Octane Case

Topics: 1978, 1967, 1979 Pages: 6 (1541 words) Published: July 19, 2010
Octane Service Station

On March 15, Julio Trevino signed a lease agreement to operate a gasoline service station that was owned by the Octane Oil Company (here after, simply “Octane”). Trevino had contacted the regional sales manager of Octane in response to an advertisement that solicited applicants “with $25,000 to invest” to lease and operate a newly erected Octane gasoline service station. Trevino had been able to accumulate approximately $32,000 for investment purposes as a result of a $25,000 inheritance and savings on the salary of $865 per week he earned as manager of a service station operated as a separate department of a J.C. Penney store. Most of this $32,000 was held in government bonds.

The regional sales manager for Octane was impressed with Trevino’s personal and financial qualifications, and after several interviews, a lease agreement was signed. During one of these meetings the sales manager informed Trevino that the new station would be ready for occupancy on May 1st at a total investment cost of $300,000. Of this amount, $100,000 had already been paid for land, and a total of $200,000 would be spent for a building that would be “good for about 40 years”. In discussing profit potential, the sales manager pointed out that Octane’s national advertising program and the consumer appeal generated by the attractive station “will be worth at least $30,000 a year to you in consumer goodwill.”

The lease agreement stipulated that Trevino pay a rental of $1,250 per month for the station plus $0.04 for each gallon of gasoline delivered t the station by Octane1. A separate agreement was also signed whereby Octane agreed to sell and Trevino agreed to buy a certain minimum quantities of gasoline and other automotive products for the service station operation.

As both evidence of good faith and as a prepayment on certain obligations that he would shortly incur to Octane, Trevino was required to deposit $20,000 with Octane at the time the lease was signed. Trevino raised the cash for this deposit by liquidating government bonds. Octane used most of this money to defray certain obligations incurred by Trevino to the oil company prior to the opening of the new station. The deductions from the $20,000 deposits were applied as follow:

| | | |Inventories of gasoline, oil, grease, tires, batteries, and accessories. |$ 13,250 | |Rental fee ($1,250 flat rental for the month of May and $170 figured as $0.04 per gallon for the gasoline |1,420 | |delivered in the opening inventory). | | |Down payment (on Trevino’s behalf) on equipment costing $12,875. |2,575 | | |$ 17,245 | | | |

1 The lease, which covered a period of one year beginning May 1, was automatically renewable unless notice of cancellation was given by either party at lease 30 days prior to an anniversary date. The regional sales manager of the Octane Oil Company estimated that approximately 150,000 gallons of gasoline would be delivered to Trevino’s Service Station during the first 12 months of operations. Subsequently, Trevino’s records revealed that 27,000 gallons (including the initial inventory) were actually delivered during the first two months of operation.

The equipment, including floor and hydraulic jacks, a battery charger, tune-up sets, and oil and grease guns, became...
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