MesoPetrolia Naziha Murad ran the 7" largest refinery in the Majnoon oil fields of Iraq. The refinery was a division of MesoPetrolia, who removes crude oil from the land through their Extraction Division, and refines and sells products through Murad's Division ( Refinery Division), and sells to internal and external buyers. An example of an internal buyer was the Commercial Asphalt Division. Murad's Refinery Division can purchase crude oil from the in- house Extraction Division or third -party sellers in the region, the same way they can sell to internal or external buyers. Refining oil involves heating the crude oil to separate out components based on their boiling points, see Exhibit 1 for more information on oil refinement. Murad's Refining Division heats and separates the crude oil. Then they can sell the petroleum products to various distributors such as gas stations, jet fuel firms, and asphalt producers. In Murad's Division, 50% of crude oil becomes gasoline, 30% becomes jet fuel, and 20% goes into asphalt production. Murad's refining facility typically processes 1 million crude oil barrels per year. The production process uses little direct labour, but Murad attributes $5 million of direct labour per year to the barrel loaders who empty crude oil barrels into the refinery process and allocates these direct labour costs proportionally to product outcome. The total overhead cost of operating the refinery is $80 million per year which also would be distributed proportionally to product outcomes. Jet Fuel MesoPetrolia sells jet fuel directly to Erbil International Airport's fuel service business. This fuel was to be sold to various airlines and local pilots. Given demand in the market, Murad feels they could price the fuel using total cost + pricing. Question 1. Create a chart exploring what prices to set for all combinations of the following scenarios: The price per barrel of crude oil is $60, $80, and $90 per barrel. The desired margin is 10% and 20%. Additionally, if the desired markup is 10% and 30%. Please indicate in your chart your initial finding for total cost per litre in the chart. Jet Fuel (Continued) Murad has the opportunity to invest in a filtration system to increase the purity of the kerosene used in the jet fuel. This would enable a higher price from the buyers. Currently Murad is able to charge a 10% margin into the price using total cost + pricing (Assume your answer from Question 1 is the current price), but with this change she would be able to charge the 30% markup on the original total cost (Assume your answer from Question 1 is correct). This would take an investment of $10 million dollars for equipment lasting five years and an annual operating expense for the filters of $800,000. In addition, each litre of jet fuel needs a trace amount of stabilizer added that cost $0.50 per litre. Question 2. Perform an incremental analysis on switching to the filtration system assuming that the 10% margin price from Question 1 is the current status quo. Please examine the scenarios for barrels being $60 per barrel and $90 per barrel. 1 One barrel of crude oil was equivalent to 160 liters.Asphalt Binder Asphalt base is also a product of crude oil rening and is used to make a product called binder that is shipped out as a nished product from the Asphalt Division of MesoPetrolia. The binder product is sold to construction companies and is added to aggregate (sandgravel} on construction sites to make roads. This Asphalt Division prefers to purchase raw asphalt base from Murad's Division but can buy their raw materials form a different supplier for $1.15 per litre. They could be persuaded to offered Murad the same price but will not pay more. Similarly, Murad prefers to sell to their inhouse Asphalt Division, but can sell to international asphalt makers on the open market. The conversion cost of turning asphalt base into binder is $0.15 per litre and asphalt binder is sold by the barrel for $320 per barrel. Question 3. What is the total cost to produce a litre of asphalt base assuming $75 per barrel and? What would be the contribution per litre for Murad's Division and the Asphalt Division respectively if Murad set the transfer price at cost? What would be the contribution per litre for Murad's Division an the Asphalt Division if they set the price at $1.15 per litre. Create a chart to display these informations. Asphalt Binder Continued The marketing team forecast potential sales on the market in exhibit 2. Question 4. Assuming your answers to Question 3 are correct and using exhibit 2, make a recommendation of how much asphalt base should be sold in-house and at what price. Question 5. Assume Murad is only allowed to sell in-house and the transfer price is set by head office at $1.30 per litre. Assume that crude barrel prices are $75 and these prices are fixed. if Murad wants a 10% margin, what will the target cost for the conversion costs per litre at the renery. Question 6. Assume that your answer to Question 4 is correct. Murad could hire a new sales agent who would increase demand to $1.50 per litre for the entire amount of asphalt base produced annually. The agent would take a 5% sales commission and a $100,000 base salary and $20,000 in one time product training. Perform an incremental assuming your answer to Question 4 is the status quo. Total Costs The costs detailed in the previous paragraphs are standard costs, however Murad had gathered some actual cost information and more details about the standard costs in Exhibit 32. 2 Do not change any solutions to previous questions (1-6) related to this new information. Question 7. Create an exhibit for the report to examine the variances between standard cost and actual results show in exhibit three. Write about potential causes for the variations observed. Question 8. Create an example balance score cared to rate Murad on the following (you may assume the metrics desired are available within reason): Productivity Cost Control Sales Labour relations > Environmental impact Quality Control Customer satisfactionExhibit 1 How oil is refined3 Distillation End products tower gasoline LPG vapors LPG naphtha reformer gasoline kerosene jet fuel diesel distillate diesel fuel akylation LPG medium weight unit gas oil gasoline cracking heavy units motor gasoline gas oil jet fuel diesel fuel residuum coker industrial fuel asphalt base For simplicity, MesoPetrolia only produced, gasoline, jet fuel and asphalt base. Exhibit 2 Expected sales price and external demand forecast First 50,000 litres $1.30 per litre Next 50,000 litres $1.20 per litre Next 50,000 litres $1.10 per litre Next 50,000 litres $1.00 per litre All remaining litres $.75 per litreExhibit 3 4 Standard and real cost information Item Standard Real Crude Barrels Processed 1 million barrels 800,000 barrels Gasoline Produced 500,000 barrels 360,000 barrels Jet Fuel Produced 300,000 barrels 280,000 barrels Asphalt produced 200,000 barrels 60,000 barrels Crude Barrel Price Weighted Average $70 per barrel Weighted Average $80 per barrel Direct Labour $5 million $4 million OH Costs (details below $80 million $95 million Depreciation $50 million $50 million Repairs $ 5 million $2 million Inventory Storage $18 million $18 million administrative $4 million $10 million Environmental fees $3 million $15 million 4 This exhibit is only used for question 7