Production Possibilities and Costs at Petro Refinery LLC Petro Refinery LLC purchases light and heavy crude oil and refines it into gasoline, diesel, and various other products. The petroleum products are then sold in gallons. For the next week, the refinery expects to be paid $2.50 per gallon of gasoline sold to distributors, $2 per gallon of diesel, and $1.5 per gallon for all other refined petroleum products. The firms refinery operations are grouped into three standard steps: distillation, conversion, and blending. Capacity in each department is calculated by measuring the equipment hours needed per refining each 1,000 barrels of crude. The firms output possibilities are based on equipment hours available, in combination with equipment hours required, in each step of the refining process. As an example, Petro Refinery LLCs weekly refining capacity is sufficient to process either 800,000 barrels of light crude or 800,000 barrels of heavy crude if devoted fully to either crude type. However, Petro Refinery LLC usually processes both light and heavy crude in any given week. For example, if 500,000 barrels of light crude are processed, there would still be sufficient availability of refining equipment for also processing 360,000 barrels of heavy crude. Data on the equipment hours required for refining light or heavy crude at each step of the way can be found in Table B. The Petro Refinery production schedule for the prior several months resulted in a weekly processing of 700,000 barrels of light crude and 120,000 barrels of heavy crude. The weekly output was 15,800,000 gallons of gasoline, 8,800,000 gallons of diesel, and 12,300,000 gallons of other petroleum products. At these levels of production, the blending facilities were operating at full capacity. However, the distillation and conversion facilities were not maximizing capacity potential. Table A Crude Input and Output Input Sweet light crude Heavy crude Price $80/barrel $74/barrel Output per barrel (in gallons) Gasoline 20 15 Diesel 10 15 Other (jet fuel, heavy fuel oil, LPG gases, etc.) 15 15 4 | P a g e Table B Refining equipment demand per 1,000 barrels Input Sweet light crude Heavy crude Equipment hour available per week Distillation 3 hours 4 hours 3,000 Conversion 2 hours 3 hours 2,400 Blending 2 hours 2.5 hours 2,400 Table C Overhead and labor costs Fixed overhead Variable overhead Labor Distillation $2,000,000/week $2/barrel $0.5/barrel Conversion 3,000,000/week 3/barrel 1/barrel Blending 2,000,000/week 2.5/barrel 1/barrel ASSIGNMENT QUESTIONS 1. How much money has Petro Refinery LLC been making per week under its current production policy of processing 700,000 barrels of light and 120,000 barrels of heavy crude after subtracting the labor costs, the variable overhead costs, and the weekly fixed overhead costs?

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