Oro Mining , Inc., has just discovered 2 new mining sites for copper. Geologists
ID: 2448421 • Letter: O
Question
Oro Mining , Inc., has just discovered 2 new mining sites for copper. Geologists and engineers have come up with the following estimates regarding the costs and copper yeilds if the mines are opened:
Total tons of copper that can be extracted over the life time of the mine
Oro's owners currently demand a return of 18% of the market price of copper.
Instructions:
a. If the current market price of copper is $10 per ton, what is Oro's target cost per ton?
b. Given the $10 market price, should either of the mines be opened? and why?
c. The engineer working on site Z believes that if a customer convey system is installed, the variable extraction cost could be reduced to $3.50 per ton. The purchase price of the system is $20,000, but the costs to restore the site will increase to $30,000 if it is installed. Given the current $10 market price, should Oro install th conveyor and open site Z?
Site A Site Z Variable extraction costs per ton $4.20 $4.50 Fixed costs over the life of the mine: Blasting $160,000 $200,000 Construction $240,000 $260,000 Maintenance $30,000 $30,000 Restoration costs $50,000 $10,000 Total fixed costs $480,000 $500,000Total tons of copper that can be extracted over the life time of the mine
$240,000 $200,000Explanation / Answer
Answer :
a) the target cost per ton of copper = Price per ton of copper - target return
= 10 - (10*0.18)
= 10- 1.8
= 8.2
b) Return from Mine A = expected revenue - variable cost - fixed costs
= 240000(10-4.2) - 480000
= 912000
percentage return = 912000/240000
=3.8
Return from Mine Z = 200000(10-4.5) - 500000
=600000
per ton return from mine Z =600000/200000
=3
Since the return per tonn is higher than required in case of both mines thus both can be opened but Mine A has higher return.
Answer c) Revised fixed cost for mine Z
= 500000+20000+20000
= 540000
Return from site Z = 200000(10-3.5) - 540000
= 1300000-540000
=760000
return per ton = 760000/200000
= 3.8
Now the return of site Z is equal to site A and both of them can be opened
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