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GROUP 4
• Wilson Ngoi
205414
• Chew Chin Cia
207945
• Siti Nazirah Mohammad Nawawi
207818
• Nurul Atikah Norham
207712
LUOTANG POWER : VARIANCES EXPLAINED
INTRODUCTION
600 MW coal-fired power company. Located in Hubei Province in Central
China. General manager, Tan Min Yi need to
make presentation about: Poor financial performance in year 2011 Consideration of 2,000 MW expansion Promotion as the company’s Executive
Vice President position
MAIN ISSUE
The poor plant performance due to the complexity nature of the contracting environment between Luotang Power Company and its supplier and customer that lead to the poor financial results of the plant
ANALYSIS OF THE ISSUE
INCOME STATEMENT ANALYSIS 2010 2011 Changes
Revenue
Normal Take 1,265,769 1,271,538
Excess Energy 237,301 90,566
Total Revenue1,503,070 1,362,104
(140,966)
Operating Costs
Coal Cost 362,062 320,183
Fixed Operating and Maintenance 38,115 39,068
Depreciation Expense 349,342 348,549
Variable Operating and Maintenance 60,058 51,886
Insurance Costs 23,432 23,666
Total Operating Costs 833,009 783,352 49,657
Net Profit from Operations 670,061 578,752 (91,309)
VARIANCE ANALYSIS
1. REVENUE VARIANCE ANALYSIS
Normal Take (3,000,000 MWh)
Qty Variance:
=
Price Variance :
=
(Favorable)
EXCESS ENERGY (AMOUNT OF MWH ABOVE 3,000,000 MWH)
Price Variance:
=
(Unfavorable)
Qty Variance:
=
(Unfavorable)
Rate / Year 2010 Rate / Year 2011
RMB 237301 / 937,377MWh=RMB 0.2532
RMB 90,566 / 427,351MWh= RMB 0.2119
Total Take (Normal Take + Excess Energy)
Price Variance:==(Favorable)
Quantity Variance:
= (Unfavorable)
2. COAL COST VARIANCE ANALYSIS
Fuel Efficiency Variance :
= = (Favorable) Fuel Cost Variance :
= = (Unfavorable)
Rate / Year 2010 Rate / Year 2011
= RMB 265
= RMB 270
3. FIXED COST VARIANCE ANALYSIS
i. Fixed Cost Variances using Net Generation as allocation base
Actual (i) Using Net Generation
2011 Standard Variance
Fixed Operating and Maintenance 39,068 33,178 5,890 (U)
Depreciation Expense 348,549 304,090 44,459 (U)
Insurance Cost 23,666 20,396 3,270 (U)
Total Fixed Costs 411,283 357,664 53,619 (U)
II. FIXED COST VARIANCES USING MINIMUM TAKE AS ALLOCATION BASE
Actual (ii) Using Minimum Take
2011 Standard Variance
Fixed Operating and Maintenance 39,068 38,115 953 (U)
Depreciation Expense 348,549 349,342 (793) (F)
Insurance Cost 23,666 23,432 234 (U)
Total Fixed Costs 411,283 410,889 394 (U)
THE COAL SUPPLY & THE SPUR TO PROVIDE LOWER QUALITY COAL
Increase of RMB 5 each tonne from RMB 265 in year
2010 to RMB 270 in year 2011.
Providing coal close to the low end of quality range to
Luotang.
Pingdingshan has its own self-interest position in Luotang
Power Company.
enable HT Power to pass over Tan and consider the
management team of Pingdingshan for the role of
Executive Vice President.
THE ENVIRONMENTAL DECISIONS THAT THE MANAGER TAKES
The contractually obligated to sell electricity to HPPC according to a power purchased contract.
Has limited opportunity to sell the energy above the contractual minimum.
Coal supply contract with Pingdingshan. No have much option in selecting other
supplier. High debt burden - approximately 80% of the
initial construction costs being financed by debt.
Expansion of 2,000 MW- increased the debt.
SOLUTIONS
• having a higher minimum annual purchase per annum
RENEW CONTRACT WITH HPPC
• want a specific quality range of coal
• negotiation
MAKE A NEW CONTRACT
WITH PINGDINGSH
AN
• produces a good amount of electricity and is Eco-friendly
REPLACE WITH HYDRO
AND TIDE
• opportunity for Luotang to have high bargaining power
EXPANSION OF SUPPLIER
NETWORK
• lightens the financial burden of Luotang
JOINT VENTURE
WITH HPPC
DECISION MAKING BASED ON REAL SOLID EVIDENCE• Renew contract with customer - HPPC
is enjoying the privilege. (not viable)• Making a new contract with existing
supplier - reduce the privilege and benefits of supplier. (not viable)
• Replacing hyrowater and tides - cost to acquire and installing and the time taken. (not viable)
Expansion of the supplier network - high bargaining power to renegotiate the price of coal. (viable)
Joint venture and having HPPC as shareholders - win-win phenomena for both parties. (viable)
CONCLUSION
Seek new supplier and have joint venture and persuade HPPC to associate for the project.
Thus it will