Q.1 Formulate a linear program which can be used to generate a comprehensive pla
ID: 2896629 • Letter: Q
Question
Q.1 Formulate a linear program which can be used to generate a comprehensive plan for the whole Far Eastern operations. Clearly de ne every variable used in your formulation.
1. Solve your linear program using SOLVER. How many barrels of crude should Global Oil purchase from Saudi Arabia for its Far Eastern operations? How much crude should be re ned in Australia? How much in Japan? Provide tables showing the quantities of gasoline and distillate shipped from each of the two re neries and from the U.S. to each of the four market areas. 2. Use sensitivity analysis to answer the following questions. { What is the marginal value of increasing supply from Brunei elds? Can this marginal value be used to estimate the total savings for Far Eastern operations if 41,000 b/d are supplied from Brunei elds instead of 40,000? Explain. { What is the marginal value of increasing the tanker eet? Can this marginal value be used if we want to increase the size to 7 tankers (from the current size of 6.5)? Explain. { What is the additional cost to Far Eastern operations if demand for gasoline in the Philippines increases to 5,200 b/d? What is the minimum price of gasoline in the Philippines that would make it pro table for Global Oil to consider such an increase in distribution? { By how much should the production costs be reduced at the re nery in Japan when operating at high process intensity in order to make it cost e ective to use Saudi crude? { Global Oil is planning a three day shutdown of its Australian re nery for maintenance purposes, in the coming year. It has storage facilities and at least two weeks of inventories, so a re nery shutdown for a few days will not disrupt distribution. What would be the cost of a planned shutdown of the re nery in Australia for three days per year? Same question for the re nery in Japan. { Currently, it is not economical to ship US distillate to the Philippines. What is the cost of US distillate at which Global Oil should consider starting such shipments? 3. Several opportunities present themselves to the Global Oil company (see the attached memos). Consider combinations of these options and prepare a recommendation. Document your report.
Explanation / Answer
Since submitting data for annual planning purposes, two additional opportunities have arisen.
We would like to include these in the plans.
A. Bid on Gasoline Contract with Australian Government
The government of Australia will submit to bid a contract for 1.5 thousand b d of gasoline.
We expect we could win this bid at a price of $26.40 per barrel. Estimated costs per barrel
as follows:
Variable Costs
crude, re ning, transportation $24.90
Allocated Overhead
.80
Total
$25.70
At these costs, the contract would have a pro t contribution of $0.70 per barrel. We would
like permission to bid on the contract. We hope that the linear programming wizards who
are working for your logistics department will not contradict us!
B. Expansion of Australian Re nery
For the past two years, the Australian re nery has been operating at full capacity. We request
authorization for capital expenditures to increase the re nery capacity to 55 thousand b d.
There are several reasons for the need for this expansion:
1. Australia can supply the current requirements in New Zealand and the Philippines more
cheaply than can Japan.
2. The proposed bid on Australian government gasoline contract above .
3. We understand the New Zealand a liate is considering increasing its requirements by
4.5 thousand b d. See below.
The cost of this expansion is 4.0 million dollars. To recover this investment1, we need an
annual savings of $702,000.
1This assumes a cost of capital rate of 20 . Depreciation tax e ects are included. With these considerations, the
$702,000 savings per year is equivalent to the $4 million investment
85
Memo to: Global Oil Headquarters
From:
New Zealand A liate
Re:
Supplement to Annual Plan
Negotiations have been begun with the NOZO Oil Company in New Zealand. This company
is a distributor, with sales of 1.6 thousand b d of gasoline and 3.2 thousand b d of distillate. If
negotiations are successfully completed, these requirements would be added to current requirements
for New Zealand, making total requirements of:
Gasoline: 7.0 thousand b d
Distillate: 11.9 thousand b d
The anticipated revenue after subtracting variable marketing costs for this acquisition are
$30.20 per barrel for gasoline and $24.60 per barrel for distillate. The purchase cost of NOZO oil
is expected to be about $21.0 million. On an annual basis, this would require $3.5 million per year
incremental pro t to justify the purchase.
Memo to: Global Oil Headquarters
From:
Tanker A liate
Re:
Supplement to Annual Plan
We have been made aware that expansions in requirements are being considered in New Zealand
and Australia. We are currently operating the tanker eet at capacity. Additional requirements
will increase the transport requirements both for crude and re ned products. This will necessitate
spot chartering unless additional tanker capacity is added.
We can lease on a long time basis additional tankers at a rate of $4.8 thousand dollars per day
per 1 unit tanker equivalent. We propose a lease of 0.5 equivalent tanker units giving us a total
capacity of 7.0 equivalent units. The cost of this would be $2.4 thousand per day or $876,000 per
year. If you prefer other arrangements, we are willing to discuss them.
Memo to: Global Oil Headquarters
From:
Borneo O ce
Re:
Supplement to Annual Plan
We have just been o ered the opportunity to increase our contract with our supplier of Brunei
crude. They are willing to supply us an additional 5 thousand b d at a cost of $20.65 per barrel.
Should we accept the o er? If not, is there a counter o er that we should propose
Page 7Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.