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 $0.85 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?

Round to two decimal​ places.

Answer 1

		Scenario I	Scenario II	Scenario III	Remarks
a	Price of copper (per pound)	1.3	1.65	2
	Production volume (bn pounds)	2.25	2.25	2.25
	Sales (bn pounds)	2.93	3.71	4.50	(price*production volume)
	Production cost (per pound)	0.85	0.85	0.85
	Total production cost(bn pounds)	1.9125	1.9125	1.9125	(production cost*production volume)
	Operating profit (per pound)	0.45	0.80	1.15	Price of copper (per pound) less Production cost (per pound)
	Operating profit (bn pound)	1.01	1.80	2.59	Sales (bn pounds) less Total production cost(bn pounds)
b	Price of copper (per pound)	1.6
	Production volume (bn pounds)	2.25
	Sales (bn pounds)	3.60
	Production cost (per pound)	0.85
	Total production cost(bn pounds)	1.9125
	Operating profit (per pound)	0.75
	Operating profit (bn pound)	1.69
		Scenario I		Scenario II		Scenario III
c	Price of copper (per pound)	1.3	1.6	1.65	1.6	2	1.6
	Production volume (bn pounds)	1.13	1.13	1.13	1.13	1.13	1.13
	Sales (bn pounds)	1.46	1.80	1.86	1.80	2.25	1.80
	Production cost (per pound)	0.85	0.85	0.85	0.85	0.85	0.85
	Total production cost(bn pounds)	0.95625	0.95625	0.95625	0.95625	0.95625	0.95625
	Operating profit (per pound)	0.45	0.75	0.80	0.75	1.15	0.75
	Operating profit (bn pound)	0.51	0.84	0.90	0.84	1.29	0.84
	Total operating profit under different scenarios	1.35		1.74		2.14