Audit Case - 1

Topics: Costs, Variable cost, Fixed cost Pages: 13 (4847 words) Published: October 13, 2011
BuyGasCo Corporation: The Use of Alternative Costing Methods in a Predatory Pricing Lawsuit 1 BACKGROUND2 BuyGasCo Corporation (BuyGasCo) is a major national chain of retail motor fuel (gasoline) service centers. This privately held company is very successful and has been in existence for 35 years. The service centers, owned and operated by BuyGasCo, are straightforward and typical of those in the industry. The main function of these service centers is to sell gasoline. The company sells three types of gasoline: regular (87 octane), plus (89 octane), and premium (93 octane). Each service center also sells commodities such as coffee, candy, sodas, and miscellaneous grocery items. The success of this company is mainly attributable to its low-cost strategy. Since its inception, BuyGasCo has attempted to be a low-cost distributor of gasoline. The operations at each service center are designed to be simple in order to keep costs at a minimum. This company does not spend excessively on things deemed to be unnecessary to the basic operations and success of the business, such as widespread advertising and extensive facilities modernization. For example, the company uses targeted sales advertising and promotions that have proven records of success. BuyGasCo passes cost savings on to the consumer by offering gasoline at the lowest possible price. This company has earned a good reputation among consumers and has a significant and growing portion of the retail gasoline national market share. Due to the fact that BuyGasCo is a national market leader, its major competitors are constantly seeking ways to gain market share and entice customers away from BuyGasCo. Earlier this year, Bill Hudson (CEO of BuyGasCo) received notice that one such competitor, Uncle Petroleum (UP), had filed a complaint with the Division of Standards in the Florida Department of Agriculture and Consumer Services (FDACS). The complaint stated that BuyGasCo was in violation of the Florida Motor Fuel Marketing Practices Act (FMFMPA) by selling regular gasoline below cost, and thus injuring the competition. A hearing was set during which BuyGasCo needed to prove that it is not selling regular gasoline below cost, and the state of Florida will attempt to prove otherwise. This case takes you through the Florida statute, the court hearing, and the company’s reaction, followed by an activity-based costing (ABC) analysis by Dr. Humboldt, a university professor. OVERVIEW OF THE FLORIDA MOTOR FUELS MARKETING PRACTICES ACT (FMFMPA) The FMFMPA was enacted in 1985 in an attempt to support healthy and just competition among those organizations marketing gasoline. The Florida legislature believed that, by disallowing unfair pricing practices and promoting competition, this Act would promote the general welfare of Florida’s citizens. The FDACS has the authority to enforce the FMFMPA. Among other actions, the FMFMPA forbids selling gasoline at retail prices below “cost” in an attempt to eliminate competition, a process called predatory pricing. In order to be found 1

Barton, T. L., MacArthur, J. B., and Moore, R. L. (2005). BuyGasCo Corporation: The use of alternative costing methods in a predatory pricing lawsuit. Issues in Accounting Education 20(4): 341-357. 2 This case is based on an actual predatory pricing lawsuit, but company and personal names are fictional and the information used in this case is disguised for confidentiality reasons. The gasoline prices and costs used in this case reflect those extant at the time of the predatory pricing lawsuit.

guilty of this Act, it must be proved that such prohibitive conduct has injured at least one competitor. Numerous definitions can be found in the FMFMPA, which specifically explain each aspect of the Act.3 In essence, motor fuel “cost” in the statute is stipulated as the direct cost of the refined gasoline (including taxes and transportation and excluding any allowances and rebates given) plus direct labor cost and...
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