Question

You are a Logistics manager for VKT Corp., and energy extraction and production company. A oil well in the company's portfolio is generating 10,000 barrels of crude oil per day in excess o present sale commitments. The crude oil can be sold as is on the commodities markets, or refined and converted into other products which may be sold for higher prices, and potential be worth more. You have been assigned to determine the company's best course of action. Prepare a sell vs. process further incremental analysis for each possible production outcome in an Excel worksheet. Your grade will be based on the correctness of your answers, as well as the use of Excel. That is, where possible, you should use formulas and cell references to get your answers, rather than keyed-in values. See your instructor for help with Excel basics if you need it. To help get you started, one analysis has been provided in the 'Your solution'tab. In a Word document, prepare a memo stating which products the company should produce if it should produce none and just sell the crude oil as is). This document should make specific reference to your incremental analysis, which should be used as the basis for your conclusions Attach both files to the Canvas assignment space by the 12:00 noon on March 17. See the details of VTK's refining process below. HINT 1: Work backward. That is, before deciding whether to sell crude as is or refine it into butane, naphthalene, and kerosene, do the analysis for processing butane into propane, naphthalene into gasoline, etc., to find out what each product is worth in its best use. HINT 2: A complete analysis will make five comparisons. One for each fully processed output (propane, gasoline, diesel fuel, heating oil), and one to determine whether the best array of products are worth more than selling the crude oil as is. VTK's Refining Process and Market Summary Crude Oil The company is producing 10,000 barrels of oil per week in excess of existing commitments. These barrels can be sold as is on the spot market for $59.83 per barrel. (1 barrel = 42 gallons) Refining Refining the crude oil requires heating and distilling it at a cost of $5,500 per week for the entire excess production. After basic refining, the crude oil is gone, but there are 44,000 gallons of butane, which can be sold for $1.40 per gallon, 198,000 gallons of naphthalene, which can be sold for $1.38 per gallon, and 60,000 gallons of kerosene, which can be sold for $3.99 per gallon. A vacuum distiller can also be run (at an additional cost of $2,400 per week that will yield 118,000 gallons of heavy gas oil, for which there is currently no market. This by-product is lost if the vacuum distiller is not run. Further processing All of the butane can be treated to convert it into 42,800 gallons of propane. Propane can be sold for $1.51 per gallon, and the conversion process costs $2,000 per week. All of the naphthalene can be isomerized and blended to convert it into 193,000 gallons of gasoline. Gasoline can be sold for $1.66 per gallon, and the conversion process costs $1,900 per week.

Answer 1

VTK Corporation
Without Processing
Production in excess(in barrel)	10000
Spot Price/Barrel	$59.83
Extra Production Revenue	$598,300.00
Refining
	Quantity(Gallon)	Price per Gallon	Revenue
Butane	44000	$1.40	$61,600.00
Naphtalene	198000	$1.38	$273,240.00
Kerosene	60000	$3.99	$239,400.00
	Total revenue by refining		$574,240.00
	Cost of Refining		$5,500
	Profit		$568,740.00
Note : Since heavy gas oil does not have current market so there is no need to run distiller
	Quantity(Gallon)	Price Per Gallon
Further Processing
If only butane is processed
Propane	42800	$1.51	$64,628.00
Extra revenue due to processing			$3,028.00
Extra cost			$2,000
Extra Profit			$1,028.00
profit if only butane is processed			$569,768.00
if butane as well as napthalene is further processed
Gasoline	193000	$1.66	$320,380.00
Extra revenue by Gasoline			$47,140.00
Extra Cost in generating Gasoline			$1,900
Extra Profit due to gasoline conversion			$45,240.00
Extra Profit due to propane conversion			$1,028.00
Profit if butane as well as napthalene is processed further			$615,008.00
Decision : Further processing is better