BHP Billiton is the world\'s largest mining firm. BHP expects to produce 2.00 bi
ID: 1172234 • Letter: B
Question
BHP Billiton is the world's largest mining firm. BHP expects to produce 2.00 bilion pounds of copper next year, with a production cost of $0.90 per pound. a. What will be BHP's operating profit from copper next year if the price of copper is $1.00, $1.25, or $1.50 per pound, and the firm plans to sell all of its copper next year at the going price? b. What will be BHP's operating profit from copper next year if the firm enters into a contract to supply copper to end users at an average price of $1.20 per pound? c. What will be BHP's operating profit from copper next year if copper prices are described as in part (a), and the firm enters into supply contracts as in part (b) for only 50% of its total output? d. For each of the situations below, indicate which of the strategies (a), (b), or (c) might be optimal. a. What will be BHP's operating profit from copper next year if the price of copper is $1.00, $1.25, or $1.50 per pound, and the firm plans to sell all of its copper next year at the going price? The operating profits will be as follows: 1.001.25 1. Price (Slb) Operating profit (S billion) (Round to two decimal places.)Explanation / Answer
(a)
Total output = 2 billion pounds
Cost of production = $0.90 per pound
(b)
Sale price of copper = $1.20 per pound
Cost of production = $ 0.90 per pound
Profit per pound = 1.20 - 0.90
= $ 0.30 per pound
Total production = 2 Billion pounds
Hence total operating profits = 0.30 x 2
= $ 0.60 Billion
(c)
In this case, half of the total output of 2 Billion pounds, is sold directly to the end users at $1.20 per pound.
Operating profits earned by selling the output to end users = 0.30 x 1
= $ 0.30 Billion
Operating profits to be earned by selling the half output in the market
Hence, total operating profits in this situation will be as under:
(d)
Optimal strategy is the strategy where total operating profits are maximum. Overall comparison of the 3 strategies shows that strategy (a) is the best since operating profits are highest in this strategy except when the selling price is $1/pound.
Price per pound ($) Cost per pound ($) profit per pound ($) Total operating profits($ Billion) 1 0.90 0.10 0.20 1.25 0.90 0.35 0.70 1.50 0.90 0.60 1.20Related Questions
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