Stochastic Cost-Volume-Profit Analysis and Decision Theory

  • Kenneth P. Gee
Chapter

Abstract

William Lehman Timber Ltd (WLT) are importers and distributors of wood and forest products. WLT have extensive yards at the port of Goole, and are contemplating the installation (on currently unused space within the Goole yards) of plant for the distillation of fusel oil. Considerations of cash flow make it strongly in WLT’s interests to lease this plant rather than purchase it outright. Two types of fusel oil distillation plant are available for leasing; direct distillation (DD) plant is being quoted with lease payments of £320000 per annum, while the more sophisticated catalysis-assisted (CA) plant is being quoted with lease payments of £490000 per annum. Because these plants are based on quite distinct technologies, they carry out the process of distillation with widely differing efficiencies. CA plant is capable of producing fusel oil at a variable cost of £0.17 per litre, while DD plant is capable of producing only at a variable cost of £0.28 per litre. WLT is part of a vertically-integrated forest products group, and sells solely through 250 ‘captive’ wholesalers belonging to this group. These wholesalers do not currently stock fusel oil, but will all be required to do so when WLT makes it available to them. The price to the wholesaler is determined by competitive considerations, and will be 55p per litre irrespective of whether the fusel oil is produced by CA plant or DD plant.

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Copyright information

© Kenneth P. Gee 1986

Authors and Affiliations

  • Kenneth P. Gee
    • 1
  1. 1.Department of Business and AdministrationUniversity of SalfordUK

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