(Process further or sell, byproduct. (CMA adapted) Newcastle Mining Company (NMC)

I produces and sells bulk raw coal to other coal companies and exporters. NMC mines and stockpiles the coal; it is then passed through a one-step crushing processjyefore being loaded onto river barges for shipment to customers.'1 he annua1 output of ten milliopJtQilnes, which is expected to remain stable, has arvaverage cost of $74 per tonnewith an average selling price j o{$3ZT^pertomel^3 Management is currently evaluating the possibility offurther processing the coal by siz¬

ing and cleaning it in order to expand markets and enhance product revenues. Management has rejected the possibility of constructing a large sizing and cleaning plant because it would require a significant long-term capital investment.

Bill Rolland, controller of NMC, has asked Amy Kimbell, mining engineer, to develop cost and revenue projections for further processing the coal through a variety of contractual arrangements. After extensive discussions with vendors and contractors, Kimbell has prepared the following projections ofincremental costs ofsizing and cleaning NMC’s annual output.

Newcastle Mining Company Sizing and Cleaning Processes Incremental Costs Direct labour $720,000 per year Supervisory personnel 120,000 per year Heavy equipment rental, operating, and maintenance costs 30,000 per month Contract sizing and cleaning 4.20 per tonne Outbound rail freight (per 60-tonne rail car) 288 per car In addition to the preceding cost information, market samples obtained by Kimbell have shown that electrical utilities enter into contracts for sized and cleaned coal similar to that mined by Newcastle at an expected average price of $43.20 per tonne.

Kimbell has learned that 5 % of the raw bulk output that enters the sizing and cleaning process will be lost as a primary product. Normally, 75% ofthis product loss can be salvaged as coal fines. These are small pieces ranging from dust-like particles up to pieces five centimetres in diameter. Coal fines are too small for use by electrical utilities but are frequently sold to steel manufacturers for use in blast furnaces.

Unfortunately, the price for coal fines frequently fluctuates between $16.80 and $28.80 per tonne (F.O.B. shipping point), and the timing ofmarket volume is erratic. Although com¬

panies generally sell all their coal fines during a year, it is not unusual to stockpile this product for several months before making any significant sales.

Required 1. Prepare an analysis to show whether it would be more profitable for Newcastle Mining Company to continue to sell the raw bulk coal or to process it further through sizing and CHAPTER 15 cleaning. (Note: Ignore any value related to the coal fines in your analysis.)

2.

a. Taking into consideration any potential value to the coal fines, prepare an analysis to show ifthe coal fines would affect the results ofyour analysis prepared in requirement 1.

b. What other factors should be considered in evaluating a sell-or-process-further decision?