I" -'. KING COAL! l Them are nine buses scheduled to drive back and forth between the two towns and the mine site where all employees report for work; 500,000 kilometres were driven last year. Employees take the bus about 93 percent of the time. The following table shows the breakdown of employees by department: Extraction 41% Plant 215 Management 13 Administration 15 Marketing 5 When analyzed according to where they work or how they devote their average work day, die management, administration, and marketing personnel had the following to say in aggregate: Extraction Plant Neither Total Management 45 35 20 100% Administration 45 40 15 100% Marketing III! 100% About $500,000 of the administration expense item is attributable to buses. Square feet occupied is the cost driver for facilities, utilities. and municipal taxes. You calm-- late the allocation to be 45 percent for extraction, 35 percent for plant, 10 percent for administration. 5 percent for management, and 5 percent for marketing. Required Complete your assignment using the case approach. KING MINE DIVISIIDN petang Statement For the Year Ending Deoemb-er 31 {in thousands of dollars] REVENUE Thermal coal: Metallurgical coal EXPENSES Extraction wages and benets Plant wages and benets Diesel fuel, gasoline Amortization, pit trucks. equipment" Amortization, buses" Amortization, plant equipment" Amortization. depletion costs Management salaries and benefits Administration Facilities. utilities and taxes Marketing department Net income before income taxes " Amortizatirm is based on the physieal exhaustion of the asset. The metallurgical coal generates revenue at the rate of STS per tonne. The thermal ooa] does not generate revenue, because it is shipped to a thermal plant owned by the provincial government. To estimate a transfer prioe, you asked the general manager of the thermal plant what would he the landed oost of thermal ooal on a long-term eon- traet. She estimated the cost to be 5T1 per tonne (delivered) for oomparable coal. The trafc ofcer {responsible for arranging for and monitoring transportation} explained that King ships clean coal at the cost of $6 a tonne. The mine is a series of interlinked pit mines that produoe 652,000 tonnes per year. Excavation equipment and trucks remove the overburden. The pits differ by coal type, and for efciency purposes the miners extract thermal coal for three weeks, and then metallurgical coal in the fourth. Pit mining wages and benets, amortisation for pit trucks and equipment, and depletion costs are entirely attributable to the extraction of the ooal. These costs are the same per tonne for both thermal and metallurgical coal. Shrinkage in the cleaning plant through the elimination of impurities reduoes the weight by eight percent. The expenses for the cleaning plant include plant wages and benets and amortization for plant and equipmenL The metallurgical process has addi- tional stages and, thus, a higher cost per tonne than thermal coal You estimate that it] peroent of all cleaning costs are attributable to thermal coal, and 30 percent to metallurgical ooal. As for diesel fuel and gasoline expenses. you estimate that $3,500,000 was for extraction, $150,000 was for the loaders in the plant, and $150,000 was for the buses. King Cool The provincial government's electrical utility has a coal mine in the King region that produces thermal and metallurgical coal using an integrated pit mine and cleaning plant. Separate reporting is not done for the extraction and cleaning plant or for the thermal coal and metallurgical coal- The assumption is that if the total. cost is competi- tive, then each part must be efcient. Although this may have been a reasonable approximation in the past, new mines have been opened that are more eicient. Now the utility's senior management wants to manage the cost of each part individually. The controller has assigned you to calculate the protability of the operations. The reason for your assignment is to gure out, as accurately as possible, the exact costs of each coal (thermal and metaiiurgical) and each operation (extraction and cleaning) at the King Mine. Then you are to compare the costs with other operations of the utiiity and with industry averages. These costs will be the starting points for specifying annual unprovements in producthity and cost effectiveness. A component of this study will be to devise a transfer price between the extraction and cleaning plant, if that would motivate cost eectiveness. When he assigned the project, the conn-oller conveyed the transfer price idea of a board member, but admitted he does not under- stand why it would be benecial. The controller asks that you explain transfer pricing and its possible benets in your report. The production process includes the extraction and hauling of raw coal to the cleaning plant. The cleaning plant prepares both types of coal for shipment by rail, the thermal to a thermal plant and the metallurgical to a private steei mill. The nancial performances of the extraction and cleaning operations and expenses of the ancillary support and administrative activities combine into a single operating statement. The statement is shown in Exhibit 1. You realize that to accomplish your project you will need to allocate these costs to the two types of coals and two opera~ lions. Subsequently, you arrange appointments with managers and other employees who are knowledgeabie concerning the content and drivers for each expense line item. Employees are transported by company has from two towns where they live to the mine site. The last 2? kilometres into the mine is a companyrrrlaintained road. You nd that the annual contract for thermal coal is 45D,[i[l(l tonnes, and 150,000 tonnes for metallurgical coal. For each contract, the King mine is the prime supplier, and the customers make up any shortage by alternative and more expensive secondary suppliers. The mine ships the full amount of each contract for each year. 99