You are a market analyst for a coal mining company. Management would like to increase output from one of your mines and to do so the sales department has targeted a coal-fired power plant as a potential customer for the additional coal. The plant is currently burning coal from one of your competitors mines which is located 650 rail miles away from the power station and has a heating value of 10,500 btu/lb. Your mines coal is somewhat lower quality (9,700 btu/lb) and would have to be transported by rail over an 837 mile distance. Through your market research you have determined the competitor mine has a marginal production cost of $30.00/ton, and the rail cost for both coals would be 2.7 cents (or 27 mils). Your mine staff has estimated the C2 production cost for the increased output at $22.50/ton.

1) What is the FOB mine price you would tell the salespeople to use as a competitive benchmark for determining what price your company could offer to the Utility as an alternative fuel supply?

2) All other strategic and business issues being equal, would it make economic sense for your firm to attempt this sale?

Disregard any quality differences between the two coals other than heat content, such as sulfur and ash content, and ignore any loading/discharge or other handling cost which might possibly be involved.