Demand elasticity and cost analysis of building a pipeline

 

Competency

Elasticity, consumer choice, utility, productivity, and nature of costs.

Course Scenario

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:

  1. Total Fixed Cost
  2. Total Variable Cost
  3. Average Variable Cost
  4. Average Fixed Cost
  5. Marginal Cost

Please use this included Excel Cost Spreadsheet to calculate your costs.

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%.

Is this a complementary good, a substitute good, or a non-related good? If there is a relationship, indicate whether the relationship is weak or strong. Justify your answer with an explanation.

Format your proposal to include a title page, introduction, conclusion, and references. Include all relevant graphs, equations, and calculations. Show your work on calculations to ensure you receive partial credit for incorrect answers. No credit will be given if your work is not shown. Remember to cite your sources using correct APA format, and also use correct grammar, spelling, and formatting.

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