This example concerns the selection between two alternative methods of processing the crude oil in an oil field that is currently in production. The criterion of of the decision (the variable of interest) is the volume (in units) of barrels of crude oil that is processed per year. The two methods of processing crude oil are:

1) a battery manually operated tanks or

2) an automated battery of tanks. The tank batteries consist of heaters, treatment devices, storage tanks, etc., and remove salt water and sediment from crude oil before to be channeled into pipelines for transport to an oil refinery.

For each of the options, fixed costs and variable costs are involved. The fixed costs include items such as labor to ensure the operation of pumps; maintenance (which is added to the production quantity of interest); taxes, certain energy costs (necessary to operate the control panels and motors in continuous mode); and, for the batteries manual, a cost for the "shrinking" of crude oil. The variable costs for the heating chemical additives and non-continuously running engines are proportional to the volume of crude oil being processed with a relation linear with respect to the production volume of interest. Relevant data is presented in the table on Excel sheet Prob 8a. These data are considered as valid for a production volume of up to 1,000 barrels per day (or 365,000 barrels per year).

In addition to the fixed and variable costs mentioned above, to ensure the operation of the automated tank battery, the following fixed costs are added:

D1: Annual cost of depreciation and interest = $3082

M1: Annual cost of maintenance, taxes and labor = $5485.

In addition to the fixed and variable costs mentioned above, to ensure the operation of the battery of manually operated tanks, the following fixed costs are added:

D2: Annual cost of depreciation and interest = $2017

M2: Annual cost of maintenance, taxes and labor = $7921.

Knowing that x is the volume of barrels that are processed per year, answer the questions following in your working document:

a) What is the Total Annual Cost (CT1 (x)) equation that is associated with the operation of the automated tank battery?

b) What is the Total Annual Cost (TC2 (x)) equation that is associated with the manually operated battery operation?

c) What is the breakeven production volume per year of the two options?

d) Interpret your answer in c) and provide a recommendation to the company for the choice of option.

e) Use the Solver tool in Excel to calculate breakeven production volume. Insert your answer into cell S22 of the Excel table below. At the moment there is a temporary value in this cell; you can replace it.

A B C D E F G H I K L M N 0 P Q R T U Information for the operation of the automated tank battery S/day Fixed cost Energy for the control panel 0,15 Energy for circulation pump 0,82 Maintenance 1,00 Meter calibration 0,40 Energy for the chemical pump 0.32 D1 : Annual cost of depreciation and interest = 3 082 5 Total fixed cost 2,69 $ M1 : Annual cost of maintenance, taxes and labour = 5 485 5 Fixed cost per year = $2.69 x 365 = 982 S Variable cost Pipeline pump (5 hp @ 50% capacity) 0,63 Chemical additives (7.5 quarts/day) 3,75 Inhibitor (2 quarts/day) 1,00 Gas (10.8 mcf/day x $0.0275/mcf)* 0,30 CFT CVT Solver response: 10 000,00 S Total variable cost 5,68 $ CT (1) = 9 549 S 114 S I Variable cost per barrel = $0.01136/bbl @ 500 bbV/day Information for the operation of the automated tank battery S/jour Fixed cost Energy for the control panel 0,16 Energy for circulation pump 0,82 D2 : Annual Cost of Depreciation and Interest = 2 017 STotal fixed cost 0,98 $ M2 : Annual cost of maintenance, taxes and labour = 7 921 5 Fixed cost per year = $0.98 x 365 = 358 5 Variable cost Chemical additives (7.5 quarts/day) 3,75 Gas (10.8 mcf/day x $0.0275/mcf)* 0,30 CFT CVT Total variable cost 4,05 $ CT (2) = 10 296 S 81 5 Variable cost per barrel = $0.00810/bbl @ 500 bb//day i One mof is equivalent to about 1 million British thermal units (BTUs). MCF is a unit of measurement for natural gas equivalent to 1,032 cubic feet.A B C E F G H J K L M -J 8 Selling price 2.25 $ 9 Units sold 15 000 This is a projection 10 Recipes 33 750,00 $ 11 Cost per unit 1,00 $ 12 Variable cost 15 000,00 $ 13 Fixed cost 20 000,00 $ 14 Profit -1250,00 $ 15 16 17 18 BREAKEVEN ANALYSIS CHANGE THE PRICE CHANGE THE UNITS SOLD CHANGE THE COST PER UNIT CHANGE THE FIXED COST 19 20 21 Selling price 2.25 $ Selling price 2.25 $ Selling price 2.25 $ Selling price 2.25 $ 22 Units sold 15 000 Units sold 15 000 Units sold 15 000 Units sold 15 000 23 Recipes 33 750,00 $ Recipes 33 750,00 $ Recipes 33 750,00 $ Recipes 33 750,00 $ 24 Cost per unit 1,00 $ Cost per unit 1,00 $ Cost per unit 1,00 $ Cost per unit 1,00 $ 25 Variable cost 15 000,00 $ Variable cost 15 000,00 $ Variable cost 15 000,00 $ Variable cost 15 000,00 $ 26 Fixed cost 20 000,00 $ Fixed cost 20 000,00 $ Fixed cost 20 000,00 $ Fixed cost 20 000,00 $ 27 Profit -1250,00 $ Profit -1250,00 $ Profit -1250,00 $ Profit -1250,00 $ 28 29 30