Newcastle Mining Company (NMC) mines coal, puts it through a one-step crushing process, and loads the bulk raw coal onto river barges for shipment to customers.
NMC€™s management is currently evaluating the possibility of further processing the raw coal by sizing and cleaning it and selling it to an expanded set of customers at higher prices. The option of building a new sizing and cleaning plant is ruled out as being financially infeasible. Instead, Amy Kimbell, a mining engineer, is asked to explore outside contracting arrangements for the cleaning and sizing process. Kimbell puts together the following summary:

Kimbell also learns that 75% of the material loss that occurs in the cleaning and sizing process can be salvaged as coal fines, which can be sold to steel manufacturers for their fur-naces. The sale of coal fines is erratic and NMC may need to stockpile it in a protected area for up to one year. The selling price of coal fines ranges from $15 to $24 per tonne and costs of preparing coal fines for sale range from $2 to $4 per tonne.
REQUIRED
1. Prepare an analysis to show whether it is more profitable for NMC to continue selling raw bulk coal or to process it further through sizing and cleaning. (Ignore coal fines in your analysis.)
2. How would your analysis be affected if the cost of producing raw coal could be held down to $20 per tonne?
3. Now consider the potential value of the coal fines and prepare an addendum that shows how their value affects the results of your analysis prepared in requirement 1.

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Selling price of raw coal Cost of producing raw coal Selling price of sized and cleaned coal Annual raw coal output Percentage of material weight loss in S27 S22 S36 10,000,000 per tonne per tonne per tonne tonnes izing/cleaning coal 6% Incremental Costs of Sizing and Cleaning Processes Direct labour Supervisory personnel Heavy equipment: rental, operating, $800,000 S200,000 per year per year 25,000 $ 3.50 per month per tonne of maintenance costs Contract sizing and cleaning raw coal Outbound rail freight $ 240 per 60-tonne rail car