Lutukka Oy owns the rights to extract minerals from beach sands in Enare Lappmark. Lutukka has costs in three areas:

a Payment to a mining subcontractor who charges €80 per tonne of beach sand mined and returned to the beach (after being processed on the mainland to extract three minerals: ilmenite, rutile and zircon).

b Payment of a government mining and environmental tax of 50 per tonne of beach sand mined.

c Payment to a barge operator. This operator charges €150 000 per month to transport each batch of beach sand – up to 100 tonnes per batch per day – to the mainland and then return to Enare Lappmark (that is, 0 – 100 tonnes per day = €150 000 per month; 101 – 200 tonnes = €300 000 per month, and so on). Each barge operates 25 days per month. The €150 000 monthly charge must be paid even if less than 100 tonnes is transported on any day and even if Lutukka requires fewer than 25 days of barge transportation in that month.

Lutukka is currently mining 180 tonnes of beach minerals per day for 25 days per month.

Required 1 What is the variable cost per tonne of beach sand mined? What is the fixed cost to Lutukka per month?

2 Plot one graph of the variable costs and another graph of the fixed costs of Lutukka. Your plots should be similar to Exhibits2.4 and 2.5. Is the concept of relevant range applicable to your plots?

3 What is the unit cost per tonne of beach sand mined

(a) if 180 tonnes are mined each day, or

(b) if 220 tonnes are mined each day? Explain the difference in the unit-cost figures.

Exhibit 2.4

Exhibit 2.5

Transcribed Image Text:

Panel A: Steering wheel costs at 600 per car assembled 200000 Panel B: Sales commissions at 5% of sales 400 Total steering wheel costs () 150000 100000 50000 1000 2000 3000 4000 Units produced Total sales commissions () 300 200 100 1000 2000 3000 4000 Sales ()