Gez Petrol Case

7 July 2016

1. 0 Introduction Mr Aiman is the GEZ Bhd’s area manager who is responsible to directing sales activities for more than twenty petrol stations in the northern region of Malaysia. The petrol station business is very stable and consistent due to the continuous increase of the regions vehicles. But the petrol station operators often facing problem to sustain the business and lead to dealership license. After investigation, Mr Aiman discover failure to sustain the petrol station business was due to lack of finance and costing knowledge among the dealer and related staff.

Besides, he also believed ability for the dealer and related staff to differentiate fixed and variable expenses, prepare financial statement, and CVP analysis can help them to survive. So Mr Aiman seek assistant from Rizal, a trained management accountant to develop financial model that can help dealer perform CVP analysis. GEZ develop and operate petrol station under three basic concepts, namely Company Owned Station (COS), Partially Company Owned Station (PCOS), and Dealer Built Station (DBS). Under COS and PCOS, the operator was the landowner and under the operator was not the landowner for DBS.

The petrol conducts mainly two business, which is fuel business and convenience store business, SelesaMart. Besides that, GEZ affiliate with more than 40 reputable business partners. Some of the affiliations partners included A&W, AmBank, American International Group (AIG), Bank Rakyat, BSN, Burger King, CIMB, Delifrance, Dunkin’ Donuts, Giant, KFC, Maybank, McDonald’s, OCBC, and RHB. Furthermore, Automated Teller Machine (ATM) and Touch ‘n Go reloads counter we installed at some of GEZ’s service stations. 2. 0 Analysis and Discussions 2. 1 How lucrative is the petrol station business??

Based from the calculation in Appendix 1, the petrol station business was able to produce total sales as much as RM20,682,189. 60. Where fuel business was able to contribute as much as 60% (RM19,251,897. 60) to total sales for the petrol station. On the other hand, the convenience store business was producing 40% to the total sales of the petrol station sales with RM1,430,292. 00. After deducting direct cost (RM19,283,712. 20), credit card fee(RM82,728. 76), and royalty (RM1,034,109. 48) for both of the business, a remaining of RM281,639. 16 was the contribution margin for the whole petrol station business.

Besides that, Appendix 1 also show the contribution margin for each of the business, where the petrol business was 0. 38% and SelesaMart was 14. 6%. Finally, after deducting all of the fixed cost like salary (RM25,568. 00), electricity, water, telephone (RM75,000. 00), equipment rental (RM7,380. 00), insurance premium (RM1,920. 00), and stationary (RM112,268. 00), the net profit for the petrol station business is RM169,371. 16. 2. 2 Since the margin on fuel business is very low (6%) compared to convenience store (20%), do you agree that the convenience store is subsidizing the fuel business?

Based on the calculation in Appendix 1, although the Petrol business contribution margin ratio (0. 38%) is far more lesser than SelesaMart (14. 60%), but the fuel business still enjoy contribution margin as much as RM72,816. 53. But after take into account the total fixed cost allocated to the fuel business, the fuel business suffer loss of -RM6,875. 79. The fuel business suffer for loss as mainly due to the loss suffer by RON 97(-RM837. 09) and diesel business (-RM88,512. 54). Whereas SelesaMart enjoy profit of RM176,245. 34. So we can concluded that the convenience store business is subsidising the fuel business.

2. 3 If the Government raised the RON95 price to RM2. 10, do you anticipate the profitability of the business will be eroded? The profitability of the business won’t be eroded if the Government raised the RON95 price to RM2. 10. The profit margin where increase from 6% to 19. 73% if the fuel price rose to RM2. 10 when we did not consider others variable cost like credit card fee and royalty. The profit margin was as the calculation below. Profit = Sales price – Cost = RM (2. 10 – 1. 6856) = RM 0. 4144 Profit margin = 0. 4144 / 2. 10 = 19. 73%

Even with the assumption all of the customers for RON 95 use credit card to make payment, the business still enjoy the profit margin of 18. 73%. Based on the computation, the profit margin (18. 73%) is still higher and much better than before (6%). Therefore, even though government raised fuel price and customers were using credit card to pay for the fuel, it won’t have significant effect on the profitability of the business. The calculation for the profit margin with assumption all of the customers use credit card to do payment was as below. Credit card fee = 1% of sales price Cost = RM 1.

6856 + (1%*RM 2. 10) = RM (1. 6856 + 0. 021) = RM 1. 7066 Profit = RM (2. 10 – 1. 7066) = RM 0. 3934 Profit margin = 0. 3934 / 2. 10 = 18. 73% On the other hand, based on Appendix 2 after consider all other variable cost like credit card fee, royalty, and with the assumption of fuel price did not increase. RON95’s contribution margin ratio was increase from 0. 96% to 14. 33%. Besides that, the total fuel business contribution margin also raises form 0. 38% to 11. 35% and this has causes the whole petrol station business’ contribution margin ratio to raise form 1. 36% to 11. 55%.

The net profit for the whole petrol station business also increased form RM169,371. 16 to RM2,570,206. 78. But if the cost of RON 95 changes according to the increased of price form RM 1. 80 to RM2. 10 like presented in Appendix 3, the contribution margin for Ron 95 did not change but the contribution margin for the whole fuel business is increasing form 0. 38% to 0. 45%. Besides, net profit for RON 95 also increased from RM82,473. 83 to RM104,554. 70 eventhough the its contribution margin ratio did not change. Besides that, the total contribution margin for both of the business also increased form RM281,639.

16 to RM305,890. 02 and the net profit for the whole business increased form RM169,371. 16 to RM193,622. 02. So government’s policy to raise RON95 price to RM 2. 10 did not eroded the business profitability but help the business to gain more profit. 2. 4 If credit card sales are reduced from 40% to 20%, what is the effect on overall profitability? If the credit card sales drop from 40% to 20% of the total sales and with the assumption that the other 80% of sales was settle by cash payment. The contribution margin for the whole business will increase from RM281,639. 16 to RM323,003. 54 and the CM ratio will increased from 1.

36% to 1. 56% as presented by Appendix 4. Increase of the contribution margin and CM ratio was due to the decrease of credit card fee that vary according to the credit card sales. Besides that, after encounter the entire total cost the net profit for both of the business increase form RM169,371. 16 to RM210,735. 54. So decreased in the credit card sales will definitely increased the profitability of the petrol station business. The effect of credit card fee was presented 2. 5 What is the appropriate basis to allocate the cashier cost between the four products RON95, RON97, diesel and SelesaMart?

Two cashiers were directed to working at the sales counter, which one of them will be concentrate on the fuel transaction and one will be responsible for the convenience store. But eventually they were handling both transactions at times. Since both of the cashier were handling both business’ transactions, the cashier cost should be allocated according to the proportion of sales among the four products. To allocate the cashier cost between the four products firstly we must calculate the total cashier cost for the whole month. Cashier cost = Monthly salary per person (RM) x No. of staff = RM 950 x 6 = RM 5,700.

00 The total cashier cost of RM5,700. 00 is for the whole product, so we must divide the cashier cost into portion of the four products by calculate the sale each product over the total sales. Portion (%) = After the proportion, the cashier cost allocated for RON 95 business was RM4,196. 63, RM98. 63 for RON 97, RM1,010. 55 for Diesel business, and RM 349. 19 for SelesaMart. The allocation of the cashiers cost was presented as below. = = = = = = = = 2. 6 Is utility cost fixed or variable? What difference does it make to the breakeven point of RON95 if it is classified as (i) fixed cost, and (ii) variable cost?

The utility cost such as electricity, water and telephone is fixed cost for petrol station business. This is because utility cost even when the is the petrol station business operated as a retail business, it should categorize the utility cost as fixed cost because the cost will be relatively the same as it was used for all the time. If the utility cost was categorize as fixed cost, the break-even point for the RON 95 business will be 3,664,613 litres and the break-even revenue will be is RM6,596,304. 85 as calculated below. Break-even point (units) = = = 3,664,613 units

Break-even point (RM) = 3,664,613 units x RM1. 80 per unit = RM6,596,304. 85 However, if the utility costs are categorize as variable costs, the break-even point for the RON 75 business will be as much as 2,743,861 litres and the Break-even revenue will be RM4,938,949. 80. Break-even point (units) = = = 2,743,861 units Break-even point (RM) = 2,743,861 units x RM1. 80 per unit = RM4,938,949. 80 As conclusion, from the calculation above, if the utility cost was categorized as fix cost, it will have a higher break-even point compare to the alternative to categorize utility cost as variable costs.

3. 0 Conclusion In conclusion, the management accounting concept and tools like cost allocation knowledge and CVP analysis is very important as by using CVP analysis the petrol station operator was able to know which of the is operate at its break-even point, lower than its break-even point, or high than its break-even point. Besides that, cost allocation like presented in Appendixes also show each of the business which is really gain profit and which business is really suffer from loss.

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