Reference no: EM132860955

Question - BHP is granted the rights to extract minerals from beach sands on Billiton Island. BHP has costs in three areas:

a. Payment to a mining subcontractor who charges $150 per ton of beach sand mined and returned to the beach (after being processed on the mainland to extract three minerals: lithium, cadmium, and palladium).

b. Payment of a government mining and environmental tax of $80 per ton of beach sand mined.

c. Payment to a barge operator. This operator charges $150,000 per month to transport each batch of beach sand-up to 150 tons per batch per day-to the mainland and then return to Billiton Island? (that is, 0 to 150 tons per day = $150,000 per month; 151 to 300 tons per day = $300,000 per month, and so on.)

Each barge operates 25 days per month. The $150,000 monthly charge must be paid even if fewer than 150 tons are transported on any day and even if BHP requires fewer than 25 days of barge transportation in that month.

BHP currently mining 280 tons of beach sands per day for 25 days per month.

(a) What is the variable cost per ton of beach sand? mined What is the fixed cost to BHP per month?

(b) What is the total cost on average per ton of beach sand mined

(1) if 280 tons are mined each day and

(2) if 320 tons are mined each day (151 to 300 tons per day = $300,000 per month, and so on. (Assume 300,00)

(c) Explain why the unit-cost figures for (b)(2) are different from those in (b)(1).

(d) Suppose BHP is mining 240 tons/day. It wants to reduce its unit-costs as much as possible. To do so, BHP is willing to change its production levels, but would like to maintain them as close as possible to the current level of 240 tons/day. Based only on the information currently given in the question and without making any further assumptions, please suggest two different production levels at which BHP can reduce unit costs to their lowest possible amount.