1 1/10 Case Analysis: AREVA AREVA provides solutions for CO2 free electricity generation, transmission and distribution I. Areva as a whole II. Fuel Fabrication: rods assembly line Outline: Daphnée Hus - Elodie Ragot - Hélène Falipou - Maïté Saulnier - Nicolas Janin

2 2/10 Income Statement, 1 st Semester 2007 In millions of eurosH H Sales revenue Other income from operations12755 Cost of sales Gross margin Research and development expenses Sales and marketing expenses General and administrative expenses Restructuring and early retirement costs Income from cash and cash equivalents Gross borrowing costs Net borrowing costs Other financial income Net financial income Income tax Net income of consolidated businesses Share in net income of associates Net income from continuing operations Net income from discontinued operations020 Net income attributable to equity holders of the parent Average number of shares outstanding Basic earnings per share Adjusted earnings per share  Gross Margin: 1084 M€;  Net Financial Income: 118 M€ Overheads  Big difference = a lot of Overheads I. 1)

3 3/10 Simplified balance Sheet, 1 st Semester 2007 In millions of euros 6/30/0712/31/06 ASSETS Goodwill Property, plant and equipment and intangible assets Assets earmarked for end-of-life-cycle operations Investments in associates Other non-current financial assets LIABILITIES AND EQUITY Equity Provisions for end-of-life-cycle operations Other provisions (including net deferred tax liabilities) Net working capital requirement Put option held by Siemens Net debt (excluding Siemens’ put) Simplified balance sheet total Net debt (including Siemens’ put) Net debt (excluding Siemens’ put) VARIATION: 60 % working capital = net balance of operating uses and sources of funds If WCR>0: uses of funds exceed sources of funds, if WCR<0: sources of funds higher than uses WCR<0 corresponding to a net use of customer advances and prepayments I. 2)

4 4/10 Fuel assembly factory Value Chain: Cost object: Fuel rod Caps Tube Fuel Fuel assembly Skeleton Fuel rods Cost object Research and Development Design Supply Marketing and sales PRODUCTION Distribution Customer service Developing Make to order Adaptation to customers’ needs Internal suppliers Core process Pull production Market decisions:  Price setter  Long-run pricing  High quality/High price Product-life cycle:  Maturity II. 1)

5 5/10 Costs  Example of product costs:  Direct materials: raw materials (skeleton, caps, tubes, nuclear fuel…)  Direct labour: people who work more than 75% in production (workers of the production process line)  Manufacturing overheads: Indirect material: paper, gloves to protect workers… Indirect labour: employees from maintenance of machinery… Indirect manufacturing expenses: lighting, heating and insurance…  Example of period costs: marketing and sales, accounting…  Variability of costs:  Fixed costs: salary, maintenance…  Variable costs: row materials… II. 2)

6 6/10 ABC system HierarchyExamplesCost drivers Unit-level Assembling a fuel assembly Duration: Number of hours of direct labour Batch- related Setting up machines to control the level of uranium enrichment Processing a purchase order (fuel assemblies with the same uranium enrichment) Transaction: Number of set-ups Transaction: Number of orders Product- sustaining Designing the fuel rods (length, soldering) and the skeleton given the uranium enrichment Duration: Number of product development hours Facility- sustaining Renting the plant Transaction: Number of square metres  Costing system  Job-costing : Each fuel assembly has its own characteristics and is unique,  ABC : - More details and focuses on activities and cost drivers - Talks the language of the organization II. 3)

7 7/10 EU, Normal, Abnormal losses  Abnormal losses  Uranium loss  Normal losses  Bad soldering (due to worker´s mistakes),  Tube and cap losses (0,5% of tolerated losses due to suppliers) 1 Fuel assembly = 200 rods + 1 skeleton  Equivalent Unit ? II. 4) We can count the number of components integrated at each stage of the process  we can determine the cost of a product not yet finished without using the concept of EU

8 8/10 Management Control  Result Control  Graph results  Information display, where everybody can see the results, the objectives and so on…  Responsibility centre  Profit centre  The fuel assemblies are sold to another branch of AREVA company  Cybernetic control system  Weekly meeting  Feedback from the workers  Continuous improvement policy Budget limitation AN INFORMATION DISPLAY II. 5)

9 9/10 Budgeting process REACTORS SECTOR AREVA NC Factory B AREVA NPAREVA T&D FUEL SECTORNUCLEAR SERVICES SECTOR DESIGN & SALES BU FUEL MANUFACTURING BU ZIRCONIUM MANUFACTURING BU FBFC Factory AFactory CFactory D  Activity based budgeting:  Estimation of the customers’orders for the next year.  Estimation of resources needed Bottom-up system EQUIPMENT SECTOR II. 6)

10 10/10 Relevant Costs  Should a second assembly line be created?  In the fuel assembly factory, old machines are not allowed to be resold after use (remaining radiation)  No disposal value Qualitative aspectsQuantitative aspects = relevant costs Meeting of the customers’ needs Changes in the labour organization Meeting of the standards (nuclear regulation) Modernity Set-up costs o consultancy firms o building firms o new equipments Operating costs o direct labour (new workers) o factory overheads (electricity…) o direct materials o productivity (cost per unit) II. 7)