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 efcient. 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 metallurgical) and each operation (extraction and cleaning) at the King Mine. Then you are to compare die costs with other operations of the utility and with industry averages. These costs will be the starting points for specifying annual improvements in productivity and cost effectiveness. A component of this study will be to devise a transfer price between the extraction and cleaning plant, it that would motivate cost effectiveness. When he assigned the project, the controller 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 steel mill. The fmancial 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 coats and two opera. tions. Subsequently, you arrange appointments with managers and other employees who are knowledgeable concerning the content and drivers for each expense line item. Employees are transported by company bus from mo towns where they live to the mine site. The last 2? kilometres into the mine is a companymaintained road. You nd that the annual contract for thermal coal is 45D,ll{i tonnes, and li 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 INE MINE DMSIEIN ne-rating Stet-eat For the Tear Ending December 31 [in thousands of dollars] REVENUE Thermal coal Metallurgical coal EXPENSES attraction wages and benefits Plant wages and benets Dietel fuel, gasoline Amortization, pit trucks. equipment\" Amortization, buses" Amortization. plant equipment" Amortization. depletion costs Management salaries art-cl benefits Administration Facilities. utilities and taxes Marketing department Net income before income taxes " Amortieathm is based on the physical exhaustion of the asset. The metallurgical coal generates revenue at the rate of H8 per tonne. The thermal coal does not generate revenue, because it is shipped to a thermal plant owned by die provincial government. To estimate a transfer price, you asked the general manager of the thermal plant what would be the landed cost of thermal coal on a long-term con- tract. She estimated the cost to be 5T1 per tonne {delivered} for comparable 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 produce mama tonnes per year. Excavation equipment and trucks remove the overburden. The pits differ by coal 131m and for efficiency,i 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-r attributable to the extraction of the coal. These costs are the same per tonne for both thermal and metallurgical coal. Shrinkage in the cleaning plant through the elimination of impurities reduces 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] percent of all cleaning costs are attributable to thermal coal, and 3|) percent to metallurgical coal. es for diesel fuel and gasoline expenses. you estimate that $3,5[llt] was for extraction, $15ll,lltl was for the loaders in the plant, and Slllil was for the buses. case 24: mo comrltll There are nine buses scheduled to drive back and forth bebween me two towns and the mine site where all employees report for work; 500,000 kilometres were dti'ren last year. Employees take the has 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 awarding 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 0]] 100% About $600,030 of the administration expense item is attrihutable to buses. Square feet occupied is the cost driver for facilities, utilities, and municipal taxes. You caicu-- 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. Recruited Complete your assignment using the case approach