Jason Rocks
Jason Rocks is small rock quarry that produces five different sizes of stones, from small crushed stones (#1 stones) to large (three-inch) rocks (#5 stones). The stones are first mined and sorted into the five grades. Once the stones are mined and sorted, they can be sold to a local distributor either washed or unwashed. Jason Rocks mines and sorts 500 tons of stone each day and is a price taker in the local stone market. The following table contains the percentage of each type of stone quarried each day and the market prices at which Jason Rocks can sell its five types of stones as either washed or unwashed:
Type of Stone | % of Daily Production | Selling Prices (per Ton) | |
Unwashed | Washed | ||
#1 | 10% | $210 | $219 |
#2 | 20 | 185 | 192 |
#3 | 20 | 150 | 170 |
#4 | 35 | 145 | 155 |
#5 | 15 | 160 | 165 |
The daily cost of mining and sorting the stones is $75,000, which includes the salaries and benefits of the employees who quarry and sort the stones, the depreciation on the equipment used in the process, the royalty payments to owners of the quarry for the stone removed, and an allocation of the utilities, insurance, property taxes, and administrative costs of the entire quarry operation. Washing any of the five types of stone costs $8 per ton and delivering the stone to the local distributor costs $7 per ton. Jason Rocks allocates the mining and sorting costs based on the tons of each type of stone produced.
Jason Rocks does not have to sell all of the types of stones it produces. Any unsold stones are left in the quarry at no additional cost after they have been mined and sorted. The owners of Jason Rocks want to maximize the quarry’s net cash flows.
Required:
a. For each of the five stone types, calculate the total cost of one ton of unwashed stones in inventory.
b. For each of the five stone types, calculate the total cost of one ton of washed stones in inventory.
c. What is the reported profit per ton of each type of unwashed stone that is sold?
d. What is the reported profit per ton of each type of washed stone that is sold?
e. Which of the five stone types should be sold as washed stones, and which stone types should be sold as unwashed stones? Which stone type(s) should not be sold?
f. The owners of Jason Rocks learn that new environmental and safety regulations have been enacted that will raise its operating costs to $85,000 per day. The owners do not expect these regulations to affect the selling prices of the washed and unwashed stones, nor do they expect them to affect the costs of washing and delivering the stones. Given this new information, how do your answers in part (e) change?
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