Tema Oil Refinery ( TOR ) is the only company mandated to refine crude oil in Ghana. The company has estimated that the fixed cost would be $ 80000. Variable costs depends on the amount of crude oil refined but include the cost of labour and administrative expenses and it is estimated to be $ 30 per barrel of crude oil refined. The proposed price for a barrel of refined crude oil is $ 50. How many barrels of crude oil must be refined and sold to cover an extra cost of spare parts of $ 8000 ?
To determine how many barrels of crude oil must be refined and sold to cover the extra cost of spare parts, we need to calculate the break-even point.
The break-even point is the point at which total revenue equals total cost, resulting in neither profit nor loss. In this case, the total cost includes both fixed costs and variable costs.
The fixed cost for the Tema Oil Refinery (TOR) is $80,000. This cost remains constant regardless of the amount of crude oil refined.
The variable costs depend on the amount of crude oil refined. It includes the cost of labor, administrative expenses, and is estimated to be $30 per barrel of crude oil refined.
The proposed price for a barrel of refined crude oil is $50.
We can calculate the break-even point using the following formula:
Break-even point (in barrels) = Fixed cost / (Selling price - Variable cost per barrel)
Let's substitute the values given in the problem:
Break-even point (in barrels) = $80,000 / ($50 - $30)
Simplifying the formula, we get:
Break-even point (in barrels) = $80,000 / $20
Break-even point (in barrels) = 4,000 barrels
Therefore, TOR would need to refine and sell 4,000 barrels of crude oil to cover the extra cost of $8,000 for spare parts.