15-24 PROCESS FURTHER OR SELL, BYPRODUCT. 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.

NMCs 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:

Selling price of raw coal $29 per tonne

Cost of producing raw coal $22 per tonne

Selling price of sized and cleaned coal $36 per tonne

Annual raw coal output 10,000,000 tonnes

Percentage of material weight loss in sizing/cleaning coal 6%

Incremental Costs of Sizing and Cleaning Processes

Direct labour $800,000 per year

Supervisory personnel 200,000 per year

Heavy equipment: rental, operating, maintenance costs 25,000 per month

Contract sizing and cleaning 3.50 per tonne of raw coal

Outbound rail freight 240 per 60-tonne rail car

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 furnaces. 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

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.)

How would your analysis be affected if the cost of producing raw coal could be held down to $20 per tonne?

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.