Question

BHP Billiton is the world's largest mining firm. BHP expects to produce 2.25 billion pounds of copper next year, with a production cost of $0.95 per pound. a. What will be BHP's operating profit from copper next year if the price of copper is $1.30, $1.65, or $2.00 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 $1.60 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.

Answer 1

Answer :

a.

Price	1.30	1.65	2.00
Operating Profit ( Price - 0.95 ) * 2.25 billion	0.7875 billion	1.575 billion	2.3625 billion

b. If price is 1.60, then

Operating profit = ( 1.60 - 0.95 ) * 2.25 ==> 1.4625 billion

c. Operating profit for ( 2.25/2 = 1.125 billion)

In case of (a)

Price	1.30	1.65	2.00
Operating Profit ( Price - 0.95 ) * 1.125 billion	0.39375 billion	0.7875 billion	1.18125 billion

d. Situations are not mentioned, ( if you have the situations then comment down)

If copper price is low next year, then situation (a) is preferable.