Oil Company X is a large oil refinery which has been expanding and taking on new investment projects. Recently, they have considered building a pipeline that stretches across the United States, from Canada to New Orleans.
Oil Company X is a large oil refinery which has been expanding and taking on new investment projects. Recently, they have considered building a pipeline that stretches across the United States, from Canada to New Orleans.
You are a member of the Cost Department. At a recent meeting of the board of directors, it was estimated that the cost of building the pipeline would be two million dollars in total for the production of a 30,000-mile stretch, $5,000 of which is a fixed cost in taxes. They also want you to determine if the currently available alternative energy source is a strong substitute good for oil, which may interfere with expected profits from this venture.
Instructions
AS A COST ANALYST AT YOUR FIRM, YOU ARE ASKED TO EVALUATE THE MARGINAL COST OF PRODUCING THE PIPELINE PER 1,000-MILE STRETCH AS WELL AS THE AVERAGE TOTAL COST OF PRODUCING THE PIPELINE PER 1,000 MILES. SUBMIT A 2-PAGE REPORT DETAILING THE COST. INCLUDE CALCULATIONS IN YOUR WORD DOCUMENT.
You will also include a table showing the final figures for the following costs:
Total Fixed Cost
Total Variable Cost
Average Variable Cost
Average Fixed Cost
Marginal Cost
Please use this included Excel Cost Spreadsheet to calculate your costs. (attached below)
Be sure to also include a calculation of the cross-price elasticity of the alternative energy source and oil. Assume the current price of oil is $50/gallon. If the price increases to $55/gallon of crude oil, the quantity demanded of the alternative energy source increases by 20%.
Quantity (miles of pipeline) Total Cost Total Fixed Cost Total Variable Cost
0 $ 5.000 $ 5.000 1.000 $ 11.573 2.000 $ 18.208 3.000 $ 29.267 4.000 $ 44.750 5.000 $ 64.657 6.000 $ 88.987 7.000 $ 117.740 8.000 $ 150.918 9.000 $ 188.518 10.000 $ 230.543 11.000 $ 276.991 12.000 $ 327.863 13.000 $ 383.159 14.000 $ 442.878 15.000 $ 507.021 16.000 $ 575.587 17.000 $ 648.577 18.000 $ 725.991 19.000 $ 807.828 20.000 $ 894.089 21.000 $ 984.774 22.000 $ 1.079.882 23.000 $ 1.179.414 24.000 $ 1.283.370 25.000 $ 1.391.749 26.000 $ 1.504.552 27.000 $ 1.621.778 28.000 $ 1.743.429 29.000 $ 1.869.502 30.000 $ 2.000.000 Average Fixed Cost Average Variable Cost Marginal Cost
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