8030 – PM Elective Quah Studio – Briefing notes for ASSESSMENT OPPORTUNITIES READ THE INTRODUCTION AND APPENDIX 1 FIRST, BEFORE READING THE REST OF THIS DOCUMENT. See highlights for the text that lays out the AO’s! Who are you? CPA, recently moved to this business Who are you advising? Suzanne Quah, owner – not financially focused What is (s)he asking you for? Why are results low, and what to do; whether to renovate a property. How am I expected to reply? Memo format or similar. It needs to look like something you would be prepared to give to your boss. Marks will be deducted if it would be hard for a non-accountant to follow. AO1 – “Should I have revised the budget since our bookings were lower than expected?” – YES! AO2 – Prepare a variance analysis on the financial results AO3 – Suggestions on how to improve overall financial performance. These AOs can be built on the same analysis – but make sure to comment on each of them. Three stages: – Flex the original budget to reflect the actual level of activity (and explain your variances) – Compare the actual financial results against the flexed budget – Comment on variances and suggest possible ways to fix them. Recommend you use the following structure in your analysis: Note that this lets you keep the key information front-and-centre. The detailed calculations (eg. of how you flexed your budget) and the commentary can go in footnotes or another tab. Line item Original budget Flexed budget Flexed vs original bgt Notes Actual results Var from flexed budget Notes Revenue item 1 $x $y ($y-$x) note 1 $z ($z-y) note 2 Revenue item 2 $x $y ($y-$x) note 3 $z ($z-y) note 4 Total rev [total] [total] [total] [total] [total] Cost item 1 $x $y ($y-$x) note 5 $z ($z-y) note 6 Cost item 2 $x $y ($y-$x) note 7 $z ($z-y) note 8 [total] [total] [total] [total] [total] etc etc 8030 – PM Elective Quah Studio – Briefing notes for ASSESSMENT OPPORTUNITIES AO 4 – Consider how to organize the business AO5 (implicit) – Consider how to evaluate the different departments The case identifies three different core types of staff responsibility (photographers, production staff, sales associates), plus the office manager (you can ignore). The case is guiding you to consider each of these as a responsibility centre. Responsibility centres can be revenue centres, cost centres or profit centres. You will need to think about: – what responsibilities each “department” will carry – what sort of targets Suzanne might set, to evaluate each and hold them accountable – any current issues you identify that may make it difficult for each department to achieve goals AO6 – Evaluate whether or not to renovate the barn There are many different ways to evaluate whether or not to proceed with an investment. The case is guiding you to create a NPV calculation stretching out 5 years, and using a discount rate of 10%. Using the information provided, create an expected cashflow statement for each year, and calculate a total NPV. Make a recommendation whether or not this is financially sensible. Don’t forget to comment on any qualitative (non-financial) factors you think are relevant. Allocation to groups: – Week 1: AO 1, AO2, AO3 – Week 2: AO 4, AO5, AO6 CPA MOCK Evaluation PM Elective Module Page 1 © 2017, Densmore Consulting Services Inc. All Rights Reserved. THE QUAH STUDIO Suggested Time (80 minutes) Today is January 11, 2017. You, CPA, just started working for The Quah Studio (TQS), a well- known photography studio in the nation’s capital. The company was founded 10 years ago by Suzanne Quah and has seen tremendous growth during that time. The main studio is located in downtown Ottawa and there is another location used for outdoor sessions in the Gatineau Hills area, about 30 minutes from the city. The rural setting is becoming popular with customers who like to have their photos taken in a natural setting. Suzanne has always focused on the studio side of the business. She likes to be behind the camera much more than sitting behind a desk. “That’s where you, CPA, come in,” she explained. “I need some help understanding the numbers.” In the past year, TQS barely broke even. “I thought things were going well, but the numbers really took me by surprise. Until I know what is going on, no one is going to get any salary increases.” Suzanne provided you with the budget she put together last year (Appendix I). “I wonder if I should have revised the budget since our bookings were lower than expected.” Suzanne asked you to prepare a variance analysis on the financial results, providing specific suggestions on how to improve the company’s overall financial performance. “I would also like you to look at the way I have organized the business. I didn’t really put any thought into it when we started. We have just added people when we saw the need. I was talking to a friend last week and she was telling me that the company she works for is organized into cost centres and revenue centres. Is that something TQS should consider?” The Ottawa location is currently operating close to capacity. It has two studios on the main floor of the building, office space and a production facility downstairs. The two acres of land in the Gatineau Hills area were purchased two years ago. TQS started using the Gatineau location for outdoor photography last year. It is a wooded lot with an old barn and two small sheds that serve as a convenient background for pictures. To make the best use of that investment, Suzanne would like to fix up the barn and winterize it so it can be used as a small indoor studio. The renovations would cost $150,000 but it would give the company the ability to use the location all year. Before committing any money to the project, Suzanne wants to be sure it is viable. She would like to recover the cost of the renovations within five years. “Do some investigation and we can get together next week so you can provide me with your recommendations.” You gathered additional financial information (Appendix II) and met with other staff (Appendix III) as part of your investigation. Juleshawkins Highlight Juleshawkins Highlight Juleshawkins Highlight Juleshawkins Highlight Juleshawkins Highlight Juleshawkins Highlight CPA MOCK Evaluation PM Elective Module Page 2 © 2017, Densmore Consulting Services Inc. All Rights Reserved. APPENDIX I 2017 BUDGET FOR THE QUAH STUDIO Revenue Studio fees Note Ottawa $260,000 1 Gatineau 130,000 2 Digital images and prints 585,000 3 Total revenue 975,000 Variable costs Photography 195,000 4 Digital images and prints 351,000 5 Total variable costs 546,000 Contribution margin 429,000 Operating costs 300,000 Expected income before tax $129,000 Notes: 1. The Ottawa location expected 500 studio sessions at $400 each and 30 weddings at $2,000 each. 2. The Gatineau location was expected to bring in 50% of the Ottawa location’s revenue in its first year. 3. Revenue from digital images and prints was budgeted at 150% of studio fee revenues. 4. Variable costs for a studio session total $200. Variable costs for a wedding session are $1,000. 5. Production costs were expected to be 60% of the digital images and prints revenue. CPA MOCK Evaluation PM Elective Module Page 3 © 2017, Densmore Consulting Services Inc. All Rights Reserved. APPENDIX II SELECTED FINANCIAL INFORMATION • There were 480 studio sessions and 24 weddings at the Ottawa studio last year. Seventeen customers complained about being assigned to other photographers (Anne Hawley and Jon Lafferty) when they expected to be dealing with Suzanne. Their regular studio fees were discounted by 50%. • Cindy Strauss (office manager) made bookings for 200 outdoor sessions and 12 weddings at the Gatineau location. All of the wedding parties arrived but only 175 of the other customers showed up. When there were scheduling conflicts with people arriving late for regular studio sessions, both groups of customers received a 50% discount on their studio fee, which happened 20 times last year. • Actual digital images and prints revenue was $402,400 last year. • In 2017, total variable costs were $407,000. • Income before tax was $18,000 for 2017. The 2017 expected tax rate for TQS is 16%. • Suzanne prepared the budget herself, using the prior year’s actual results as her guide. She increased revenue by 10% based on what she wanted the company to achieve. The details of the budget were not shared with the rest of the staff. • The Gatineau location could accommodate up to 400 studio bookings and 30 weddings each year if the barn was renovated. Volume would be expected to increase at a rate of 20% per year. TQS expects a return on its investment of 10%. • The company would invest in more marketing and hire a site manager to make sure people are familiar with the location. Annual costs for the marketing would be $10,000 and the salary for the site manager would be $50,000. CPA MOCK Evaluation PM Elective Module Page 4 © 2017, Densmore Consulting Services Inc. All Rights Reserved. APPENDIX III NOTES FROM DISCUSSIONS WITH STAFF 1. Photographers The company has two full-time photographers on staff (in addition to Suzanne) and hires additional contractors if there are conflicting schedules. Anne Hawley and Jon Lafferty have been with the company for five years. For the first few years after TQS was incorporated, Suzanne did all the photography herself. She hired Anne and Jon when she found she could not keep up with the demand. The full-time photographers are salaried employees. 2. Production staff Peter Grouse manages the digital imaging and technical side of the business. In addition to producing all of the images in the production facility, he manages a full-time staff of three computer technicians and is responsible for ensuring the company has the latest in electronic and digital equipment to maintain its competitive edge. “We developed new processes this year to keep down costs,” he told you. “I just don’t understand why Suzanne thinks this was a bad year. We managed to hold related costs to 57% of digital images and print revenue and that was a lot better than we had done before.” 3. Sales associates After Peter’s team processes the pictures, sales associates send proofs to customers. To prevent customers from simply printing out pictures from the proofs, the company encrypts the files so the pictures cannot be saved or printed until a contract has been created to determine which pictures the customer wants to purchase. One full-time and three part-time employees work in sales, all of whom are paid a salary. If a customer is only purchasing a few images, the price per image starts at $100. As the volume increases, the price goes down to a minimum of