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PROBLEM 1 9 . 3 A Target Costing Meiger Mining, Inc., has just discovered two new mining sites for iron ore. Geologists and engineers have

PROBLEM 19.3A
Target Costing
Meiger Mining, Inc., has just discovered two new mining sites for iron ore. Geologists and engineers have come up with the estimates on the
following page regarding costs and ore yields if the mines are opened.
Site A
$3.80
Variable extraction costs per ton
Variable extraction costs per ton
Fixed costs over the life of the mine:
Blasting ....
Construction
Maintenance
Restoration costs
Total fixed costs
Total tons of ore that can be extracted over the life of the mine:
$150,000
225,000
25,000
40,000
$440,000
200,000
160,000
Meiger's owners currently demand a return of 20 percent of the market price of iron ore.
Instructions
a. If the current market price of iron ore is $8 per ton, what is Meiger's target cost per ton?
b. Given the $8 market price, should either of the mines be opened?
c. The engineer working on Site B believes that if a custom conveyor system is installed, the variable extraction cost could be reduced to $3 per
ton. The purchase price of the system is $25,000, but the costs to restore the site will increase to $45,000 if it installed. Given the current $8
market price, should Meiger install the conveyor and open Site B?
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