Accounting for Decision Making and Control 6th Edition by Jerold Zimmerman

Exercise 4

To induce utilities to award contracts to Westinghouse Electric to build nuclear reactors, Westing- house contracted to supply uranium to these utilities at an average price of $9.50 per pound over a 20-year period. In 1966, Westinghouse disclosed in its annual report,
Westinghouse Electric Corporation has entered into a number of long-term contractual agreements to sell up to 80 million tons of uranium to utility companies to encourage nuclear reactor construction and to secure sales of uranium. The contracts are optional to the purchasers at a fixed price. The average contract price is approximately $9.50 per pound, and the current market price is $8.00 per pound. We cannot reasonably estimate the amount of purchases that will be made under these agreements because of the optional nature of the contracts.
By 1976, the market price of uranium was over $40 per pound. Westinghouse was unable to meet its commitments to deliver uranium and was faced with a potential loss of $2.275 billion, which was over six times the company's net income in 1976. In 1976, a new manager of the Westinghouse uranium supply division (USD) was hired. This division is responsible for the acquisition and sales of uranium to utilities, both those that have Westinghouse reactors and those with competitor reactors. USD purchases raw uranium in world markets and then processes it into nuclear reactor fuel cells. This division is evaluated as a profit center. The new manager argues that because a number of longterm supply agreements were signed before he joined Westinghouse, USD's revenues on these old contracts should be measured using the current market price rather than the original contract price.
Required:
a. How should the performance of the uranium supply division be measured
b. Public utilities, including those with nuclear power generating plants, are regulated by state commissions. State regulatory commissions set the utilities' prices for electricity based on cost plus a "fair return on capital." Cost is based on transactions prices. Given the facts in the problem, how should managers of public utilities with Westinghouse Electric uranium contracts behave, in light of the difference between the contract price of $9.50 per pound of uranium and the current market price of $44.50