Page 6 - CIMA May 18 - MCS Day 1 Suggested Solution

CIMA MAY 2018 – MANAGEMENT CASE STUDY

However, the money spent on acquiring the bus on a six year cycle will have to be spent again in
another six years, whereas that on a ten year cycle will last for another four years. In this
situation, over a period of thirty years, replacing the bus every six years would involve five bus
purchases over the period, whereas replacing it every ten years would involve only three
purchases.

So the numbers again are not directly comparable with each other. The calculation of an EAC
would make the numbers comparable by saying that if the buses are to be replaced indefinitely,
the EAC represents the annual spend to be made on each cycle. A decision can then be made as
to which cycle appears cheapest on an annual basis.

Limitations of the technique

The technique is limited in that it makes certain assumptions, including that the asset to be
purchased will be replaced at the end of its replacement cycle with an identical asset, at the same
price, with the same maintenance costs and the same residual value.

This is very unlikely in real life. A bus purchased now is unlikely to still be in production by the
time it needs to be replaced. Even if the same model is still available, it is likely to have been
upgraded to a more up to date version, maybe with efficiency improvements.
Prices are subject to inflation, so the purchase price and the maintenance costs will increase over
time.

Menta’s needs may change over time. For instance, a local route that currently uses a small
minibus may become more popular over time, perhaps due to a large housing development being
built, so a larger bus will be needed in the future, or maybe Menta may make the decision to
move towards electric vehicles when its buses are replaced.

Menta also seems to currently use its buses well beyond their useful life. The school bus that was
involved in the accident was 22 years old, whereas the life expectancy of its buses has a maximum
of ten years. It may well be that currently Menta would not consider the use of the EAC
technique because it has a policy of maintaining buses to keep them in use for as long as possible.

The technique also ignores the qualitative aspects of asset replacement and external factors.
Menta may be forced at any time to upgrade their buses due to regulatory changes in this highly
regulated industry.

2. PRICING STRATEGIES

Menta’s strategy involves charging a ‘competitive rate’.

When Menta was growing in the 1980s it competed aggressively against the competition,
primarily through cutting fares.

Current pricing strategies adopted by the company are:

Individual journey fares versus season tickets

Menta offers on its fare‐paying services a season ticket option where passengers can pay up front
for a week or a month and receive a discount compared to buying the tickets individually. In
doing this, the company is encouraging bulk buying by its customers, enabling Menta to receive

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