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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

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
Sonimads 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 3.50 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?

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