Question

It costs a petroleum refinery $0. 39 to refine one gallon of gasoline, and $0. 39 to refine one gallon of natural gas. The refinery can sell gasoline for $2. 11 per gallon, and can sell natural gas for $1. 60 per gallon. Due to the refining process, the refinery must produce and sell twice as much natural gas as it does gasoline. If the refinery’s monthly overhead costs, not including production costs, are $180,000, how many gallons of natural gas will the refinery have sold when it breaks even each month? Round to the nearest whole gallon, if necessary. A. 86,957 b. 141,732 c. 148,760 d. 217,392.

Answer 1

The gallons of natural gas that the petroleum refinery must sell to break even each month is A. 86,957.

Data and Calculations:

Variable cost of refining gasoline per gallon = $0.39

Selling price of gasoline per gallon = $2.11

Contribution margin per gallon of gasoline = $1.72 ($2.11 - $0.39)

Variable cost of refining natural gas per gallon = $0.39

Selling price of natural gas per gallon = $1.60

Contribution margin per gallon of natural gas = $1.21 ($1.60 - $0.39)

Contribution margin per two gallons of natural gas = $2.42 since twice of natural gas must be produced.

Fixed costs = $180,000

Break-even point in units for gasoline = Fixed costs/Contribution margin per unit

= 43,478.26 ($180,000/$4.14)

Break-even point in units for natural gas = 86,957 (43,478.26 x 2) gallons.

At the break-even point, the Petroleum Refinery will not make any profit or loss for both gasoline and natural gas.

Thus, the gallons of natural gas that the petroleum refinery must sell to break even each month is A. 86,957.

Learn more: brainly.com/question/9212451