Question

Antioch Extraction, which mines ore in Montana, uses a calendar year for both financial-reporting and tax purposes. The following selected costs were incurred in December, the low point of activity, when 1,950 tons of ore were extracted:

Straight-line depreciation	$	48,500
Charitable contributions*		14,500
Mining labor/fringe benefits		448,500
Royalties		102,250
Trucking and hauling		437,370

*Incurred only in December.

Peak activity of 3,250 tons occurred in June, resulting in mining labor/fringe benefit costs of $747,500, royalties of $134,750, and trucking and hauling outlays of $567,370. The trucking and hauling outlays exhibit the following behavior:

Less than 1,950 tons	$	372,370
From 1,950–2,449 tons		437,370
From 2,450–2,949 tons		502,370
From 2,950–3,449 tons		567,370

Antioch uses the high-low method to analyze costs.

Required:

1. 1. Classify the five costs listed in terms of their behavior: variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semivariable.

2. 2. Calculate the total cost for next February when 2,250 tons are expected to be extracted.

3. 3-a. Is hauling 1,950 tons with respect to Antioch’s trucking/hauling cost behavior cost-effective?

4. 3-b. If the company plans to extract 1,950 tons, at what number of tons can cost-effectiveness be achieved?

5. 4. Distinguish between committed and discretionary fixed costs. If Antioch were to experience severe economic difficulties, which of the two types of fixed costs should management try to cut?

6. 5. Speculate as to why the company’s charitable contribution cost arises only in December.

Answer 1

Answer 1:

The classification is provided as below:

Cost	Classification
Straight-line depreciation	Committed Fixed Cost
Charitable Contributions	Discretionary Fixed Cost
Mining Labor/Fringe Benefits	Variable
Royalties	Semi-Variable Cost
Trucking and Hauling	Step-Fixed Cost

Answer 2:

The total cost for next February when 2,250 tons are expected to be extracted is arrived as below:

Straight Line Depreciation	48,500
Charitable Contributions	0
Mining Labor/Fringe Benefits (2,250*230)	517,500
Royalties:
Fixed	53,500
Variable (2,250*25)	56,250
Trucking and hauling (Refer to table)	437,370
Total Cost	$1,113,120

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