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 1,500 tons of ore were extracted:  

Straight-line depreciation ..........................$25,000 Royalties .....................................$135,000

Charitable contributions* ...........................$11,000 Trucking and hauling ..................275,000

Mining labor/fringe benefits ........................$345,000

*Incurred only in December.

Peak activity of 2,600 tons occurred in June, resulting in mining labor/fringe benefit costs of $598,000, royalties of $201,000, and trucking and hauling outlays of $325,000. The trucking and hauling outlays exhibit the following behavior:

Less than 1,500 tons .............................................................................................................................................$250,000

From 1,500–1,899 tons ..........................................................................................................................................$275,000

From 1,900–2,299 tons ..........................................................................................................................................$300,000

From 2,300–2,699 tons ..........................................................................................................................................$325,000

Antioch uses the high-low method to analyze costs.

Required:

1. Classify the five costs listed in terms of their behavior: variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semivariable. Show calculations to support your answers for mining labor/fringe benefits and royalties.

2. Calculate the total cost for next February when 1,650 tons are expected to be extracted.

3. Comment on the cost-effectiveness of hauling 1,500 tons with respect to Antioch’s trucking/hauling cost behavior. Can the company’s effectiveness be improved? How?

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? Why?

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

Answer 1

1. Cost analysis and classification using the high-low method:

Cost	1500 Ton	2600 Ton	Type of nature
Drpreciation	$25,000	$25,000	commited fixed cost
Charitable Contribution	$11,000	$0	Discretionary fixed cost
Mining labour/ Fringe benefits	$345,000	$598,000	Variable cost
Royalties	$135,000	$201,000	Semi variable cost
Trucking and hauling	$275,000	$325,000	Step-fixed cost

Calculations:

a) Variable Cost Per Unit(Mining)=Difference in Total Cost / Difference in Tons

=$598,000-345,000 / 2,600-1,500

=$230 per ton

Fixed cost(mining)=Total Cost - Variable Cost

=$598000 - (230 * 2,600)

=$0

B)Variable cost per unit(Royalty)= Difference in Total costs / Difference in Tons

=$201,000 - $135,000 / 2,600-1,500

=$60 per ton

Fixed cost(Royalty)=Total costs - Variable costs

=$201,000-($60 * 2,600)

=$45,000.

2. Statement showing the cost for 1650 tons:

Particulars	1650 ton
Depreciation	$25,000
MiningLabour/Fringe benifits	$379,500
Royalties(variable)	$99,000
Royalties(Fixed)	$45,000
Trucking and hauling	$275,000
Total cost	$823,500

3.

Trucking and hauling is the step fixed cost for the company. Upto 1499 tons of the mining cost of hauling is $250,000 and for 1500 to 1899 tons, cost is $275,000.

Company should operate at the level of the upper limit of the class of activity to improve the cost effectiveness.

4.

Committed fixed costs are costs that are incurred for each period of production.Discretionary fixed costs are fixed costs that are expended at the management decission.

If management is experianced in economic difficulties, discremitionary fixed cost should be reduced because it is incured by management decission. Committed fixed cost cannot be reduced as it is already committed and is a production capacity cost.

5.

The charitable contribution is the discretionary cost for company. it is expended at the management decission. The reson for expense for charitable purpose may be the tax saving.