ACCA · Question 31 · Performance measurement and control

Section C

QuantumGrid operates in the renewable energy sector and has two investment centers: SolarGen (which generates solar power) and GridDistribute (which manages the power grid and sells to consumers).

Part A (10 marks)
SolarGen currently generates a Return on Investment (ROI) of 14%. The division's total capital employed is $50 million. QuantumGrid's weighted average cost of capital (WACC) is 10%.
SolarGen's manager is considering a new solar farm project requiring an investment of $10 million. The project is expected to generate an annual controllable profit of $1.2 million.

Evaluate the new project using both ROI and Residual Income (RI). Discuss the behavioral implications of using ROI versus RI for evaluating the SolarGen manager's performance in this specific scenario.

Part B (10 marks)
SolarGen transfers electricity to GridDistribute. Currently, SolarGen has no spare capacity and can sell all the electricity it generates to the external national grid at a market price of $80 per MWh. The variable cost of generation is $30 per MWh.
GridDistribute currently buys electricity from the external market at $80 per MWh but is demanding that SolarGen transfer electricity internally at full cost ($50 per MWh) to improve GridDistribute's profitability.

Advise the board of QuantumGrid on the appropriate transfer pricing policy. Calculate the minimum and maximum transfer prices, and discuss the impact on divisional autonomy and goal congruence if the board forces SolarGen to transfer at $50 per MWh.