With respect to performance assessment of Ramesh Shah for the years 2024-25 and 2025-26, ANALYZE the potential problems of using the total cost of…

UFL acquired BCPL to mitigate the risk of disruptions to the supply chain rather than profit making. Hence, it has adopted an internal transfer pricing policy of charging its entire cost of production plus 15% mark up to UFL based on the ammonium nitrate supplied. For the years 2024-25 and 2025-26, Ramesh Shah's performance is assessed based on other technical and non-financial measures and not on the financial performance of this unit. Therefore, for these years, Ramesh Shah is not being held accountable for the cost of production of the ammonium nitrate supplied to the internal units. He does not have any incentive to identify any opportunities for cost efficiencies. In the long run, this would lead to cost inefficiencies that would reduce the company's overall profit margins. It has already been pointed out by Roshan Lal that UFL has absorbed an increase of 23,000 per ton within these two years. This was due to increase in fixed cost of 20,000 in FY 2025-26 plus 15% mark up on it. While UFL accepted this increase in the interest of goal congruence, in the sense that all the internal units must work towards the overall goal of the company and not just towards their individual unit's objectives. At the same time, Ramesh Shah must be held accountable for managing the cost of production at BCPL in an cost effective manner that will boost the overall profit margins of the company.