Buygasco
TO: Dr. Jian Cao, ACG Professor
FROM: Andre Smith, MBA Candidate
DATE: November 17, 2014
SUBJECT: BuyGasCo Case Analysis
Introduction
The BuyGasCo Corporation (BuyGasCo) case calls into question which costing approach is appropriate in determining whether or not BuyGasCo is guilty of predatory pricing. In determining BuyGasCo’s guilt, it should be noted that they have been historically known to provide low prices to its customers. BuyGasCo is a retail fuel and service chain center that has been in business for 35 years and operates with typical industry standards. This low cost for fuel has been an integral part of BuyGasCo’s corporate strategy along with reducing unnecessary costs for advertising. The plaintiff, the State of Florida, utilizes an approach which allocates indirect costs to the three different grades of gasoline based on the average amount of gasoline sold from each grade. On the other hand, the defendant, BuyGasCo, utilizes an approach in which the indirect costs are allocated using a simple average approach, which allocates the same cost to each grade, regardless of volume sold. The difference in approaches provides for a difference in indirect costs for each grade of gasoline. This poses a problem because the Florida Motor Fuel Marketing Practices Act (FMFMPA) prohibits gas companies from selling gasoline at retails prices that are below “cost.” If gas companies are believed to be participating in such practices, then they will be accused of predatory pricing. Utilizing the plaintiff’s costing approach yields the result of BuyGasCo selling gasoline for less than its cost as a competitive advantage.
The Judge’s Ruling
During the initial hearing, the judge’s preliminary ruling was in agreement with the plaintiff’s costing approach, citing that it seems to determine the gasoline costs more accurately. The judge chose the plaintiff’s costing approach over the defendant’s because it provides a more precise connection between the
FROM: Andre Smith, MBA Candidate
DATE: November 17, 2014
SUBJECT: BuyGasCo Case Analysis
Introduction
The BuyGasCo Corporation (BuyGasCo) case calls into question which costing approach is appropriate in determining whether or not BuyGasCo is guilty of predatory pricing. In determining BuyGasCo’s guilt, it should be noted that they have been historically known to provide low prices to its customers. BuyGasCo is a retail fuel and service chain center that has been in business for 35 years and operates with typical industry standards. This low cost for fuel has been an integral part of BuyGasCo’s corporate strategy along with reducing unnecessary costs for advertising. The plaintiff, the State of Florida, utilizes an approach which allocates indirect costs to the three different grades of gasoline based on the average amount of gasoline sold from each grade. On the other hand, the defendant, BuyGasCo, utilizes an approach in which the indirect costs are allocated using a simple average approach, which allocates the same cost to each grade, regardless of volume sold. The difference in approaches provides for a difference in indirect costs for each grade of gasoline. This poses a problem because the Florida Motor Fuel Marketing Practices Act (FMFMPA) prohibits gas companies from selling gasoline at retails prices that are below “cost.” If gas companies are believed to be participating in such practices, then they will be accused of predatory pricing. Utilizing the plaintiff’s costing approach yields the result of BuyGasCo selling gasoline for less than its cost as a competitive advantage.
The Judge’s Ruling
During the initial hearing, the judge’s preliminary ruling was in agreement with the plaintiff’s costing approach, citing that it seems to determine the gasoline costs more accurately. The judge chose the plaintiff’s costing approach over the defendant’s because it provides a more precise connection between the