Demand Elasticity and Cost Analysis of Building a Pipeline Paper
Description
Oil Company X is a large oil refinery which has been expanding and taking on new investment projects. Recently, they have considered building a pipeline that stretches across the United States, from Canada to New Orleans.
You are a member of the Cost Department. At a recent meeting of the board of directors, it was estimated that the cost of building the pipeline would be two million dollars in total for the production of a 30,000-mile stretch, $5,000 of which is a fixed cost in taxes. They also want you to determine if the currently available alternative energy source is a strong substitute good for oil, which may interfere with expected profits from this venture.
Instructions
AS A COST ANALYST AT YOUR FIRM, YOU ARE ASKED TO EVALUATE THE MARGINAL COST OF PRODUCING THE PIPELINE PER 1,000-MILE STRETCH AS WELL AS THE AVERAGE TOTAL COST OF PRODUCING THE PIPELINE PER 1,000 MILES. SUBMIT A 2-PAGE REPORT DETAILING THE COST. INCLUDE CALCULATIONS IN YOUR WORD DOCUMENT.
You will also include a table showing the final figures for the following costs:
Total Fixed Cost
Total Variable Cost
- Average Variable Cost
- Average Fixed Cost
- Marginal Cost
- Please use this included Excel Cost Spreadsheet to calculate your costs. (attached below)
- Be sure to also include a calculation of the cross-price elasticity of the alternative energy source and oil. Assume the current price of oil is $50/gallon. If the price increases to $55/gallon of crude oil, the quantity demanded of the alternative energy source increases by 20%.
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