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Fill in the blanks Cedars Mining Company (CMC) mines coal, puts it through a one-step crushing process, and loads the bulk raw coal onto river
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Cedars Mining Company (CMC) mines coal, puts it through a one-step crushing process, and loads the bulk raw coal onto river barges for shipment to customers. CMC'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, Sara Draper, a mining engineer, is asked to explore outside contracting arrangements for the cleaning and sizing process. Draper puts together the following summary: (Click the icon to view the summary) (Click the icon to view the additional information.) Required Requirement 1. Prepare an analysis to show whether it is more profitable for CMC to continue selling raw bulk coal or to process it further through sizing and cleaning. (Ignore coal fines in your analysis.) Begin by calculating the incremental sales revenue, and then incremental costs and the incremental gain or loss. (Do not round until the final answer for each cost calculation, then round to the nearest dollar. Use parentheses or a minus sign for losses.) Incremental sales revenues Sales revenue after further processing $ 318,780,000 257,400,000 Sales revenue from bulk raw coal Incremental sales revenue 61,380,000 Incremental costs: Direct labour Supervisory personnel Heavy equipment costs Sizing and cleaning 815,000 220,000 336,000 35,640,000 30,360,000 Outbound rail freight 67,371,000 Incremental costs $ (5,991,000) Incremental gain (loss) Selling price of raw coal Cost of producing raw coal Selling price of sized and cleaned coal Annual raw coal output $ 26 per tonne $ 18 per tonne $ 35 per tonne 9,900,000 tonnes 8 % Percentage of material weight loss in sizing/cleaning coal Direct labour Supervisory personnel Heavy equipment: rental, operating, maintenance costs Contract sizing and cleaning Outbound rail freight Incremental Costs of Sizing and Cleaning Processes $ 815,000 per year $ 220,000 per year $ 28,000 per month $ 3.60 per tonne of raw coal $ 200 per 60-tonne rail car Draper 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 CMC may need to stockpile it in a protected area for up to one year. The selling price of coal fine ranges from $13 to $26 per tonne and costs of preparing coal fines for sale range from $3 to $4 per tonne. 1. Prepare an analysis to show whether it is more profitable for CMC 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 $14 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. The analysis indicates that it would be more profitable to continue to sell bulk raw coal without further processing because there is an incremental loss. Requirement 2. How would your analysis be affected if the cost of producing raw coal could be held down to $14 per tonne? O A. The cost of producing the raw coal is relevant to the decision to process further or not. Decreasing the cost of producing raw coal will increase the incremental costs found in requirement 1. O B. The cost of producing the raw coal is relevant to the decision to process further or not. This will affect the incremental costs determined in requirement 1, but it is unknown whether it will increase or decrease the incremental costs. O C . The cost of producing the raw coal is relevant to the decision to process further or not. Decreasing the cost of producing raw coal will decrease the incremental costs found in requirement 1. CD. The cost of producing the raw coal is irrelevant to the decision to process further or not. This will not affect the analysis determined in requirement 1. Requirement 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. Begin by calculating the incremental income at both the minimum and maximum income levels. Minimum Maximum Incremental income per tonne 594,000 Tonnes 594,000 Incremental income
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