Meiger Mining, Inc., has just discovered two new mining sites for iron ore. Geologists and engineers have come up with the estimates on the following page regarding costs and ore yields if the mines are opened. Variable extraction costs per ton Fixed costs over the life of the mine: Blasting Construction Maintenance Restoration costs Total fixed costs Total tons of ore that can be extracted over the life of the mine: $ Site A 3.80 $150,000 225,000 25,000 40,000 $440,000 200,000 Site B $ 4.00 $185,000 240,000 20,000 35,000 $480,000 160,000 Meiger's owners currently demand a return of 20 percent of the market price of iron ore. Required: a. If the current market price of iron ore is $8.5 per ton, what is Meiger's target cost per ton? b-1. Given the $8.5 market price, compute the total cost per ton for Site A and Site B if fixed overhead costs are assigned to products on the basis of estimated tons of ore that can be extracted over the life of the mine. b-2. Should either of the mines be opened? c-1. The engineer working on Site B believes that if a custom conveyor system is installed, the variable extraction cost could be reduced to $3 per ton. The purchase price of the system is $25,000, but the costs to restore the site will increase to $45,000 if it is installed. Given the current $8 market price, compute the total cost per ton for site B. c-2. Should Meiger install the conveyor and open Site B?
Meiger Mining, Inc., has just discovered two new mining sites for iron ore. Geologists and engineers have come up with the estimates on the following page regarding costs and ore yields if the mines are opened. Variable extraction costs per ton Fixed costs over the life of the mine: Blasting Construction Maintenance Restoration costs Total fixed costs Total tons of ore that can be extracted over the life of the mine: $ Site A 3.80 $150,000 225,000 25,000 40,000 $440,000 200,000 Site B $ 4.00 $185,000 240,000 20,000 35,000 $480,000 160,000 Meiger's owners currently demand a return of 20 percent of the market price of iron ore. Required: a. If the current market price of iron ore is $8.5 per ton, what is Meiger's target cost per ton? b-1. Given the $8.5 market price, compute the total cost per ton for Site A and Site B if fixed overhead costs are assigned to products on the basis of estimated tons of ore that can be extracted over the life of the mine. b-2. Should either of the mines be opened? c-1. The engineer working on Site B believes that if a custom conveyor system is installed, the variable extraction cost could be reduced to $3 per ton. The purchase price of the system is $25,000, but the costs to restore the site will increase to $45,000 if it is installed. Given the current $8 market price, compute the total cost per ton for site B. c-2. Should Meiger install the conveyor and open Site B?
Chapter14: Capital Structure Management In Practice
Section14.A: Breakeven Analysis
Problem 8P
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Transcribed Image Text:Meiger Mining, Inc., has just discovered two new mining sites for iron ore. Geologists and engineers have come
up with the estimates on the following page regarding costs and ore yields if the mines are opened.
Variable extraction costs per ton
Fixed costs over the life of the mine:
Blasting
Construction
Maintenance
Restoration costs
Total fixed costs
Total tons of ore that can be extracted over the life of the mine:
Site A
$ 3.80
$150,000
225,000
25,000
40,000
$440,000
200,000
Site B
$ 4.00
$185,000
240,000
20,000
35,000
$480,000
160,000
Meiger's owners currently demand a return of 20 percent of the market price of iron ore.
Required:
a. If the current market price of iron ore is $8.5 per ton, what is Meiger's target cost per ton?
b-1. Given the $8.5 market price, compute the total cost per ton for Site A and Site B if fixed overhead costs are
assigned to products on the basis of estimated tons of ore that can be extracted over the life of the mine.
b-2. Should either of the mines be opened?
c-1. The engineer working on Site B believes that if a custom conveyor system is installed, the variable extraction
cost could be reduced to $3 per ton. The purchase price of the system is $25,000, but the costs to restore the
site will increase to $45,000 if it is installed. Given the current $8 market price, compute the total cost per ton for
site B.
c-2. Should Meiger install the conveyor and open Site B?
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