Question

Yahoo Gold Mining Company (YGMC) mines coal, puts it through a one-step crushing process, and loads the bulk raw coal onto river barges for shipment to customers.
YGMC’s management is currently evaluating the possibility of further processing the raw coal by sizing and cleaning it and selling it to an expanded set of customers at higher prices. The option of building a new sizing and cleaning plant is ruled out as being financially infeasible. Instead, Darrell Cornwall, a mining engineer, is asked to explore outside contracting arrangements for the cleaning and sizing process.

Darrell puts together the following summary:
Selling price of raw coal = $27 per tonne
Cost of producing raw coal = $22 per tonne
Selling price of sized and cleaned coal = $36 per tonne
Annual raw coal output = 10,000,000 tonnes
Percentage of material weight loss in sizing/cleaning coal = 6%

Incremental Costs of Sizing and Cleaning Processes
Direct labour = $800,000 per year
Supervisory personnel = 200,000 per year
Heavy equipment: rental, operating, maintenance costs = 25,000 per month
Contract sizing and cleaning = 3.50 per tonne of raw coal
Outbound rail freight = 240 per 60-tonne rail car

Darrell also learns that 75% of the material loss that occurs in the cleaning and sizing process can be salvaged as coal fines, which can be sold to steel manufacturers for their furnaces. The sale of coal fines is erratic and YGMC may need to stockpile it in a protected area for up to one year. The selling price of coal fines ranges from $15 to $24 per tonne and costs of preparing coal fines for sale range from $2 to $4 per tonne.

Required
1) Prepare an analysis to show whether it is more profitable for YGMC to continue selling raw bulk coal or to process it further through sizing and cleaning. (Ignore coal fines in your analysis.)
2) How would your analysis be affected if the cost of producing raw coal could be held down to $20 per tonne?
3) Now consider the potential value of the coal fines and prepare an addendum that shows how their value affects the results of your analysis prepared in requirement 1.

Answer 1

1
	Raw Coal	Processed Coal
QTY	10000000	9400000
Selling Price	27	36
Cost of Production	22	22
Total Sales	270000000	338400000
Total Cost of Production	220000000	220000000	Cost is same as coal processed will be same.
Direct Labour		800000
Suprvisor		200000
Rent and Maintenance		300000
Sizing and cleaning		35000000	Qty considered is 10000000
Rail Freight		40000000	Qty considered is 10000000
	50000000	42100000
YGMC will benefit by continuting to sale raw coal.
2
Cost of Production	20	20
Total Sales	270000000	338400000
Total Cost of Production	200000000	200000000
Direct Labour		800000
Supervisor		200000
Rent and Maintenance		300000
Sizing and cleaning		35000000
Rail Freight		40000000
	7,00,00,000	6,21,00,000
YGMC will benefit by continuing to sale raw coal.
3
Qty	450000	=600000*75%
Sale PRICE	15	24	15	24
Cost	2	2	4	4
Profit	13	22	11	20
Total Gain	5850000	9900000	4950000	9000000
Processed Coal Gain	42100000	42100000	42100000	42100000
Total Profit	47950000	52000000	47050000	51100000
Raw Coal Sale Profit	50000000	50000000	50000000	50000000
(Loss)/Gain	-2050000	2000000	-2950000	1100000
Analysis - If price is 24 then only It will be benefitial for YGMC to go for futher processing of raw coal.