Group 6 ACG Case2 - Case Analysis PDF

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Cynthia Sanquini Matthew Wisecarver Sujaya Bharathi Shivanahalli Veerappa Thi Thu Thao Nguyen ACG 6315 Dr. Jian Cao BuyGasCo Corporation: The Use of Alternative Costing Methods in a Predatory Pricing Lawsuit 1. The costing approach used by the plaintiff's is in par with the reasonable rental value, which is attributable to the sale of motor fuel at the retail outlet that should be assigned by the percentage of gross sales attributed to the motor fuel sales. In other words, the reasonable rental value is allocated based on the sales which is a requirement of the Florida Motor Fuel Marketing Practices Act (FMFMPA). Hence, the judge saw that the allocation on the products is based on the sales volume per type of gasoline grade which is in congruence with Plaintiff's costing approach. 2. Dr. Humboldt uses a hypothetical “kiosk” in his analysis to show activity that is directly related to gasoline sales. In an earlier analysis the cost of the convenience store building was included in the overhead calculations. The convenience store houses more than just the gasoline attendant, they are also selling items that are not included in gasoline sales. This makes computing the overhead cost less accurate. By adding a kiosk and showing only the activity related to gas sales, a more accurate calculation of overhead cost is gained and the FMFMPA’s standard of calculating non-labor costs is met. 3. Explain how the costs in the case behave with respect to the following cost hierarchy: unitlevel, batch-level, product-level, and organizational-level, including specific examples of each hierarchy level. Unit-Level: can be traced to each individual unit of product in this case it would be the costs attributed to each gallon of gas. Also, each different type of gas was a different price which makes different unit costs. Batch Level: the costs associated with the action of selling gas is traced to the types of gas equally. In this case it was split between Regular, Plus and Premium. These are allocated equally because regardless of the volume of each transaction or the overall difference between amount purchased of each type of gas. Product Level: product level costs is an action taken to support the specific product or activity, in this case the sale of gasoline. An example of product level costing in the case would be the purchasing of the equipment used to sell gas, specifically the pumps, or the tanks, lines etc… Organization Level: what the organization spends to maintain specific operations of the facilities. This would be purchasing a new gas station, in the case they stated the price of $700,000 or 20% less to not have the convenient store within the station and only an attendant on site. 4. Explain why Dr. Humboldt's ABC analysis yields a result between the extremes of the other two costing approaches that had been used in earlier court hearing. Dr Humboldt’s ABC model has essentially split the difference between the cost per gallon from the 2 extreme approaches. Where, 70% of the total indirect cost was allocated equally

to the three types of gasoline grades and the remaining 30% allocated to the products on a per unit basis. 5. Activity Based Costing (ABC) is a two-stage model with a five-step process. The fivestep process includes; identifying activities, assigning cost to the activities, determining the basis for assigning the cost of activities to cost objects, determining the cost per unit of activity, and reassigning costs from the activity to the cost object on the basis of the cost object’s volume of consumption of activities. Dr. Humboldt’s use of the ABC method is seen in Exhibits 8 and 9. Step one, Dr. Humboldt identified the activities as; labor, kiosk, and gasoline dispensing (Exhibit 9). Step two, costs were assigned to each activity; $5,220 for labor, $4,501 for the kiosk, $23,456 for gasoline dispensing (Exhibit 9). The costs were determined in exhibit 8. Step 3, the Activity Cost Drivers were assigned to each Activity Pool. Gallons of gas sold was the cost driver for Labor and Kiosk. Number of products was used as the cost driver for Gasoline Dispensing (1/3 Each Grade). Step 4, The above information was used by Dr. Humboldt to determine the total indirect cost for each product (Regular $13,680, Plus 9,996, and Premium $9,501). Step 5, Dr. Humboldt took the indirect cost for each product and divided it by volume to determine the Cost Per Gallon of Gas Sold (Regular $0.0400, Plus $0.0786, Premium 0.0968). 6. Critique the Florida statute's use of "cost'' in assessing whether predatory pricing of gasoline has occurred. In order to prevent predatory pricing, the Florida Motor Fuel Marketing Practices Act has the effect of damaging competition. The cost of the regular gasoline per gallon may occur to be below cost if the statute is to be followed because the traditional costing approach was used, in which a single variable (number of gallons sold) was used to evaluate the costs when there are usually several activities involved in the sale of petrol industry. Using one single variable, high volume products absorb over-costs, products with low volume are liable for inadequate costs. That leads to what they call product costs subsidization because the regular fuel registers in the high volume of sales, which will require more quantity of dispensing machines. 7. Explain whether you think the judge should lift the injunction on BuyGasCo, following consideration of Dr. Humboldt's ABC analysis. Dr. Humboldt's ABC model is more advanced than that of the plaintiff and the defendant. However, the costs of the gasoline dispensing activities based on one single cost driver (number of petrol grades) was yet the best alternative. It is our point of view that reasonable rental cost of supply gasoline assets should also be allocated to common gasoline and gradespecific petrol dispensing assets. Different grade facilities shall include containers, pumping equipment, plumbing and tubes...The measurements of these three grades would be the same. Hence, the grade special gasoline dispensing costs will be an activity cost driver. Moreover, common gasoline dispensing costs can be allocated per unit. We find that in our opinion the judge should lift the injunction on BuyGasCo. Dr. Humboldt’s case proved that ABC Company was not undercutting the market prices. Furthermore, through Exhibit 6, it is shows that the total activity cost of operating a gas station in Florida ($729,565) is more

expensive than the FMFMPA’s posted average of $700,000 (pg. 349). The lower price that ABC Company is using may be cheaper than the competitions but the market still sees the price of the “reasonable rental value” as being higher than the FMFMPA stated....