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The Chartered Institute of Management Accountants Page 2

CIMA Global Business Challenge 2012

Scenario

You are the consultant to VYP an independent TV production company.

Prepare a report that prioritises analyses and evaluates the issues facing the
board of VYP. You should make recommendations where appropriate.


Read all the information provided before you begin

Note: Todays date is 31 March 2012. You should write your report as at
this date.
























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A variety of issues have arisen, on which the board would like your analysis
and opinion:

Re-commissioned drama series

Following the successful launch of a drama series last year the BBC
announced last week that it wishes to re-commission a second series. The
programme last year revolved around a group of four rowers preparing for the
rowing world championships held in 2011. It covered the ups and downs of
life as a rower and dealt with the pressures on relationships the training
created. The programme was unusually well received by the viewing public.

The BBC have offered the new series at the 2011 prices less 10% arguing
that the sets have been built and many of the normal teething problems had
been resolved last time. VYP have always struggled to realise the savings
considered likely when a series is repeated.

The new drama series will be a long one giving 5m of revenue to VYP (after
the 10% discount mentioned above). J anet Black, Finance Director has
indicated that in her experience VYP would be lucky to make more than 5%
operating margin on this project (after allowing for some modest cost savings
associated with re-commissioned programmes). She has said that it is about
time that VYP exploded the myth that re-commissioned programmes are
significantly cheaper to make and should take this up with the BBC.

Preliminary enquiries have indicated that all but one of the main actors is
available. J ohn Strong, one of the original rowers in the team, is already
contracted for the next 10 months on other projects with GGG, another TV
production company. The drama series is scheduled to be shown in the 8
weeks from 1
st
April 2013 to coincide with the rowing world championships in
J une of that year. The series will take 4 months to plan and shoot. Les
Fisher believes that when it comes to personal service contracts anything is
possible and is interested to hear what might be done to release Mr. Strong
from the pre-existing contract with GGG to allow him to take part in second
series of the drama.

Proposal to expand into corporate advertising videos

An old friend at Zubinos Coffee Shops Ltd has approached Steve Voddil with
a request to help him promote his chain of coffee shops. The coffee shop
industry has expanded considerably in the last ten years but more recently the
business has been coming under increased competitive pressure. The
market is now saturated with specialist coffee shops and margins are being
squeezed as Zubinos reduces prices and suffers higher costs partly due to
ever increasing oil prices (affecting delivery and raw material costs).



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The idea is for VYP to produce a corporate advertising video, which will be
shown on local independent TV. It has also been suggested that more
modern media channels might be appropriate (You Tube for example) and
Steve Voddil is interested in your opinion on this idea.

Steve Voddil requires a financial assessment and a wider discussion as to the
viability of the strategic change of direction. He has prepared cost and
revenue data for the first video but has indicated that once this has been
done, up to 15% of the costs might be saved for subsequent attempts as VYP
gains experience.

Description
Revenue 17,000

Studio hire 5,000
Actors Note 1
Film crew Note 2
Scripting 1,200
Music 1,500

Note 1:
Steve is unsure how much actors will cost as much depends on the skill level
needed and availability. He thinks that there is a 40% chance that the cost
will be 2,800 and a 60% chance that the costs will be 4,800 per video.

Note 2:
Using past cost analysis it has been noted that the film crew cost varies in line
with the cost of studio hire. For every 1 spent on studio hire the film crew will
cost 1.20.

Steve is particularly interested in how you will treat notes 1 and 2 and
whether your treatment raises any issues or reservations in your
recommendations.

Zubinos may well be interested in subsequent videos if the first one goes well;
indeed Steve thinks that this could be an exciting development exposing VYP
to a new market for its services. The market for corporate videos is huge and
growing, its about time we exploited our skill set better he said.

Fee negotiation for new childrens programme

Following the success of a pilot programme, the UK broadcaster is keen to
proceed with the first series of a new childrens programme called Sammy
Squirrel making use of puppetry. The negotiations have gone well as the
broadcaster thinks the likelihood of success is good given the rave reviews
from critics and pilot programme viewers (children and parents) alike.


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The broadcaster has accepted that this is a new area for VYP but is confident
in its ability to produce the programme. The area of contract contention
surrounds the ownership of merchandising rights. The sale of puppets and
other items based on Sammy Squirrel would carry good margins and the
prospect of future sales.

The broadcaster has offered to fund 20 programmes, which will occupy 54
minutes broadcasting each with advertising taking up the other 6 minutes
within an hour of television time. The broadcaster has offered 350,000 per
hour for the programmes, which is considered to be generous. If this offer is
accepted the merchandising rights will remain with the broadcaster.

VYP is considering whether to accept a lower fee in return for the right to sell
the merchandise itself. After discussions with other production companies
that are known to VYP senior management it is thought that the fee from the
broadcaster would drop by 35% in order for VYP to gain a 40% share of the
merchandising margin. In this case 60% of the merchandising margin would
be payable back to the broadcaster in the form of a royalty.

Merchandising would involve a range of tasks including design, manufacture,
sales and marketing as well as distribution. J ohn Young accepts VYP has
little skill in many of these areas but states VYP outsources all sorts of tasks
already, merchandising would simply be added to the list.

The level of merchandising sales is very difficult to predict and will be heavily
dependent on the level of publicity the programme gets and how well-liked it is
by the viewers. It is also dependent on exposure. If the broadcaster decides
not to re-commission future programmes the sales of merchandise will most
likely collapse.

Equally the margin gained from outsourced merchandised sales is variable
but a typical rate would be around 25%. VYP feels that it is sensible to
consider only the first year of potential merchandising sales in the first
instance and wants to know what the breakeven level of sales would be when
compared to the fee of 350,000 per hour excluding any merchandising
income. It also wants some research done to give an indication of likely
merchandise sales levels. This should be based on the Teletubbies a
successful puppet based TV programme of the late 1990s. J ohn Young
thinks this should be enough evidence for you to be able to give a clear
recommendation resulting from an assessment of the proposal on fees. He
also wants you to indicate the likely risks VYP exposes itself to should it
venture into selling merchandise.





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Banks friend or foe? A new documentary by VYP

Having been budgeted to make a healthy margin, VYPs latest documentary is
now forecast to make a loss. The programme attempts to explain why the
financial crisis of 2008 happened. The investigation phase of the programme
took longer than anticipated and involved repeated interviews, as the
programme director required further clarification on a large number of
inconsistencies in the evidence gathered.

Steve Voddil is unhappy that a loss is to be made but has ruled out any
renegotiation of the fee. He said we have agreed a fee, its too late to go
back now and ask for more VYP do not do that. He has asked the
programme producer for suggestions on what can be done.




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The programme producer is suggesting the following steps to achieve a
breakeven position:
1. No more interviews, VYP must produce the programme based on the
evidence it has to date.
2. Expensive computer graphics interface (CGI) usage will be cut back.

The programme director (Sarah Runner) is furious at these suggestions. An
award winner of the past, Sarah sees this work as important and potentially
worthy of an award. The world has the right to know the truth. The profit
motive should be put to one side just this once she said. She added, The
use of graphics and other CGI techniques are essential to display to non-
financially aware viewers the reasons why the crisis happened if our viewers
do not understand then we have failed.

Steve has asked for an assessment of the two solutions put forward. It has
been estimated that if the programme were produced including more
interviews as needed and the full use of CGI then the loss would be in the
region of 30,000. This compares with a forecast margin of 32,000 on
forecast revenue of 290,000.

Accident at studio

VYP hires studios when they are needed. Recently, due in part to poor
planning, a studio was needed at short notice. VYP had little time to set up
the studio before filming began and so the set builders started work at 11pm
the previous day to get the set ready. The set builders worked with limited
breaks until 10am the next morning eating and drinking on the go. At 9.30am
one of the builders fell off a gantry and broke his arm. The gantry was
properly built and was safe for use. The accident was put down to a lack of
concentration and tiredness.

VYP routinely asks the set builders to work long and often anti-social hours.
One of VYPs leading producers says Look, actors are expensive and set
builders are cheap. We must build the sets ready for a decent days worth of
filming, its just economics!