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.

NOTE: The table is in french, please translate into english

\fL27 X V =L23-L25-L26 A R C E F G H I K L M Prix de vente 2.25 $ 00 Unites vendues 15 000 Ceci est une projection 10 Recettes 33 750,00 $ 11 Cout par unite 1,00 $ 12 Cout variable 15 000,00 $ 13 Cout like 20 000,00 $ 14 Profit (Benefice) -1250,00 $ 15 16 17 ANALYSE POINT MORT 18 CHANGEZ LE PRIX CHANGEZ LES UNITES VENDUES CHANGEZ LE COOT PAR UNITE CHANGEZ LE COOT FIXE 19 20 21 Prix de vente 2.25 $ Prix de vente 2.25 $ Prix de vente 2.25 $ Prix de vente 2.25$ 22 Unites vendues 15 000 Unites vendues 15 000 Unites vendues 15 000 Unites vendues 15 000 23 Recettes 33 750,00 $ Recettes 33 750,00 $ Recettes 33 750,00 $ Recettes 33 750,00 $ 24 Cout par unite 1,00 $ Cout par unite 1,00 $ Cout par unite 1.00 $ Cout par unite 1,00 $ 25 Cout variable 15 000,00 $ Cout variable 15 000,00 $ Cout variable 15 000,00 $ Cout variable 15 000,00 $ 26 Cout like 20 000,00 $ Cout like 20 000,00 # Cout like 20 000,00 # Cout like 20 000,00 $ 27 Profit (Benefice) -1250,00 $ Profit (Benefice) -1250,00 $ Profit (Benefice) -1250,00 $ Profit (Benefice) -1250,00 $ 28 29 30 31 32 33