Luotang Power

Luotang Power Company

Main issue: Tan has explained to the Board Of director regarding the contractual agreement between the supplier and the customer and the external factor that has cause the performance on the financial result become poorer compare to the prior year.

Analysis of the issue

As for the for the Luotang case , the analysis for the main can divided into three parts which variance analysis, environmental factor and lastly supplier which one of the reason why the Luotang Power face poor performance in their financial result.

QUANTITATIVE ANALYSIS

i. Quantity Variance

A quantity variance is a part of standard costing concept where it is the budgeted cost and against which performance is monitored so that cost control is maintained. In this case, we are using the formula below find quantity variance:

= (Net generation MWh in current year - Net generation MWh in prior year) X

Price per MWh in prior year

2010 | 2011 |

(3,937,377MWh-3,028,690MWh) X (RMB0.4200/kWh x 1000) = 908,687MWh X RMB420 = RMB 381,648,540 (F) | (3,427,351MWh-3,937,377MWh) X (RMB0.4219/kWh x 1000) = (510,026MWh) X RMB421.90 = (RMB 215,179,969.40) (U) |

From the result above, the quantity variance is based upon the quantity of electricity sold to HPPC. There are huge different between year 2010 and 2011. The quantity variances in 2011 is unfavorable. This is because the quantity of electricity sold to HPPC (Hubei Provincial Power Company) in 2011 decrease (3,427,351MWh) compared to year 2010 (3,937,377 MWh). Since HPPC had many its own electricity generating unit across Hubei Province, so it can effectively substitute the electricity purchased from Lutong with their own production.

ii. Price variance

In this case, price variance is based upon the average price that electricity was sold to HPPC. We are using the formula below to find price variance:

= (Price per MWh in current year-Price per MWh in prior year) X Net...