Question
Problem #1 BHP Billiton, owner of several iron ore mines in Australia, has discovered two new mining sites for iron ore. They have hired a
Problem #1
BHP Billiton, owner of several iron ore mines in Australia, has discovered two new mining sites for iron ore. They have hired a local geologist and an engineering firm to estimate costs and ore yields for these two sites if they are opened.
| Site A | Site B |
Variable extraction costs per ton | $3.50 | $4.10 |
Fixed costs over the life of the mine: | ||
Blasting | $160,000 | $195,000 |
Construction | $200,000 | $235,000 |
Maintenance | $30,000 | $25,000 |
Restoration costs | $45,000 | $40,000 |
Total Fixed costs | $435,000 | $495,000 |
Total tons of ore that can be extracted over the life of the mine: | 210,000 | 150,000 |
BHP Billiton demands a return of 20% of the market price of iron ore.
Instructions:
- If the current market price of iron ore is $9 per ton, what is BHPs target cost per ton?
- Given the $9 market price, should either of the mines be opened?
- The engineer working on Site B believes that if a custom conveyor system is installed, the variable extraction cost could be reduced to $3.25 per ton. The purchase price of the system is $30,000, but the costs to restore the site will increase to $45,000 if it is installed. Given the current $9 market price, should BHP install the conveyor and open Site B?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started