Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.

Length
This case is 8 pages in length and its case teaching package is 6 pages.

Abstract

This case is set in a small oil refinery owned by a large integrated oil company. The time is 1980 when the "best thinking" in the industry was that oil prices would be well over $50 a barrel by 1990.

This short but very rich case is based on an actual capital expenditure decision in one of the major oil companies in 1980. There are three major themes in the case:

1. Sorting out the managerial insights in a "joint costing" product context.
2. Review of the financial analysis framework for capital investment decision.
3. Blending financial and strategic factors in capital spending.

Linkages to Textbooks or Journal Articles/Fit Within a Course

This case can be used in a second-year MBA elective in Strategic Cost Management course to review capital expenditure analysis techniques while emphasizing a blending of calculations with strategic assessment. The case can also be used at or near the end of a segment on capital expenditure analysis in an MBA core course.

Study Questions

1. Using the same format as in Exhibit 1 of the case, recalculate the economic return for the project, using both joint product costing ($32.30) and by-product costing for resid and using DOE costing ($29.00) and opportunity costing for fuel gas. All the basic data will be the same as in Exhibit 1 except for the cost of fuel and resid.
2. What do you believe is the best accounting method for fuel gas and residual oil? Why? Which set of accounting numbers produces the most meaningful economic return calculations?
3. Is the proposed solvent decarbonizing unit profitable enough to justify the investment? Can you calculate a break-even value for resid? So what?
4. As MacGregor, would you recommend the SDU project to headquarters? What economic analysis would you present to support your recommendation? What qualitative (versus quantitative) factors influence your decision?

The downloadable file for this case is in Microsoft® Word 7.0 for Windows®.

If you do not have Microsoft Word, you can download the free Microsoft® Word Viewer 97 right here:   For Windows 3.x   For Windows 95

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