Description

In the world market for copper, there are two types of copper mines: Type 1 (primarily located in North America) and Type 2 (primarily located in Asia and South America). Each type of mine incurs five “buckets” of costs: (1) direct materials; (2) energy inputs (such as electricity and natural gas); (3) shipping; (4) production labor; and (5) production and administrative overhead. Direct materials, energy inputs, and shipping services are purchased in competitive spot markets, and the total monthly costs that a firm incurs on these items vary in direct linear proportion to the quantity of copper produced in the mine during that month. If a mine produces no copper in a particular month, it incurs no direct materials, energy, or shipping costs. By contrast, the total monthly costs for production labor and overhead are volumeinsensitive: the levels of these costs do not vary with the volume of production in the mine. Even if the mine temporarily suspended operations for a month (i.e., produced zero output in that month), the mine would still incur the same total monthly cost for labor and overhead that it would have incurred had the mine produced a positive volume of copper. Labor and overhead costs would “go away” only if the mine was permanently shut down and withdrawn from the industry. Each type of mine has a capacity that dictates the maximum amount of copper that can be produced in a given month. The firm can produce any volume of output in the mine, provided that it does not exceed this capacity. The table below shows the cost profiles of the two different types of mines, as well as their capacities (expressed as tons of copper per month). It also shows the number of mines that are on active or near-active status in the world market. All costs are expressed on an average cost basis (i.e., per ton of copper produced). The average costs of labor and overhead indicate what the per-ton costs would be if a mine produced at full capacity. Mine Number of active or nearactive mines Direct Materials ($ per ton) Energy ($ per ton) Shipping ($ per ton) Labor ($ per ton, assuming full capacity output)* Overhead ($ per ton, assuming full capacity output)* Capacity of a mine (tons per month) Type 1 50 250 300 50 450 100 60,000 Type 2 40 150 200 100 150 100 100,00