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