Sonimad Mining Company produces and sells bulk raw coal to other coal companies.

Sonimad mines and stockpiles the coal; it is then passed through a one$-$step crushing

process before being loaded onto river barges for shipment to customers. The annual

output of $10$ million tons, which is expected to remain stable, has an average cost of $$20$

per ton with an average selling price of $$27$ per ton.

Management is evaluating the possibility of further processing the coal by sizing and

cleaning to expand markets and enhance product revenue. Management has rejected the

possibility of constructing a sizing and cleaning plant, which would require a significant

long$-$term capital investment.

Bill Rolland, controller of Sonimad, has asked Amy Kimbell, mining engineer, to develop

cost and revenue projections for further processing the coal through a variety of

contractual arrangements. After extensive discussions with vendors the contractors,

Kimbell has prepared the following projections of incremental costs of sizing and cleaning

Sonimad$$s annual output:

Direct Labor $($employee leasing$)$ $$600,000$ per year

Supervisory personnel $($ employee leasing$)100,000$ per year

Heavy equipment rental, operating, and maintenance costs $25,000$ per month

Contract sizing and cleaning $3\mathrm{.}50$ per ton

Outbound rail freight $($per $60-$ton rail car$)240$ per car

In addition to the preceding cost information, market samples obtained by Kimbell have

shown that electrical utilities enter into contracts for sized and cleaned coal similar to that

mined by Sonimad at an expected average price of $$36$ per ton.

Kimbell has learned that $5\%$ of the raw bulk output, that enters the sizing and cleaning

process will be lost as a primary product. Normally, $75\%$ of this product loss can be salvaged

as coal fines. These are small pieces ranging from dust$-$like particles up to pieces $2$ inches

in diameter. Coal fines are too small for use by electrical utilities but are frequently sold to

steel manufactures for use in blast furnaces.

Unfortunately, the price for coal fines frequently fluctuates between $$14$ and $$24$ per ton

$($ FOB shipping point$),$ and the timing of market volume is erratic. While companies

generally sell all their coal fines during a year, it is not unusual to stockpile this product for

several months before making any sales.

Questions:

$1.$ Prepare an analysis to show whether it would be more profitable for Sonimad

Mining Company to continue to sell the raw bulk coal or to process it further

through sizing and cleaning. $($Note: Ignore any value related to the coal fines in your

analysis.$)$

$2.$ a$.$ Taking into consideration any potential value to the coal fines, prepare an analysis

to show if the fines would affect the results of your analysis prepared in Question

$1.$

b$.$ What other factors should be considered in evaluating a sell$-$or$-$process$-$further

decision?