A fuel oil distributor is planning to invest in a new terminal facility. The cos
ID: 1196208 • Letter: A
Question
A fuel oil distributor is planning to invest in a new terminal facility. The costs are provided below.
Initial costs:
Buildings and equipment
$1,500,000
Trucks
150,000
Annual costs:
Maintenance
145,000
Labor
500,000
Oil processing costs $0.30 per gallon. The life of the building and equipment is 20 years. The life of the trucks is 10 years. A MARR of 12% is desired. Oil can be sold for $0.75 per gallon.
(a) Breakeven: How many gallons of oil must be sold to breakeven?
(b) Sensitivity: If annual costs (maintenance, labor, processing) increase by 10%, what must the new price (up from $0.75) be if the number of gallons sold does not change?
Initial costs:
Buildings and equipment
$1,500,000
Trucks
150,000
Annual costs:
Maintenance
145,000
Labor
500,000
Explanation / Answer
a.
Total Fixed Cost = 1500000+150000+145000+500000 = $2295000
Contribution margin = price per gallon – processing cost per gallon = .75 - .3
Contribution margin = $.45
Thus,
Break Even Point in units = 2295000 / contribution margin = 2295000/.45
Break Even Point in units = 5100000 Gallons
b.
in a new scenario, maintenance, labor, processing cost increase by 10%.
New total fixed cost = 1500000+150000+ (145000+500000)*1.10
New total fixed cost = $2359500
If breakeven point in units does not change then
5100000 = 2359500/ Contribution margin
Contribution margin = 2359500/5100000 = .4626
New Price = Contribution margin + processing cost = .4626+.3*1.1
New Price =$ .7926 or $.8 per gallon
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