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Contractual Energy Case

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Submitted By Jingbo
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What Mr. Tan worried about is that the net profit from operation in 2011
(578,751K RMB) is not as good as it is in 2010 (670,061K RMB). We concentrate on the variance between 2010 and 2011 and the data variance shall show us why the net operation income decreased.
Relevant Data * Production:

(MWh) | 2010 | 2011 | Contractual Energy | 3,000,164.00 | 3,000,325.00 | Exess Energy | 937,666.00 | 427,214.00 | Total | 3,937,830.00 | 3,427,539.00 |

* Price:

(RMB/KWh) | 2010 | 2011 | Contractual price | 0.4219 | 0.4238 | Excess Energy price | 0.2531 | 0.2120 | Average | 0.3817 | 0.3974 |

* Coal:

| 2010 | 2011 | Mass of coal per MWh (Ton/MWh) | 0.347 | 0.346 | Total Coal Consumed (Ton) | 1,366,269.819 | 1,185,863.446 | Total Cost of Coal (RMB) | 362,062,000.000 | 320,183,000.000 | Coal price
(RMB/Ton) | 265.000 | 270.000 |

* Explanation:

The production form shows the variance in total production between 2010 and 2011. This affects the revenue performance of the company.

The price form shows the sales price variance in 2010 and 2011. This will also affects the revenue performance.

The coal form shows the variance of fuel efficiency and fuel cost in 2010 and 2011.

Data Variance | Contract Minimal | Excess | Total | Quantity Var | 67,925.90 | -129,185,192.16 | -129,117,266.26 | Price Var | 5,700,617.50 | -17,554,223.26 | -11,853,605.76 | Fuel Efficiency Var | - | - | 957,626.79 | Fuel Cost Var | - | - | -5,928,754.60 | Fixed Operating & Maintenance Var | - | - | -5,890,000.00 | Depreciation Expense Var | - | - | -44,459,000.00 | Variable Operating & Maintenance Var | - | - | 392,419.45 |

* Quantity Variance, Price Variance, Fuel Efficiency Variance and Fuel Cost Variance is the variances between 2010 to 2011 * Fix Operating & Maintenance Variance, Depreciation Expense Variance, Variable Operating & maintenance Variance compares the actual cost to standard cost in 2011 * All the favorable variances are in positive numbers while unfavorable variances are in negative numbers.
Variance Analysis

From the graph we can see that:

* The decrease in the purchase of HPPC is the most significant reason for the bad performance in 2011. This is mainly attributed to the significant decrease in excess energy HPPC brought in 2011. * Another noticeable variance is the depreciation cost. Although Luotang didn’t produce as much as 2010. The depreciation cost is almost the same as 2010 in 2011 and exceed the standard cost for 44 millions. * It turns out that the doubt of Mr. Tan about the decline in the quality of the coal is untrue. From the analysis we can see that the Fuel Efficiency Variance is actually favorable in 2011. There is a little unfavorable variance in the Fuel Price but not too much.
Conclusion & Suggestions
We can attribute the variances as the following categories

* Variance in market includes volume and price variance from the HPPC, and the variance of fuel price from PIngdingshan. These are the variance we have little control. * Variance from operation includes Fuel efficiency variance, FFOH Variance, VFOH Variance and Depreciation Variance. These are the variance we can control.

We can see that the total Variance from operaion is 48,998,953.76 RMB. Considering the situation, the decrease of net operating income is almost inevitable in a buyer’s market like China. However, we could have lower our loss by 48,998,953.76 RMB by better operation management.

Suggestions for improvement:

* Try to find other market in the nearby provinces in China since HPPC is the monopoly of power supply in Hubei province. Our destiny shall be controlled by HPPC if we failed to find another market.

* We should have more rigorous cost control and operation management while our market is shrinking. We could have avoided 49 million lost if we manage to cut down by the linear amount of decrease in sales.

* Depreciation cost is quite noticeable. It is most likely that Luotang is use straight line depreciation by the year used of equipment. It will make the income statement looks worse if our production is shrinking due to the market reason. We suggest measuring the depreciation by actual hour used or capacity used of equipment, instead of years used. This will make the depreciation cost goes down when the production is shrinking.

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