Week 11: Real World Applications 10

Assume Daewoo, a hypothetical oil extraction company, has the following cost structure. It spends:

• $40/barrel on labor costs, raw materials, energy, and • $35/barrel on interest, depreciation, insurance, and administrative staff expense.

Read the textbook carefully, and answer the following questions.

• A recession hits, the market price of crude oil falls to $50 per barrel, and the profitability takes a hit. Should Daewook keep running the mine? Elaborate.
• Russia invades Ukraine, the market price shoots up well above $100 per barrel, and competitors announce new expansion plans. Should Daewoo add the new capacity? Elaborate.

Place your answer here.

The company should still continue to work on running the mine because although they are not making as much money, They still have the production capacity, and storage to keep the oil in storage until the prices go up, in order to achieve this they might have to cut costs, or sell some oil at unwanted prices, but Their best decision is to keep running.

I believe that the company should add the new capacity considering the market for their product is improving, they should take advantage of this Economic boom in oil in order to help expand the company and improve the resources in case there is a recession.