MFE Project (G4)

Group Members: Tan Yong Han Edmund Yang Jia Rui Richard Goh Yu Ziyu Huang Hao
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Product Mix (Oil) With the increased competition from refiners in lower wages countries like Indonesia and Thailand, Exxon Mobil (EM) has been making losses for the past few quarters and they have to reduce cost to keep up with the keen competition.1 EM produces two grades of cut-rate gasoline for industrial distribution. 2 The grades, Grade 95 and Grade 97 are produced by refining a blend of two types of crude oil, type X100 and X220 which has different composition of Pentane and Octane.3 Each Crude oil differs not only in cost per barrel, but in composition as well. The following table indicates the percentage of crucial ingredients found in each crude oil and the cost.

X100 X200

Pentane Octane Cost Per Barrel 35% 55% $30.00 60% 25% $34.80 Table 1: Composition of X100 and X2004

The weekly demand for the Grade 95 of gasoline is at least 25,000 barrels and demand for the Grade 97 is at least 32,000 barrels per week. At least 45% of each barrel of Grade 95 must make out of Pentane and at most 50% of each barrel of Grade 97 must contain Octane. 5 Although the gasoline yield from one barrel of crude oil depends on the type of crude and type of processing used in this essay we will assume that one barrel of crude oil will yield one barrel of gasoline

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Business Times: 5 May 12; Survival of Singapore refineries seen under threat ExxonMobil: Singapore Integrated Manufacturing Site Manual 3 Interview with Ms Karen Wong (Public and Government Affairs Exxon Mobil) 4 The Figures do not add up to 100% as Crude oil just like gold you cant get 100% composition purity. 5 Interview with Ms Karen Wong (Public and Government Affairs Exxon Mobil)
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The problem that EM is facing is to determine the right amount of each type of crude oil to purchase each week for refining to satisfy demand at minimum cost that can maximize the profit for the shareholders and the firm. Our Question To find out whether the firm is currently minimizing her costs by purchasing the right amount of each type of crude oil for refining. Our Conjecture In order to minimize costs, ceteris paribus .The only solution is to find the right product mixture for refining to maximize profit for the firm. Model We start out by letting x1 , x2, x3, x4 denote x1=Barrels of crude oil x100 refined to produced grade 95 of Gasoline x2= Barrels of crude oil x100 refined to produced grade 97 of Gasoline x3= Barrels of crude oil x200 refined to produced grade 95 of Gasoline x4= Barrels of crude oil x200 refined to produced grade 97 of Gasoline x1+ x3= Total amount of crude refined to produce the refined Grade 95 to meet demand which is x1 + x3 x2+ x4 25000

Total amount of crude refined to produce the refined Grade 97 to meet

demand which is

x2+ x4

32000

As at least 45% of each barrel of Grade 95 must make out of Pentane

0.35 x1 + 0.60 x3
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0.45 x1 + 0.45 x3

Similarly as at most 50% of each barrel of Grade 97 must be make out of Octane

0.55 x2 + 0.25 x4

0.52 x2 + 0.50 x4

Here is the Entire Formulation 6 Min x1, x2, x3, x4 f(x1, x2, x3, x4) = 30x1 + 30x2 + 34.8x3 + 34.8x4 s.t. x1 + x3 x2 + x4 25000 32000

-0.10x2 + 0.15x3 0.05x2 - 0.25x4 x1 x2 x3 x4 0

Due to the complexity of our model, we are unable to provide a good graphical representation of our model.
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We simplify the constraints,

-(x1+x2+x3+x4) 0.10x1 + 0.05x2-0.15x3 - 0.25x4 x1 x2 x3 x4

Modified Lagrangian Function, ( ) ( ( ) )

Kuhn-Tucker conditions for the modified Lagrangian,

L x1 =30 +

-0.10

0, )=0

x1

x1(30+

- 0.10

L x2=30+

-0.15

0, )

x2

x2(30+

L x3=34.8+ x3(34.8+ )

x3

L x4=34.8+ x4(34.8+ )

g1(x1, x2, x3, x4)= -( x1+ x2+ x3+ x4) (x1 + x2 + x3 + x4 - 57000) = 0

g2(x1+ x2+ x3+ x4)=0.10 x1+0.05 x2 0.15 x3 - 0.25x4 (0.15x3 + 0.25x4 - 0.10x1 - 0.25x2) = 0

If 30+ 0.05 x3(4.8+0.25 x4(4.8+0.35 ) )

If 30+ x1(-0.05 x3(4.8+0.2 x4(4.8+0.3 ) ) )

If 34.8+ x1(-4.8-0.25 x2(-4.8-0.2 x4(0.1 If 34.8+ x1(-4.8-0.35 x2(-4.8-0.3 x3(-0.1 ) ) ) ) ) )

If x1=0, x2=0, x3=0 and x4=0, then there is no solution.

From all equations and excel program to got minimization solution (Refer to Table 2) which is

Table 2: Solution

x1=15000, x2=26666.67 x3=1000 x4=5333.33

The total cost of this mix will be $1783, 600.

Conclusion

With more and more refiners relocating to lower wages countries, the refiners in Singapore have to minimize cost to stay competitive in todays globalized world.

Our Model has identified the optimal product mix for Exxon Mobil to purchase every week to minimize cost for them to stay competitive and we will present our findings to Exxon Mobil for their necessary action.

Furthermore, we learn that the usage of Lagrange function to solve complex multi-variable optimization problems is extremely useful in solving many of reallife complex problems and the study of Economics help to develop economic intuition that are useful.

Acknowledgement

Prof Zhang Yi for his unwavering support to our project

Ms Daena Tan and Ms Karen Wong from Exxon Mobil Public and Government Affairs Department for providing insights into the oil industry