Question

1(a): You are the operations manager at your firm. Due to a pre-existing contract, you have the opportunity (but not the obligation) to acquire 30,000 barrels of gasoline and 50,000 barrels of heating oil for a total cost of $7,500,000. The current market price of gasoline is $2.0785 per gallon and for heating oil is $93.08 per barrel. One barrel = 42 gallons. You are not sure that your firm needs all of the gasoline or heating oil. As a result, you are wondering if you should take this opportunity. What is the value of this opportunity in dollars? (do not include any symbols, such as $, in your response).

Answer 1

Negative $227,090

Step-by-step explanation:

As for the provided information, we have:

The manager is not sure if the company would require gasoline or heating oil.

Thus, if the company is able to purchase it at low cost and then further sell it in the open market, at an increased price, it will be a positive deal to the company.

Current market price, and the cost thereof at market price:

Gasoline = $2.0785
`*` 42
`*` 30,000 = $2,618,910

Heating oil = $93.08
`*` 50,000 = $4,654,000

Total market cost for both gasoline and heating oil = $7,272,910

The deal price offered = $7,500,000

Since the deal price offered is more than the current price, there is no positive benefit.

Thus, opportunity value for this = $7,272,910 - $7,500,000 = - $227,090