- 15 Marks
Question
Squash Refinery has planned the following monthly sales for the first four months in the year:
| Months | 1 | 2 | 3 | 4 |
|---|---|---|---|---|
| Gasoline (litres) | 140,000 | 200,000 | 220,000 | 250,000 |
| Diesel (litres) | 100,000 | 130,000 | 180,000 | 210,000 |
The proposed ex-refinery prices are GH¢12.5 and GH¢10.8 per litre for gasoline and diesel respectively.
One metric tonne of crude oil when processed can yield 2,000 litres of gasoline and 2,500 litres of diesel. The inventory policy of the company is as follows:
- Closing inventory at the end of each month: Twice the monthly sales for gasoline and 150% of the monthly sales for diesel.
- Opening inventory: Gasoline – 200,000 litres, Diesel – 180,000 litres, and Crude – 140 metric tonnes.
Note: The purchase of crude is based on the production requirement for gasoline.
Required:
i) Prepare the sales budget for gasoline and diesel for the first three months. (3 marks)
ii) Calculate the quantity of crude oil to be purchased for the first three months. (12 marks)
Answer
i) Sales Budget for Gasoline and Diesel:
| Month | Gasoline (litres) | Selling Price (GH¢) | Sales Value (GH¢) | Diesel (litres) | Selling Price (GH¢) | Sales Value (GH¢) |
|---|---|---|---|---|---|---|
| 1 | 140,000 | 12.5 | 1,750,000 | 100,000 | 10.8 | 1,080,000 |
| 2 | 200,000 | 12.5 | 2,500,000 | 130,000 | 10.8 | 1,404,000 |
| 3 | 220,000 | 12.5 | 2,750,000 | 180,000 | 10.8 | 1,944,000 |
(Marks are evenly spread using ticks = 3 marks)
ii) Production Budget for Gasoline and Crude Purchase:
Gasoline Production Requirements:
- Month 1:
- Sales: 140,000 litres
- Add closing stock (twice monthly sales): 140,000 × 2 = 280,000 litres
- Less opening stock: 200,000 litres
- Total production required: 140,000 + 280,000 – 200,000 = 220,000 litres
Month 2:
- Sales: 200,000 litres
- Add closing stock: 200,000 × 2 = 400,000 litres
- Less opening stock: 280,000 litres
- Total production required: 200,000 + 400,000 – 280,000 = 320,000 litres
Month 3:
- Sales: 220,000 litres
- Add closing stock: 220,000 × 2 = 440,000 litres
- Less opening stock: 400,000 litres
- Total production required: 220,000 + 440,000 – 400,000 = 260,000 litres
Crude Oil Purchase Requirement (based on gasoline production):
- Crude needed for Month 1: 220,000 litres ÷ 2,000 litres/metric tonne = 110 metric tonnes
- Crude needed for Month 2: 320,000 litres ÷ 2,000 litres/metric tonne = 160 metric tonnes
- Crude needed for Month 3: 260,000 litres ÷ 2,000 litres/metric tonne = 130 metric tonnes
Crude Purchase Calculation:
- Month 1:
- Crude required: 110 metric tonnes
- Add closing stock: 160 metric tonnes × 80% = 128 metric tonnes
- Less opening stock: 140 metric tonnes
- Crude to purchase: 110 + 128 – 140 = 98 metric tonnes
- Month 2:
- Crude required: 160 metric tonnes
- Add closing stock: 130 metric tonnes × 80% = 104 metric tonnes
- Less opening stock: 128 metric tonnes
- Crude to purchase: 160 + 104 – 128 = 136 metric tonnes
- Month 3:
- Crude required: 130 metric tonnes
- Add closing stock: 155 metric tonnes × 80% = 124 metric tonnes
- Less opening stock: 104 metric tonnes
- Crude to purchase: 130 + 124 – 104 = 150 metric tonnes
- Tags: Crude Oil, Diesel, Gasoline, Inventory Management, Production Budget, Sales Budget
- Level: Level 2
- Topic: Budgetary control
- Series: MAR 2024
- Uploader: Kwame Aikins