ISSUES IN ACCOUNTING EDUCATION

Vol. 20, No. 4

November 2005
pp. 341–357

BuyGasCo Corporation: The Use of

Alternative Costing Methods in a
Predatory Pricing Lawsuit
Thomas L. Barton, John B. MacArthur, and Rebecca L. Moore

ABSTRACT: The purpose of the BuyGasCo Corporation (BuyGasCo) case is to intro-

duce and evaluate the use of different costing systems as evidence in a predatory
pricing lawsuit. The setting of this case is a major chain of retail motor fuel (gasoline)
service centers, which has been accused of selling regular gasoline below cost (as
defined under Florida state statutes). The judge accepted the volume-based method
used by the plaintiff and issued an injunction disallowing BuyGasCo from selling regular
gasoline below cost as concluded in the plaintiff’s report. BuyGasCo retained an ac-
counting professor from the local university as an expert witness for the defense to
determine if activity-based costing (ABC) analysis would provide grounds for a possible
appeal of the judge’s ruling.

BACKGROUND

B
uyGasCo 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 are typical of those in the industry. The main function
of these service centers is to sell gasoline. This company sells three types of gasoline
comprising 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 unnecessary to the basic operations

Thomas L. Barton and John B. MacArthur are both Professors at the University of North
Florida, and Rebecca L. Moore is a Senior Associate of Audit and Risk Advisory Services
with KPMG LLP.
The authors thank Sue Ravenscroft (editor), Linda Ruchala (associate editor), two anonymous reviewers, and
numerous University of North Florida graduate and undergraduate students for their help in improving this instruc-
tional case. The authors are grateful to Bobby Waldrup, Assistant Professor at the University of North Florida, for
his help in class-testing this case. The authors also thank participants at the poster session of the American
Accounting Association 2003 Management Accounting Section Research and Case Conference for their helpful
comments and suggestions on an earlier version of this instructional case.
This case is based on an actual predatory pricing lawsuit, but company and personal names are fictitious and
the information used in the 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.

341
342 Barton, MacArthur, and Moore

and success of the business, such as widespread advertising and extensive facilities mod-
ernization. For example, the company uses targeted sales advertising and promotions that
have proven records of success. BuyGasCo passes cost savings 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. FDACS investi-
gated this complaint and found it to have merit. 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.
The 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 univer-
sity professor.

OVERVIEW OF THE FLORIDA MOTOR FUEL MARKETING

PRACTICES ACT (FMFMPA)
The FMFMPA was enacted in 1985 in an attempt to support healthy and just compe-
tition among those organizations marketing gasoline.1 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 guilty of this Act, it must be proved that such prohibited conduct has injured
at least one competitor. Numerous definitions can be found in the FMFMPA, which spe-
cifically explain each aspect of the Act.
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 facilities cost. The FMFMPA also presents guidelines on
how to calculate direct labor costs, gasoline dispensing costs, and convenience store costs
attributable to the gasoline-selling function of a company. This Act states that the minimum
direct labor cost for the gasoline-selling function of a company is equal to the full-time
equivalent cost of the salary and benefits of one employee, taking into account the number
of hours the store is open. The Act requires that a ‘‘reasonable rental value’’ be found for
the portion of the convenience store used to sell gasoline and the gasoline dispensing assets.
The various operations costs associated with this convenience store should be added to the
reasonable rental value percentage of the building and land costs. These costs include
utilities, repairs and maintenance, property taxes, and insurance.
If found in violation of FMFMPA, then BuyGasCo would have to pay up to $10,000
per day in fines (to a maximum of $250,000). BuyGasCo may also have an injunction

1
The Florida Petroleum Marketers and Convenience Store Association provided the background information
regarding the FMFMPA on its website: http: / / www.fpma.org / pdf / MotorFuelMarketingPracticesAct.pdf.

Issues in Accounting Education, November 2005

BuyGasCo Corporation: The Use of Alternative Costing Methods 343

issued against it, forcing it to stop selling regular gasoline until the price is set above cost.
Also, should BuyGasCo be found guilty, its competitors can file a private suit and seek
damages for any financial injury that they suffer.

BUYGASCO’S RESPONSE TO A SUBPOENA

Bill Hudson, CEO of BuyGasCo, received a subpoena from the state of Florida, Office
of the Attorney General, requesting accounting and other information that the state needed
to investigate a predatory pricing allegation. The following is the response to the subpoena
from Mr. Hudson.

To: State of Florida, Office of the Attorney General

From: Bill Hudson, CEO BuyGasCo Corporation
Re: Facility Activities
Date: February 17, 2003
CC: Brown, Heekin, and Persis Law Firm

At the request of the Office of the Attorney General, I have included information about
the gasoline sales of BuyGasCo Corporation in Florida. This information has been provided
upon subpoena so that the state can determine if a prima facie case exists that BuyGasCo
Corporation has committed predatory pricing. A copy of this information has also been
sent to our lawyer at Brown, Heekin, and Persis Law Firm. Please note that our company
is cooperating fully in this investigation, and we are eager to clear our good name.
All numbers provided are monthly averages based on the last 30 months of operation.
BuyGasCo’s service stations provide two main services, the sale of gasoline (which is the
focus of this case) and the sale of convenience store commodities. The average gasoline
sales of BuyGasCo by grade of gasoline and in total are shown in Exhibit 1.
The direct costs associated with the gasoline sales function include the cost of the
motor fuel from the wholesaler plus taxes and transportation costs. The direct costs of each
grade of gasoline are presented in Exhibit 2.
The average monthly indirect costs of the gasoline selling activities over the past 30
months were $33,177.

EXHIBIT 1
Average Gasoline Sales of BuyGasCo Corporation in Florida

Premium Plus Regular Total

Average Gallons of Gas Sold Per Month 98,178 127,120 342,203 567,501
Percent of Total 17.3% 22.4% 60.3% 100%

EXHIBIT 2
BuyGasCo Direct Costs Associated with Gasoline Sales

Average Direct
Gasoline Type Cost Per Gallon
Premium $1.22
Plus $1.20
Regular $1.18

Issues in Accounting Education, November 2005

344 Barton, MacArthur, and Moore

Please contact our lawyer, Mr. Brown, J.D., at Brown, Heekin, and Persis Law Firm if
you need any further information.

THE HEARING
The following are relevant portions of the transcript from the hearing concerning the
predatory pricing allegation against BuyGasCo. The judge, the Honorable Davies, must
determine if the plaintiff, the state of Florida, represented by the Assistant Attorney General
(AAG), Ms. Barrier, J.D., has proven that BuyGasCo is violating the FMFMPA. In this
hearing, Mr. Brown, J.D., of Brown, Heekin, and Persis Law Firm represents BuyGasCo
Corporation.

Judge Davies: Court is now in session. This hearing is to determine the outcome of case
number 2003-05143 State of Florida v. BuyGasCo Corporation. Ms. Barrier, you may call
your first witness.
Ms. Barrier (AAG): Thank you, your honor. I would like to call the management account-
ing expert witness for the plaintiff, Mr. Donohoe, CPA. Mr. Donohoe, what were your
findings regarding the cost of gasoline to BuyGasCo?
Mr. Donohoe, CPA: I utilized an approach to product cost assignment that is used by
countless organizations, and has been found to be very accurate and reliable. I assigned the
average monthly indirect costs generated by the gasoline service center to the different
grades of gasoline based on the number of gallons sold. This is clearly illustrated by an
exhibit, which I believe you already have in your possession, your honor.
Judge Davies: That is correct.
Ms. Barrier (AAG): I would like to enter this exhibit into evidence as the plaintiff’s Exhibit
A (see Exhibit 3).
Judge Davies: So entered.
Mr. Donohoe, CPA: In Exhibit A for the plaintiff, you can see the average monthly indirect
costs for the service center, as defined by Florida state statute, allocated to the three different
grades of gasoline based on the average amount of gasoline sold per month, as provided
by BuyGasCo Corporation. The average number of gallons of gasoline sold per month was

EXHIBIT 3
Plaintiff’s Exhibit A
Calculation of Costs and Profits for BuyGasCo Corporation’s Gasoline Products
Prepared by Mr. Donohoe, CPA

Regular Plus Premium Total

Average Gallons of Gas Sold Per Month 342,203 127,120 98,178 567,501
Percent of Total 60.3% 22.4% 17.3% 100.0%
Average Monthly Indirect Costs $20,006 $7,432 $5,739 $33,177
Cost Per Gallon Sold $0.0585 $0.0585 $0.0585

Direct Indirect Profit

Price Cost Cost (Loss)
Premium $1.43 $1.22 $0.0585 $0.1515
Plus $1.36 $1.20 $0.0585 $0.1015
Regular $1.23 $1.18 $0.0585 ($0.0085)

Issues in Accounting Education, November 2005

BuyGasCo Corporation: The Use of Alternative Costing Methods 345

chosen as the indirect cost allocation base because gasoline sales drive this business. It is
contended that the monthly indirect costs vary in direct proportion to the number of gallons
of gasoline sold per month. The indirect costs do not change depending on the grade of
gasoline sold; therefore, each grade is charged the same indirect cost per gallon. When the
indirect costs are added to the direct costs, it becomes apparent that the selling price of
BuyGasCo Corporation’s regular gasoline sold in the state of Florida is below the average
monthly total cost per gallon.
Ms. Barrier (AAG): Thank you, Mr. Donohoe. That is all of the questions that I have for
this witness, your honor.
Judge Davies: Cross-examine? (Looking at Mr. Brown.)
Mr. Brown (Defense Attorney): No, your honor, but we will call a rebuttal expert witness
to contest the testimony of the plaintiff’s expert witness.
Judge Davies: Very well, Mr. Donohoe, you may step down. Ms. Barrier, please call your
next witness ...
(Later)
Judge Davies: Mr. Brown, you may call your first witness.
Mr. Brown (Defense Attorney): Thank you, your honor. I would like to call the manage-
ment accounting expert witness for the defense, Mr. Faranhat, CPA. Mr. Faranhat, you were
given the same information to analyze as Mr. Donohoe to determine if BuyGasCo Corpo-
ration is involved in predatory pricing. What were your findings?
Mr. Faranhat, CPA: I respectfully disagree with Mr. Donohoe’s analysis and conclusions.
I allocated the average monthly indirect costs generated by the gasoline service center
evenly to each of the three different grades of gasoline. This can be seen in the exhibit for
the defense that you were given earlier.
Mr. Brown (Defense Attorney): I would like to enter this exhibit into evidence as the
defense Exhibit 1 (see Exhibit 4).
Judge Davies: So entered.
Mr. Faranhat, CPA: In Exhibit 1 for the defense, you can see the average monthly indirect
costs for the service center allocated to the three different grades of gasoline using the
simple average approach. The indirect costs are mainly fixed costs that would exist no
matter how many different types of gasoline are sold and do not change in response to the

EXHIBIT 4
Defense’s Exhibit 1
Calculation of Costs and Profits for BuyGasCo Corporation’s Gasoline Products
Prepared by Mr. Faranhat, CPA

Regular Plus Premium Total

Average Monthly Indirect Costs ($33,177 / 3) $11,059 $11,059 $11,059 $33,177
Average Gallons of Gas Sold Per Month 342,203 127,120 98,178 567,501
Cost Per Gallon Sold $0.0323 $0.0870 $0.1126

Direct Indirect Profit

Price Cost Cost (Loss)
Premium $1.43 $1.22 $0.1126 $0.0974
Plus $1.36 $1.20 $0.0870 $0.0730
Regular $1.23 $1.18 $0.0323 $0.0177

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346 Barton, MacArthur, and Moore

number of gallons of gasoline sold. For example, the depreciation of the gasoline dispensing
assets and the salary of the sales attendants are fixed costs. Each type of gasoline uses these
fixed resources equally, and therefore the costs should be allocated to the different types
of gasoline equally. Next, the indirect costs allocated to each grade of gasoline are divided
by the average number of gallons of gasoline sold per month. When the indirect costs per
gallon are added to the direct costs and subtracted from the prices, it becomes apparent
that BuyGasCo Corporation is not selling any of the grades of gasoline below cost.
Judge Davies: Cross-examine?
Ms. Barrier (AAG): No, your honor. We have already presented our view on this matter.
We believe that our method is more widely accepted and allocates indirect costs in a more
accurate way.
Judge Davies: Very well, Mr. Faranhat, you may step down. Mr. Brown, please call your
next witness.
(After considering the evidence, the following ruling was issued.)
Judge Davies: After reviewing all of this information, my preliminary ruling is that the
plaintiff’s analysis is accepted, and the defendant’s is rejected. The plaintiff’s analysis and
reasoning seem to more accurately determine the gasoline costs. Therefore, I issue an
injunction prohibiting BuyGasCo Corporation from selling regular gasoline at a price below
the cost calculated using the approach used in the accepted analysis.

MEETING OF BUYGASCO EXECUTIVES TO DISCUSS THE PROBLEMS

WITHIN THE CURRENT COSTING SYSTEM AND THE HEARING RESULT
The day after the hearing, the Chief Executive Officer (CEO) of BuyGasCo Corpora-
tion, Bill Hudson, called a meeting with the other executive officers to discuss the apparent
inaccuracy of the current cost system and the result of the hearing. The other executives
of BuyGasCo include: Ashley Green, Chief Financial Officer (CFO); Tiffany Mills, Chief
Operating Officer (COO); Steven Leddy, Vice President of Marketing (VPM); and Patrick
Cooke, Southeast Regional Manager (RM-SE), the most senior regional manager chosen to
represent all the regional managers.

Bill Hudson (CEO): As you all know, we experienced a severe setback yesterday in court.
The judge issued an injunction not allowing us to sell our high-volume gasoline product,
regular gasoline, using our normal pricing. This result will have a considerable negative
effect on our business in several ways.
Ashley Green (CFO): I agree. Using the product costing approach used by the prosecutors,
we will have to raise the price charged for regular gasoline. Naturally, increasing our
gasoline prices will reduce the demand for our regular gasoline and reduce our profits.
Steven Leddy (VPM): I can’t believe the judge’s ruling! How are we supposed to raise
our prices in such a competitive industry and still maintain our competitive advantage?
Most of our customers base their gasoline buying decisions on price. We have built brand
loyalty due to our strategy of being a low-price distributor of gasoline. This is going to
devastate our marketing efforts unless we cut our costs in some way to maintain our regular
gasoline prices!
Tiffany Mills (COO): Personally, I do not see where we could possibly cut more costs at
our gasoline service stations, unless we use candlelight instead of electricity in our stores!
Patrick Cooke (RM-SE): That’s a great idea, fire at a gas station!

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BuyGasCo Corporation: The Use of Alternative Costing Methods 347

Tiffany Mills (COO): I still do not understand how two alternative costing systems can
produce such different results. I do not think we should give up without a fight. Is there
any way to find new evidence that will support our position and enable us to successfully
appeal the case?
Ashley Green (CFO): In the accounting journals I receive, I have been reading about a
problem that many companies experience called product-cost cross-subsidization. I have
never considered it possible before that we could experience the same problem, as most of
the articles deal with manufacturing companies, but I am beginning to wonder now if this
might be the cause of our current legal dilemma. As I understand it, product-cost cross-
subsidization occurs when products are over- or undercosted. This problem is often attrib-
utable to the fact that indirect costs are not allocated appropriately to the products and
services that benefit from them. Further, this problem usually entails an undercosting of
low-volume products and an overcosting of high-volume products. Certainly, regular gas-
oline is our high-volume product, so I suspect a connection. In essence, products produced
in small quantities are assigned less than their fair share of indirect costs, and products
produced in large quantities are assigned more than their fair share of indirect costs. This
misallocation results in high-volume products subsidizing low-volume products. Product-
cost cross-subsidization often occurs in organizations using traditional volume-based cost-
ing systems, which seems to be the type of system used by the plaintiff’s expert witness.
Ever since we were alerted about these allegations, I have been researching different cost
systems. One such system I have read about that seems to correct product-cost cross-
subsidization for many types of companies is called Activity-Based Costing, or ABC for
short.
Steven Leddy (VPM): This is way outside my expertise. Do you mind explaining what
ABC is and how it works?
Patrick Cooke (RM-SE): I remember reading several articles about ABC written by a
professor of accounting at the university here in town, Dr. J. T. Humboldt. He is a CPA
and CMA, too. He presented very compelling arguments in favor of using this costing
system. As I understand it, ABC assigns indirect costs on the basis of the activities a product
or service uses on its way to the customer.
Ashley Green (CFO): That is a correct summary of ABC according to my understanding,
Patrick. I was planning on presenting the idea of implementing an ABC system at this
meeting, so I created a simple exhibit to show you how it works (see Exhibit 5).
Ashley Green (CFO): I am no ABC expert, but the exhibit presents the general idea of
the costing model. This costing system was originally developed to solve the problems
firms were facing due to product-cost cross-subsidization. According to ABC, activities
drive indirect costs for a product or service. This system uses cost drivers, or factors that
cause indirect costs, to assign indirect costs. By using cost drivers, or activity drivers as
they are sometimes called, the indirect costs are more accurately assigned to the products
or services that use them. Firms that successfully implement an ABC system claim nu-
merous other advantages, such as costing non-value-added activities and information to
help with capacity management.
Bill Hudson (CEO): So this system was created in part to solve the problem of product
cost-cross-subsidization. Interesting! I am also beginning to wonder if this is the problem
we’re experiencing with the state’s costing approach. Maybe this system is a resolution to
our legal pricing problems! Ashley, please contact Dr. Humboldt and find out if he is
interested in helping us. If so, I will prepare an engagement letter to send to him. In the

Issues in Accounting Education, November 2005

348 Barton, MacArthur, and Moore

EXHIBIT 5
How ABC Works
Presented by Ashley Green, CFO

Step 1: Step 2: Step 3: Step 4:

Identify an Identify an Use the cost Identify another
activity and its appropriate cost driver to assign activity and repeat
costs. driver for the the activity cost to steps 1–3 until all
activity. the individual indirect costs
products/services. have been
assigned.

meantime, I would like to read some of his articles to better acquaint myself with ABC. I
think that we have made real progress at this meeting and hopefully are heading in the
right direction to solve our legal costing problems. The meeting is adjourned.

HUMBOLDT ENGAGEMENT LETTER

BuyGasCo Corporation
Engagement Letter

To: Dr. J. T. Humboldt

From: Bill Hudson, CEO
Re: Activity-Based Costing System

The purpose of this engagement letter is to secure your services to determine the effect of
an Activity-Based Costing (ABC) system on the assignment of indirect costs to the different
grades of gasoline we offer. I have read various articles written by you concerning the
implementation of ABC at other companies. I note that this system has proven to be cost-
beneficial for many firms, providing a more accurate assignment of indirect costs to prod-
ucts and services.
As Ashley Green, CFO, explained to you, the reasons behind our interest in ABC is
to determine if it is worthwhile to appeal a predatory pricing injunction handed down
against us last week. If so, this case will be appealed next month, when we must present
evidence that we are not in violation of The Florida Motor Fuel Marketing Practices Act
(FMFMPA), which is published online at http://www.flsenate.gov/Statutes/, TITLE
XXX111, Chapter 526, Part 1.
During your conversation with Ashley Green, you requested a detailed breakdown and
analysis of BuyGasCo activities associated with gasoline sales. Upon cursory consideration,
it is apparent that three primary activities are involved in selling gasoline in BuyGasCo
service stations. These activities are processing gasoline payments (labor), housing atten-
dants in a portion of the convenience store, and using gasoline-dispensing equipment.
Sales attendants are needed to collect payments for gasoline sales and to deal with any
related problems. For example, sales attendants are needed to deal with any difficulties
customers encounter processing credit card or debit card transactions at the pump. One
attendant per shift should be able to cope with gasoline sales and any related problems,

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BuyGasCo Corporation: The Use of Alternative Costing Methods 349

which is consistent with the FMFMPA.2 Each employee earns $7.50 per hour plus 16
percent for benefits. BuyGasCo service stations are open 20 hours each day, divided into
two shifts of 10 hours each, with each attendant working four days in a seven-day period.
The estimated monthly labor costs are $5,220 per month.3
The FMFMPA clearly stipulates how the nonlabor costs associated with the sale of
motor fuel are to be calculated, which are captured under the umbrella of ‘‘reasonable
rental value.’’4,5 For a typical Florida BuyGasCo gasoline service station, the reasonable
monthly rental value for motor fuel sales is calculated as $27,957, including utilities, prop-
erty taxes, insurance, and allowed environmental compliance costs. Therefore, the total
estimated monthly costs associated with motor fuel sales amount to $33,177 ($5,220
⫹ $27,957).
The average cost to construct a convenience store in Florida is $700,000 and if there
were no convenience store sales, it is estimated that it would cost 20 percent of this amount
to build a kiosk to house a gasoline sales attendant.
Also, gasoline storage and dispensing assets are necessary to support the gasoline-
selling activities. The costs of these assets were obtained from the company’s fixed-asset
master listing and are shown in Appendix A (Exhibit 6). Some of the gasoline dispensing
assets are specific to the different gasoline grades and some are common to all types of
gasoline as shown in Appendix B (Exhibit 7).
We would like you to provide us with an ABC analysis of gasoline sales to see if this
improves our costing of gasoline and supports challenging the injunction.
Thank you for your time and consideration.

DR. HUMBOLDT’S ANALYSIS

Dr. Humboldt submitted the analysis contained in Exhibits 8 through 11. Bill Hudson
convened another meeting of the senior executives to consider Dr. Humboldt’s work. The
participants liked what they saw and were convinced it presented a strong case for appealing
the injunction. As Mr. Hudson put it, ‘‘We want to keep on giving the people of Florida
the best value for their money. ABC will help us do it!’’

2
The pertinent definition from the FMFMPA is: 526.303 (4): ‘‘Direct labor cost’’ means the personnel costs
incurred at a retail outlet attributable to providing motor fuel sales at a retail outlet and includes, without
limitation, the personnel costs relating to the purchase, storage, inventory, and sale of motor fuel, the maintenance
of equipment, and environmental reporting and compliance, but does not include the costs of environmental
cleanup or remediation. In no case shall the direct labor cost be less than the cost of one employee’s salary and
benefits, based upon that employee’s working those hours in which the retail outlet is providing motor fuel
available to the public.
3
$7.5 hourly wage ⫻ 1.16 to add benefits ⫽ $8.70 per hour ⫻ 20 hours per day ⫻ 30 days per average month
⫽ $5,220 estimated labor costs per month.
4
The pertinent definition from the FMFMPA is: 526.303 (9): ‘‘Reasonable rental value’’ means the bona fide
amount of rent which would reasonably be paid in an arm’s length transaction for the use of the specific
individual retail outlet, including land and improvements, utilized for the sale of motor fuel. The value of the
land and improvements shall include the costs of equipment; signage; utilities, property taxes, and insurance, if
paid by the owner; and environmental compliance, such as testing, detection, and containment systems; but does
not include the costs of environmental cleanup and remediation. In determining the reasonable rental value of
the specific retail outlet, the rental amount of comparable retail outlets in the relevant geographic market shall
be considered. When motor fuel is sold at the retail level along with other products, the reasonable rental value
attributable to the sale of motor fuel at the retail outlet shall be allocated by the percentage of gross sales
attributable to motor fuel sales.
5
See the Florida Petroleum Marketers and Convenience Store Association, Inc., website at: http: / / www.fpma.org/
pdf / MotorFuelMarketingPracticesAct.pdf, for a straightforward example of the calculation of the reasonable
rental value assigned to motor fuel sales under the FMFMPA.

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350 Barton, MacArthur, and Moore

QUESTIONS FOR DISCUSSION

1. Why do you believe the judge chose the plaintiff’s costing approach over the
defendant’s?
2. Explain why Dr. Humboldt’s analysis included the cost of a hypothetical ‘‘kiosk.’’
3. Explain how the costs in the case behave with respect to the following cost hierarchy:
unit-level, batch-level, product-level, and organizational-level, including specific ex-
amples of each hierarchy level.
4. Explain why Dr. Humboldt’s ABC analysis yields a result between the extremes of the
other two costing approaches that had been used in the earlier court hearing.
5. To what extent do Dr. Humboldt’s calculations represent an application of ABC, based
upon your understanding of ABC? Please explain.
6. Critique the Florida statute’s use of ‘‘cost’’ in assessing whether predatory pricing of
gasoline has occurred.
7. Explain whether you think the judge should lift the injunction on BuyGasCo, following
consideration of Dr. Humboldt’s ABC analysis.

EXHIBIT 6
Appendix A
Breakdown of BuyGasCo Gasoline Dispensing Assets for a Typical
Florida Gasoline Service Station

Activity Type Resources Used Cost

Gasoline Dispensing Holding Tanks $90,330
Gasoline Dispensing Pumping Equipment $69,690
Gasoline Dispensing Plumbing $50,410
Gasoline Dispensing Piping $40,565
Gasoline Dispensing Multi-Product (M-P) Dispensers $116,520
Gasoline Dispensing BuyGasCo Sign $29,660
Gasoline Dispensing Canopy $123,480
Gasoline Dispensing Islands $87,710
Gasoline Dispensing Electrical Equipment $80,860
Gasoline Dispensing Lighting Fixtures $40,340
Total Activity Costs $729,565

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BuyGasCo Corporation: The Use of Alternative Costing Methods 351

EXHIBIT 7
Appendix B
Gasoline Dispensing Activity
Dominant Asset Characteristics

Grade
Activity Specific Common
Holding Tanks X
Pumping Equipment X
Plumbing X
Piping X
M-P Dispensers X
BuyGasCo Sign X
Canopy X
Islands X
Electrical Equip. X
Lighting Fixtures X

EXHIBIT 8
Estimated Cost of Kiosk and Gasoline Dispensing Assets Used to Assign the Reasonable
Rental Value

Description Amount Percent

Cost of Assets:
Cost of Gasoline Dispensing Facilities (Exhibit 6) $729,565 83.9%a
Cost of the Convenience Store Building $700,000
Kiosk Cost Estimate versus Existing Convenience Store 20%
Imputed Kiosk Cost ($700,000 ⫻ 20%) $140,000 16.1%b
Total Imputed Cost of Facilities without Convenience Store and Excluding $869,565 100.0%
Land ($729,565 ⫹ $140,000)

Assignment of Reasonable Rental Value:

Reasonable Rental Value including Utilities, Property Taxes, Insurance, $27,957
and allowed Environmental Compliance Costs assigned to Gasoline
Sales
Reasonable Rental Value Assigned to Activity Cost Pool 2, Kioskc $4,501 16.1%
Reasonable Rental Value Assigned to Activity Cost Pool 3, Gasoline $23,456 83.9%
Dispensingd
Total Costs $27,957 100.0%
a
Percentage of total imputed cost of assets used by Dr. Humboldt to assign the reasonable rental value
($27,957) to Activity Cost Pool 3 (see d below).
b
Percentage of total imputed cost of assets used by Dr. Humboldt to assign the reasonable rental value
($27,957) to Activity Cost Pool 2 (see c below).
c
$27,957 ⫻ 16.1% ⫽ $4,501.
d
$27,957 ⫻ 83.9% ⫽ $23,456.

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352
EXHIBIT 9
Humboldt’s ABC Method

Activity Cost Activity Regular Regular Plus Premium Premium

Pools Driver Calculation Cost Plus Calculation Cost Calculation Cost
Pool 1: Labor Gallons of $5,220 ⫻ 60.3% $3,148 $5,220 ⫻ 22.4% $1,169 $5,220 ⫻ 17.3% $903
($5,220) Gas Sold
Pool 2: Kiosk Gallons of $4,501 ⫻ 60.3% $2,714 $4,501 ⫻ 22.4% $1,008 $4,501 ⫻ 17.3% $779
($4,501) Gas Sold
Pool 3: Gasoline 1 / 3 Each $23,456 ⫻ 33.3% $7,818 $23,456 ⫻ 33.3% $7,819 $23,456 ⫻ 33.3% $7,819
Dispensing Grade
($23,456)
Total Indirect Cost $13,680 $9,996 $9,501
($33,177)

Barton, MacArthur, and Moore

Cost Per Gallon $13,680 / 342,203 ⫽ $0.0400 $9,996 / 127,120 ⫽ $0.0786 $9,501 / 98,178 ⫽ $0.0968
of Gas Sold
BuyGasCo Corporation: The Use of Alternative Costing Methods 353

EXHIBIT 10
Humboldt’s ABC Method Results

Direct Indirect Profit

Price Cost Cost (Loss)
Regular $1.23 $1.18 $0.0400 $0.0100
Plus $1.36 $1.20 $0.0786 $0.0814
Premium $1.43 $1.22 $0.0968 $0.1132

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354
EXHIBIT 11
Comparison of Profit / Loss under the Three Cost Assignment Methods
Per Gallon of Gasoline Sold
2 3 4 5 6 7 8
1 Direct Indirect Profit (Loss) Indirect Profit (Loss) Indirect Profit (Loss)
Price Cost Cost [1 ⴚ (2 ⴙ 3)] Cost [1 ⴚ (2 ⴙ 5)] Cost [1 ⴚ (2 ⴙ 7)]

Assignment Method
Per Gallon of Simple Averages Unit-Based (Gallons) Humboldt’s ABC
Gasoline Sold
Regular $1.2300 $1.1800 $0.0323 $0.0177 $0.0585 ($0.0085) $0.0400 $0.0100
Plus $1.3600 $1.2000 $0.0870 $0.0730 $0.0585 $0.1015 $0.0786 $0.0814
Premium $1.4300 $1.2200 $0.1126 $0.0974 $0.0585 $0.1515 $0.0968 $0.1132

Barton, MacArthur, and Moore

BuyGasCo Corporation: The Use of Alternative Costing Methods 355

CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE

Learning Objectives
There are five primary learning objectives of the case. After completing the case, stu-
dents should be able to:
1. Understand how alternative costing methods can critically impact the outcome of a
predatory pricing legal case. (Linked questions: 1 and 7)
2. Understand the practical constraints on costing models, such as limited data available
on a timely basis, statutory restrictions, and a judge’s costing expertise. (Linked ques-
tions: 1, 2, 5, and 6)
3. Identify the cost hierarchy in a real-world organization. (Linked question: 3)
4. Critique various costing models. (Linked questions: 1, 4, 5, and 7)
5. Critique a statutory definition of ‘‘cost.’’ (Linked question: 6)

Implementation Guidance
This instructional case is designed so that it can be used in an introductory management
accounting course at the undergraduate or M.B.A. level. The case setting of retail motor
fuel (gasoline) service centers has the major advantage of being a familiar one to most
students because they own/have owned automobiles. Typically, students can envision the
typical activities involved with retailing gasoline and convenience store items as they con-
sider the case questions. There is also widespread interest in court cases in general, as
evidenced by extensive coverage of court cases on various television shows and news
programs, which should help to arouse interest in the teaching case. Given its real-world
scenario and unique, interesting setting (a predatory pricing case), it can also be used by
accounting majors in a cost accounting course at the junior or senior level and as part of
a series of cases in a Master of Accountancy course. Of course, the level of analysis
expectations in answering the case questions differs from introductory to more advanced
management accounting courses. Additional or replacement questions may be used accord-
ing to the purpose for using the case.
The case was successfully used in undergraduate Cost Accounting, M.B.A. Manage-
ment Accounting, and Master of Accountancy Advanced Managerial Accounting Theory
classes.

Student Feedback
An anonymous survey was conducted of M.B.A. students and undergraduate cost ac-
counting students following completion of the written case analysis using the questions
about the BuyGasCo ABC case shown in the Appendix. Fifty-one M.B.A. and 28 cost
accounting students answered the questions (Table 1). Ninety-four percent of the students

TABLE 1
Analysis of Questions about the BuyGasCo ABC Case

Strongly Strongly
Question Disagree Disagree Neutral Agree Agree
1 0.00 0.00 0.06 0.62 0.32
2 0.00 0.03 0.15 0.56 0.26
3 0.00 0.05 0.14 0.62 0.19
4 0.00 0.04 0.13 0.59 0.24

Issues in Accounting Education, November 2005

356 Barton, MacArthur, and Moore

believed the case to be a good illustration of a real-world application of ABC (question 1).
Eighty-two percent found the case encouraged them to think critically about the application
of ABC (question 2). Eighty-one percent found the case interesting (question 3). Eighty-
three percent found the case to be a positive learning experience (question 4). The survey
results of the M.B.A. and cost accounting students are consistent with, on average, 87
percent of the M.B.A. students strongly agreeing or agreeing with the statements versus 83
percent of the cost accounting students.
In addition, several students provided written comments (mainly positive) in response
to question 5. The following are a representative sample of the M.B.A. students’ comments:
‘‘I really enjoyed the case. It was a great real-world example that helped with my
understanding of activity-based costing.’’
‘‘Good use of real-world examples to illustrate understanding.’’
‘‘Cool application of how Mgt Acct. can impact the interpretation of law.’’
‘‘I thought, as a real-world example, it was very helpful.’’
‘‘I wish this was assigned sooner when I was confused and learning about ABC.
This example illustrates the concept well.’’
‘‘The case made me think about factors I wouldn’t normally consider. Overall it was
beneficial.’’
‘‘Great example!’’
‘‘Great case to do [because] we can actually relate to it and understand it.’’
‘‘I enjoy practical application of the concepts from class, and this particular case
(aside from being based on a real case), is relevant to any industry with similar statutes
governing pricing. This a good fun application.’’
The following are a representative sample of the cost accounting students’ comments:
‘‘This was a good example of a real-world experience.’’
‘‘I liked the format it was presented in.’’
‘‘I liked how it tied costing methods in with the law and used accounting profes-
sionals to find answers.’’
‘‘It is interesting to see how a concept from class relates to real-life situations.’’
Some students stated that they did not like the ambiguity in some of the questions and
would like fuller explanation of the Exhibits. For example, one M.B.A. student stated:
‘‘Some of the charts and tables at the end were confusing, [and] some more detailed ex-
planations of them would be beneficial.’’ A cost accounting student made a similar com-
ment: ‘‘Needs more explanation on the cost method comparison.’’ Clarifying information
was added to some of the Exhibits. However, ambiguity is present in real-world, non-
textbook environments, and deciphering the exhibits is intended to be part of the learning
process.

APPENDIX
Questions about the BuyGasCo ABC Case
Please indicate your agreement or disagreement with the following statements by cir-
cling the number corresponding to your answer:
1. The case is a good illustration of a real-world application of activity-based costing
(ABC).
1 2 3 4 5
|----------------|----------------|----------------|----------------|
strongly disagree neutral agree strongly
disagree agree

Issues in Accounting Education, November 2005

BuyGasCo Corporation: The Use of Alternative Costing Methods 357

2. The case encouraged me to think critically about the application of ABC.

1 2 3 4 5
|----------------|----------------|----------------|----------------|
strongly disagree neutral agree strongly
disagree agree
3. I found the case interesting.
1 2 3 4 5
|----------------|----------------|----------------|----------------|
strongly disagree neutral agree strongly
disagree agree
4. The case was a positive learning experience.
1 2 3 4 5
|----------------|----------------|----------------|----------------|
strongly disagree neutral agree strongly
disagree agree
5. Any other comments?

TEACHING NOTES
Teaching Notes are available through the American Accounting Association’s new elec-
tronic publications system at http://aaahq.org/ic/browse.htm. Full members can use their
personalized usernames and passwords for entry into the system where the Teaching Notes
can be reviewed and printed.
If you are a full member of AAA and have any trouble accessing this material, please
contact the AAA headquarters office at office@aaahq.org or (941) 921-7747.

Issues in Accounting Education, November 2005