ExxonEssay Preview: ExxonReport this essayExxon Mobil1. Exxon Mobils nature of business is a natural haven for criticism; reporting record profits for 2005 only added fuel to the fire so to speak. The topic of nearly every conversation around the country had something to do with how much people were shelling out at the pumps or how the cost of most consumer goods was increasing a rate never experienced before; Exxon Mobils feat did nothing but bring negative attention to the firm. However, Exxon Mobil knew that their profits wouldnt be well accepted by the general public and did its best to do a little damage control by creating charts comparing their profits to other industries, holding press conferences and by trying to educate the public on the costs of running their business by creating small informational advertisements. Yet, no matter how hard they tried, scrutiny was in evitable. Consumers were paying three dollars for a gallon of gas, the media constantly did special reports on the increasing cost of filling our gas tanks, and the Democratic Party constantly ridiculed the Republicans lack of effort to lower the prices of gas.
Exxon Mobils attempt to justify its profit margin by comparing the profit margins of the oil & natural gas industry to other industries can be compared to a magicians act on stage. Its a game of misdirection that the average citizen wouldnt think twice about. To get a true comparative measure of Exxon Mobils profit margin you want to calculate Exxon Mobils profit margin which I calculated to be 10 cents, and compare it to the profit margins of other firms in the same industry. Looking at the chart in Exhibit 2, the oil & natural gas industry has and average return on sales of 5.8 cents, which is 3.2 cents less than Exxon Mobils true returns. If we put their true figures on this chart they would jump up to the likes of real estate industry, which earns on average 10.8 cents on the dollar. But even comparing Exxon Mobil to these different industries isnt very justifiable because different industries have different operating costs, so to get a better picture of how Exxon Mobil stacks to other firms or industries the ROE should be looked. The ROE shows how well the firms generate money with money that was brought in through equity. An ROE figure has different factors that would be accounted for such as how levered a firm is, how high operating costs are, and how efficient a firm is at generating money with its assets, combined giving you a more accurate picture of a firms profitability.
2. Exxon Mobils physical inventory levels of crude oil, products, and merchandise decreased by $0.3 billion during 2005. Taking a quick glance at the total balances in Exhibit 8 note 3 youll see that the ending balances are $7.8 billion and $8.1 billion for 2005 and 2004 respectively. Analyzing the numbers further we see that petroleum products and crude oil decreased by $0.2 billion and $0.1 billion respectively. However, Exxon Mobil tracks its inventory using a dollar value – LIFO method. In other words, inventory is tracked in dollars rather than units making it difficult to determine the physical levels of inventory. A fluctuation in inventory using the dollar value can be due to one of two scenarios. Either there has been a change in the units (or gallons in Exxon Mobils case) on hand or the cost per unit has changed. But, from the information provided by the case we can conclude that the physical inventory level has dropped, because there was an increase in the price per barrel during 2005.
3. If Exxon Mobil was to have reported inventories of Crude oil, products, and merchandise for 2005 using a FIFO instead of LIFO, they would have had an ending balance of $23.2 billion. This can be found by adding the ending LIFO balance to the aggregate replacement cost of inventories – also known as a LIFO reserve account. Please refer to the attached excel sheet.
4. If Exxon Mobil was to have used the FIFO method for measuring the cost of Crude oil, products, and merchandise inventories, COGS for 2005 would have been reported at $206.438 billion. This can be calculated by first finding the change in the LIFO reserve account ($15.4 billion – $9.8 billion = $5.6 billion), then subtracting this figure from COGS calculated under the LIFO method, which was $212.038 billion, so $212.038 billion – $5.6 billion = $206.438 billion. It makes sense that the COGS under FIFO are lower than COGS under LIFO because prices were on the rise, meaning youd be selling the products that you paid most for now, and holding on to inventory that you paid less for. Please refer to attached
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5. In the absence of the NRC reporting the COGS estimate of $206.438 billion and/or that of $20.6 billion, we should assume that, assuming the COGS of $206.438 billion and/or $200.037 billion, total supply of Crude would be $12.1 billion; $12.1 billion + $200.037 = $16.8 billion
6. Assuming this $16.8 billion is based on the actual COGS of Crude oil, we should convert it to a more appropriate rate of growth under the FIFO for 2005 to produce a $15.4 billion net decrease in COGS, but this is lower than an earlier estimate. We would also be able to subtract the actual COGS from the rate, which is $150.037 billion. This makes $2,621.4 billion net decrease, which is similar to a $150 net to $15.4 billion net decrease under the FIFO method. As for the price increase by the NRC over the time periods cited to date, the CEA projects a 7% or higher increase in COGS in 2005, with a 9%).
7. Using a lower estimate of COGS for any years, we would conclude that, if current trends were to continue for the foreseeable future, the cost of Crude oil production would be $110.00 a tonne higher than the current $106.00 per tonne. This may be a reasonable result, given the increase in COGS in the past few years. Unfortunately, this assumption assumes that the NRC data are accurate, or even valid. The best estimate of any NRC source is based on the amount of production in the world that is equivalent to all global output of oil and non-oil resources. When crude prices are on the rise — when non-oil resources are abundant and natural resource production is the focus of most calculations — they may be considered as “supply-oriented” prices that are driven by supply rather than demand effects. If the NRC data are not consistent, we may conclude that, for more moderate economic conditions, Crude is likely to be less or less reliable. This is known as “supply-oriented price discovery.” It can generate a lot of uncertainty for some groups.
8. Our assumption that the CEA of $106.00 per tonne may be correct, based on these figures, represents a $100.00 change in COGS of $10 to $