Determine whether the following transactions involve spot exchange, contracts, o

Question

Determine whether the following transactions involve spot exchange, contracts, or vertical integration. Explain.

1. A major oil company refines gasoline from crude oil produced by oil wells that it owns.

2. Transcontinental, an interstate natural-gas pipeline, has a legal obligation to purchase a specified amount of gas per week from a well owned by Fred Smith in Enid, Oklahoma.

3. A cabinetmaker purchased a dozen wood screws from the local hardware store.

4. An electric utility purchases coal from an underground mine

Explanation / Answer

1. A major oil company refines gasoline from crude oil produced by oil wells that it owns.: Vertical integration as there is a value addition for conversion of crude oil to gasoline.

2. Transcontinental, an interstate natural-gas pipeline, has a legal obligation to purchase a specified amount of gas per week from a well owned by Fred Smith in Enid, Oklahoma.: Contracts

3. A cabinetmaker purchased a dozen wood screws from the local hardware store.: Spot Exchange.

4. An electric utility purchases coal from an underground mine: Contract as it is a recurring purchase and some terms and conditions to be finalised for such transaction.

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