10.380

7.887 8.384 8.853 9.295 9.712

7.499 7.943 8.358 8.745 9.108

7.139 7.536 7.904 8.224 8.560

6.805 7.161 7.487 7.786 8.061

6.495 6.814 7.103 7.367 7.606

16 17 18 19 20

14.718 15.562 16.398 17.226 18.046

13.578 14.292 14.992 15.678 16.351

12.561 13.166 13.753 14.324 14.877

11.65212.16612.65913.13413.590

10.83811.27411.69012.08512.462

10.10610.47710.82811.15811.470

9.447 9.763

10.05910.33610.594

8.851 9.122 9.372 9.604 9.818

8.313 8.544 8.756 8.950 9.129

7.824 8.022 8.201 8.365 8.514

21 22 23 24 25

18.857 19.661 20.456 21.244 22.023

17.011 17.658 18.292 18.914 19.523

15.415 15.937 16.444 16.936 17.413

14.02914.45114.85715.24715.622

12.82113.16313.48913.79914.094

11.76412.04212.30312.55012.783

10.83611.06111.27211.46911.654

10.017 10.201 10.371 10.529 10.675

9.292 9.442 9.580 9.707 9.823

8.649 8.772 8.883 8.985 9.077


CMA Canada 163

Table 2 (cont’d) Present Value of One Dollar Per Year — n Years at i%

( )P

i

in

n

=

−+

⎛

⎝

⎜⎜

⎞

⎠

⎟⎟

1 1

1

n 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 01 02 03 04 05

0.901 1.713 2.444 3.102 3.696

0.893 1.690 2.402 3.037 3.605

0.885 1.668 2.361 2.975 3.517

0.877 1.647 2.322 2.914 3.433

0.870 1.626 2.283 2.855 3.352

0.862 1.605 2.246 2.798 3.274

0.855 1.585 2.210 2.743 3.199

0.848 1.566 2.174 2.690 3.127

0.840 1.547 2.140 2.639 3.058

0.833 1.528 2.107 2.589 2.991

06 07 08 09 10

4.231 4.712 5.146 5.537 5.889

4.111 4.564 4.968 5.328 5.650

3.998 4.423 4.799 5.132 5.426

3.889 4.288 4.639 4.946 5.216

3.785 4.160 4.487 4.772 5.019

3.685 4.039 4.344 4.607 4.833

3.589 3.922 4.207 4.451 4.659

3.498 3.812 4.078 4.303 4.494

3.410 3.706 3.954 4.163 4.339

3.326 3.605 3.837 4.031 4.193

11 12 13 14 15

6.207 6.492 6.750 6.982 7.191

5.938 6.194 6.424 6.628 6.811

5.687 5.918 6.122 6.303 6.462

5.453 5.660 5.842 6.002 6.142

5.234 5.421 5.583 5.725 5.847

5.029 5.197 5.342 5.468 5.576

4.836 4.988 5.118 5.229 5.324

4.656 4.793 4.910 5.008 5.092

4.487 4.611 4.715 4.802 4.876

4.327 4.439 4.533 4.611 4.676

16 17 18 19 20

7.379 7.549 7.702 7.839 7.963

6.974 7.120 7.250 7.366 7.469

6.604 6.729 6.840 6.938 7.025

6.265 6.373 6.467 6.550 6.623

5.954 6.047 6.128 6.198 6.259

5.669 5.749 5.818 5.878 5.929

5.405 5.475 5.534 5.585 5.628

5.162 5.222 5.273 5.316 5.353

4.938 4.990 5.033 5.070 5.101

4.730 4.775 4.812 4.844 4.870

21 22 23 24 25

8.075 8.176 8.266 8.348 8.422

7.562 7.645 7.718 7.784 7.843

7.102 7.170 7.230 7.283 7.330

6.687 6.743 6.792 6.835 6.873

6.313 6.359 6.399 6.434 6.464

5.973 6.011 6.044 6.073 6.097

5.665 5.696 5.723 5.747 5.766

5.384 5.410 5.432 5.451 5.467

5.127 5.149 5.167 5.182 5.195

4.891 4.909 4.925 4.937 4.948


CMA Canada 164


( )P

i

in

n

=

−+

⎛

⎝

⎜⎜

⎞

⎠

⎟⎟

1 1

1

n 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 01 02 03 04 05

0.826 1.510 2.074 2.540 2.926

0.820 1.492 2.042 2.494 2.864

0.813 1.474 2.011 2.448 2.804

0.807 1.457 1.981 2.404 2.745

0.800 1.440 1.952 2.362 2.689

0.794 1.424 1.923 2.320 2.635

0.787 1.407 1.896 2.280 2.583

0.781 1.392 1.868 2.241 2.532

0.775 1.376 1.842 2.203 2.483

0.769 1.361 1.816 2.166 2.436

06 07 08 09 10

3.245 3.508 3.726 3.905 4.054

3.167 3.416 3.619 3.786 3.923

3.092 3.327 3.518 3.673 3.799

3.021 3.242 3.421 3.566 3.682

2.951 3.161 3.329 3.463 3.571

2.885 3.083 3.241 3.366 3.465

2.821 3.009 3.156 3.273 3.364

2.759 2.937 3.076 3.184 3.269

2.700 2.868 2.999 3.100 3.178

2.643 2.802 2.925 3.019 3.092

11 12 13 14 15

4.177 4.279 4.362 4.432 4.489

4.035 4.127 4.203 4.265 4.315

3.902 3.985 4.053 4.108 4.153

3.776 3.851 3.912 3.962 4.001

3.656 3.725 3.780 3.824 3.859

3.543 3.606 3.656 3.695 3.726

3.437 3.493 3.538 3.573 3.601

3.335 3.387 3.427 3.459 3.483

3.239 3.286 3.322 3.351 3.373

3.147 3.190 3.223 3.249 3.268

16 17 18 19 20

4.536 4.576 4.608 4.635 4.657

4.357 4.391 4.419 4.442 4.460

4.189 4.219 4.243 4.263 4.279

4.033 4.059 4.080 4.097 4.110

3.887 3.910 3.928 3.942 3.954

3.751 3.771 3.786 3.799 3.808

3.623 3.640 3.654 3.664 3.673

3.503 3.518 3.529 3.539 3.546

3.390 3.403 3.413 3.421 3.427

3.283 3.295 3.304 3.311 3.316

21 22 23 24 25

4.675 4.690 4.703 4.713 4.721

4.476 4.488 4.499 4.507 4.514

4.292 4.302 4.311 4.318 4.323

4.121 4.130 4.137 4.143 4.147

3.963 3.971 3.976 3.981 3.985

3.816 3.822 3.827 3.831 3.834

3.679 3.684 3.689 3.692 3.694

3.551 3.556 3.559 3.562 3.564

3.432 3.436 3.438 3.441 3.442

3.320 3.323 3.325 3.327 3.329


CMA Canada 165


( )P

i

in

n

=

−+

⎛

⎝

⎜⎜

⎞

⎠

⎟⎟

1 1

1

n 31% 32% 33% 34% 35% 36% 37% 38% 39% 40% 01 02 03 04 05

0.763 1.346 1.791 2.131 2.390

0.758 1.332 1.766 2.096 2.345

0.752 1.317 1.742 2.062 2.302

0.746 1.303 1.719 2.029 2.260

0.741 1.289 1.696 1.997 2.220

0.735 1.276 1.674 1.966 2.181

0.730 1.263 1.652 1.936 2.143

0.725 1.250 1.630 1.906 2.106

0.719 1.237 1.609 1.877 2.070

0.714 1.225 1.589 1.849 2.035

06 07 08 09 10

2.588 2.739 2.854 2.942 3.009

2.534 2.678 2.786 2.868 2.930

2.483 2.619 2.721 2.798 2.855

2.433 2.562 2.658 2.730 2.784

2.385 2.508 2.598 2.665 2.715

2.339 2.455 2.540 2.603 2.650

2.294 2.404 2.485 2.544 2.587

2.251 2.356 2.432 2.487 2.527

2.209 2.308 2.380 2.432 2.469

2.168 2.263 2.331 2.379 2.414

11 12 13 14 15

3.060 3.100 3.129 3.152 3.170

2.978 3.013 3.040 3.061 3.076

2.899 2.931 2.956 2.974 2.988

2.824 2.853 2.876 2.892 2.905

2.752 2.779 2.799 2.814 2.826

2.683 2.708 2.727 2.740 2.750

2.618 2.641 2.658 2.670 2.679

2.556 2.576 2.592 2.603 2.611

2.496 2.515 2.529 2.539 2.546

2.438 2.456 2.469 2.478 2.484

16 17 18 19 20

3.183 3.193 3.201 3.207 3.211

3.088 3.097 3.104 3.109 3.113

2.999 3.007 3.012 3.017 3.020

2.914 2.921 2.926 2.930 2.933

2.834 2.840 2.844 2.848 2.850

2.758 2.763 2.767 2.770 2.772

2.685 2.690 2.693 2.696 2.698

2.616 2.621 2.624 2.626 2.627

2.551 2.555 2.557 2.559 2.561

2.489 2.492 2.494 2.496 2.497

21 22 23 24 25

3.215 3.217 3.219 3.221 3.222

3.116 3.118 3.120 3.121 3.122

3.023 3.025 3.026 3.027 3.028

2.935 2.937 2.938 2.939 2.939

2.852 2.853 2.854 2.855 2.856

2.773 2.775 2.775 2.776 2.777

2.699 2.700 2.701 2.701 2.702

2.629 2.629 2.630 2.630 2.631

2.562 2.562 2.563 2.563 2.563

2.498 2.499 2.499 2.499 2.499

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