Question

You are the lucky inheritor of your great uncle’s mines which is located in the mineral rich mountains of Lulity and produces raw mineral extract called LLT, which is processed into three types of minerals called Lu, Li and Ty. The following scenario pertains to this mine:

The mine has been in your family for the last decade, and was managed by your great uncle profitably in that time. For the last year, your great uncle has been ill, and so the mine had been subcontracted to a firm that charges $40 per ton of LLT mineral extracted. This LLT mineral extract is taken to the factory and processed to give three minerals, Lu, Li and Ty. The local government also charges an environmental tax of $13 per ton of LLT extracted. To transport the LLT from the mountain to the factory, a contract transport company is paid $1,500 per month to transport up to 100 tons per batch per day. Hence for 0 to 100 tons, the charge is $1,500 per month, for 101-200 tons, the charge is $3,000 per month and so on.

Of the three processed minerals, Lu and Li have high sales value as compared to total sales value of all products, while Ty has a low sales value as compared to total sales value of all products, even though it is extracted in the greatest quantity.

i. After you take over the mine, you find that this month, 180 tons of LLT are extracted for 25 days of the month. What are the variable costs, fixed costs and total costs incurred in this month? Show workings. [5]

ii. With relation to the above scenario, explain the concept of relevant range. You may make use of a graph to explain your point. [4]

iii. If market based data is used to allocate joint costs for Lu and Li, which methods would be appropriate. Explain any one method.

Answer 1

> Kindly find answer to Question i,

4,500 Tons 1 Total Extraction of LLT during the month 180 Tons X 25 Days 2 Variable Cost $ 202,500 2a Subcontractor charges 4500 Tons X $45 per Ton in 58,500 2b Environmental Tax 4500 Tons X $13 per Ton ANS-ia Total Variable Cost $ 261,000 $ 3,000 3 Fixed Cost Transportation Cost 0-100 Tons - $1500 Per Month 101 - 200 Tons - $3000 Per Month Here, Extraction is 180 tons per day. So, Cost would be $3000 Per Month ANS - ib Total Fixed Cost $ 3,000 ANS-ia ANS-ib ANS-ic 4 Total Cost Total Variable Cost Total Fixed Cost Total Cost $ $ 261,000 3,000 264,000

> Answer to Question ii,

The concept of Relative range is cost need to be incurred if we extract certain tons of LTT. Like if we will extracat and trasport any number between 0-100 Tons, Fixed cost would be $1500. But if we will trasport more than 100 Tons i.e. 101-200 tons, Fixed cost will increse by $1500 and would be $3000.
Here, at any point of extraction Variable cost per unit would be same.

> Answer to Question iii,
If we need to allocate Joint cost between Lu and Li based on Market Data, we will use Sales Value of each category as a base to allocate Joint cost. The reason is , both the minerals are having higher sales value and so, it would be appropriate to use that base.