Eurasifrac, a multi-national company of diverse interests, was reviewing a number of its activities in order to determine possible courses of action.

(1) The company owned a coal mine where increased geological difficulties had resulted in the full cost per ton of coal mined rising from £70 to

£90 in the last year. The current market price of coal was £80 per ton, and was likely to remain at that level in the forseeable future. The normal level of output was 10 000 tons per annum. A director has argued that the mine should be closed, so that the company’s profits would increase. All of the employees should be made redundant.

(2) A factory owned by the company was located in a rural environment close to a small town. The local community had complained that poisonous effluent was being discharged in a river passing through the town. Scientific tests had shown that fish were being killed, and that seepage of poison had occurred into agricultural and residential land adjacent to the river.

The fixed costs include £3M of the parent company costs allocated to the factory annually.
The local community had requested that the pollution be stopped, but the company replied that the factory was not very profitable. In order to eliminate the poisonous effects a capital outlay on new plant of £4M over three years would be required.
Over the past two years the company had stockpiled a very scarce material known as Igoxi, which it used in a high-technology process.
The material had cost £6.50 per lb and all of the stock-pile of 10 tons had been purchased at this price. The material was not used in normal production, but only on special contract orders.
(3 In the last three months world demand had increased the market price of Igoxi to £10 per Ib.
Required:
Prepare a report advising the company as follows:

(a) Whether the company should proceed to close the coal mine. (8 marks)

(b) Whether the company can justify continuing to operate the factory and allow the river to remain polluted. (10 marks)
(¢) What should be the basis of valuing the stock of Igoxi:
(i) for balance sheet purposes.
(ii) for production purposes.

Transcribed Image Text:

Summarised Revenue Statement of the Factory for the last three years Year I Year II Year III M M M Sales 10.0 12.0 15.0 less Variable costs 5.0 6.7 9.1 Fixed costs 4.0 4.1 4.1 Profit 1.0 1.2 1.8