GEZ PETROL STATION: PLANNING USING COST-VOLUME-PROFIT ANALYSIS INTRODUCTION
As an Area Manager of GEZ Bhd, a major oil company in Malaysia, in 2010, Mr Aiman oversaw the sales activities of over twenty petrol stations in the northern region of Malaysia. His responsibilities included training petrol station dealers and staff, implementing sales promotions, and introducing initiatives to improve sales. Despite the steady growth in vehicles, petrol station operators often struggled to sustain their businesses, resulting in the revocation of their dealership licenses. The lack of knowledge in finance and costing contributed to these failures. Recognizing the importance of management accounting concepts such as cost allocation and CVP analysis, Mr Aiman believed that petrol station dealers and staff should have an understanding of cost accounting. They should be able to differentiate variable and fixed expenses, prepare financial statements, and conduct a cost-volume-profit (CVP) analysis. To support the dealers in performing CVP analysis, Mr Aiman enlisted the help of Rizal, a trained management accountant. GEZ PETROL STATIONS
GEZ operated petrol stations under three main concepts: Company Owned Station (COS), Partially Company Owned Station (PCOS), and Dealer Built Station (DBS). The operators of COS and PCOS were either landowners or individuals nominated and approved by GEZ. However, under the DBS concept, the operators did not own the land. These petrol stations typically conducted two main businesses: fuel sales and a convenience store called SelesaMart. Fuel business involved selling Petrol Ron 95 (R95), Petrol Ron 97 (R97), and Diesel, with a monthly sales volume of 200 million litres for petrol and 150 million litres for diesel. SelesaMart stores sold various items including groceries, snacks, drinks, confectionery, and cigarettes. On average, each store had around 2,500 stock keeping units (SKU). Furthermore, GEZ had over 40 business partners operating at their service stations. They preferred affiliations with reputable partners such as A&W, AmBank, American International Group (AIG), Bank Rakyat, BSN, Burger King, CIMB, Délifrance, Dunkin’ Donuts, Giant, KFC, Maybank, McDonald’s, OCBC, and RHB. Some service stations also had Automated Teller Machines (ATM) and counters for Touch ‘n Go reloads provided by GEZ.Operating a petrol station offers long-term stability and consistency as a major advantage.
As the number of vehicles in the country continued to grow, there was an increased demand for fuel. One advantage of petrol stations was that operators did not have to spend on advertising, as it was done by GEZ. Dealing with customers was not a problem, as the price of fuel remained fixed. However, there were several drawbacks associated with petrol stations. Firstly, the profit margin for the fuel business was very low. Effective cash collection management was crucial for operators. In 2010, the cost of fuel accounted for approximately 94% of the sale price. Additionally, there was a loss of product due to fuel evaporation during filling. Another challenge faced by petrol operators was the rising cost of credit card fees charged by banks, as more customers started using credit cards. The credit card fee imposed by banks constituted 1% of the sales price.
Developing a CVP model: The case of Baron Service Station
To begin his assignment, Rizal obtained the necessary data from Baron Service Station (BSS), a busy petrol station located in a city in northern Malaysia. In 2009, BSS had a monthly average sales of approximately RM1.7 million, with RM1.6 million generated from the fuel business and the remaining from SelesaMart. Within the fuel business, the sales distribution was approximately 79% for R95, 2% for R97, and 19% for diesel. All products experienced some level of product loss due to fuel evaporation during filling, with an acceptable loss rate of 0.3% for diesel and 0.5% for petrol. BSS had four petrol pumps and one diesel pump, with a total of twenty nozzles. in addition to the fuel business, BSS also operated SelesaMart, which had an average gross profit margin of 20%. The operator paid a royalty fee of 5% of the sales value to GEZ, along with a fixed monthly equipment fee. Overall, the assignment focused on the revenue and cost analysis of both the fuel and SelesaMart businesses.
In 2009, BSS recorded a sales revenue of RM20,682,189.60. This revenue was divided into RM19,251,897.60 from fuel sales and RM1,430,292 from SelesaMart sales. It is expected that the sales from SelesaMart will directly correlate with the total litres of fuel sold. Table 1 presents data on the sales units in litres, price per litre, cost per litre, and the percentage of product loss for the three types of fuel in 2009. The table provides information on the revenue and cost of fuel.
ProductsSale (litres)Price per litre (RM)Cost per litre (RM)Product loss R958,459,6041.801.68560.5%
R97174,5762.051.93560.5%
Diesel2,037,0721.801.7388 0.3%
Employees and Salary
BSS employed one station manager who oversaw both businesses. He had two supervisors under his direct supervision – one for the fuel business and one for SelesaMart. There were twelve crew members stationed at the forecourt to assist customers with fueling, working in various shifts. At any given time, there were two cashiers operating at the sales counter – one focused on fuel transactions and one for the shop, although they sometimes handled both types of transactions. Overall, BSS had six cashiers. One clerk was responsible for documenting and recording transactions for both businesses. Two general workers were hired to maintain the cleanliness of the station. A security guard was appointed to protect the station during nighttime. The table below shows the monthly salary and number of employees for each position:
Table 2: Monthly salary and number of employees
Monthly salary per person (RM)No. of staff
Station manager: 3,206 (1 staff)
Supervisor: 1,674 (2 staff)
Cashier: 950 (6 staff)
Crew: 812 (12 staff)
Clerk: 960 (1 staff)
General worker: 805 (2 staff)
Security guard: 1,000 (1 staff)
Other Expenses
Credit card sales accounted for 40% of total sales, with a 1% fee charged by banks for credit card transactions. Sixty percent of the electricity, water, and telephone expenses were allocated to the fuel business while the remaining 40% were allocated to SelesaMart. In 2009, Baron spent RM75,000 on electricity, water, and telephone. BSS rented various equipment including gondolas, a chiller, a pelmet, and a cashier’s counter for the operation of SelesaMart. The rental payment for this equipment in 2009 was RM7,380. The petrol station paid an insurance premium of RM1,920 in 2009 which covers robbery, fire, public liability, and workmen compensation for the entire business. Additionally, BSS spent RM2,400 on stationery during the same year. Lastly, what would happen if the government were to raise RON prices?
Armed with the financial information mentioned above, Rizal initiated his analysis to determine the profitability of the service station business. This analysis also considered the various costs involved and whether they were fixed or variable. Rizal’s concern extended to ensuring that the financial model could adapt for scenario analysis. Specifically, he wanted to assess how potential revisions to the prices of RON95 and RON97 would affect GEZ’s profitability. Additionally, he desired for the model to enable cost-volume-profit analyses. For instance, he wanted to determine the amount of sales required from each fuel product and Selesamart in order for the petrol station to break-even.
