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North West Coal Mining Company (NWCMC) mines coal, puts it through a one-step crushing process, and loads the bulk raw coal onto river barges for shipment to customers.

NWCMCs 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, John Snow, a mining engineer, is asked to explore outside contracting arrangements for the cleaning and sizing process. John 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

John 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 NWCMC 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:

Prepare an analysis to show whether it is more profitable for NWCMC to continue selling raw bulk coal or to process it further through sizing and cleaning. (Ignore coal fines in your analysis.) (24 marks)

How would your analysis be affected if the cost of producing raw coal could be held down to $20 per tonne? (6 marks)

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