Question

Bling Diamonds Extraction, which mines for diamonds in Russia, 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
1,400 tons of ore were extracted:
Straight-line depreciation			30,000		Royalties	160,000
Mining labor/fringe benefits			420,000		Trucking and hauling	225,000
Peak activity of 3,000 tons occurred in June, resulting in mining labor/fringe benefit costs of $900,000,
royalties of $230,400, and trucking and hauling outlays of $275,000. The trucking and hauling outlays
exhibit the following behavior:
Less than 1,499 tons			225,000
From 1,500-2,999 tons			250,000
From 3,000-4,499 tons			275,000
From 4,500-5,999 tons			300,000
Bling uses the high-low method to analyze costs.
Required:
1.	Classify which costs listed in terms of their behavior are the following: semi-variable and step-fixed.
	Show calculations to support your answers for mining labor/fringe benefits and royalties.
2.	Calculate the total cost for next February when 1,700 tons are expected to be extracted.

Answer 1

Fixed cost

Straight-line depreciation

Semi-variable

Mining labor/fringe benefits

Trucking and hauling

Royalties (fully variable - check below solution)

Level	Ton of ore extracted	Mining labor/fringe benefits	Royalties
High	3000	900000	230400
Low	1400	420000	160000
Difference	1600	480000	70400
Variable cost per ton (Difference of cost / 1600 difference in units)		300	44
Remarks for above Variable cost per ton		480000/300	70400/44
Total cost at high level		900000	230400
Less: variable cost at high level (3000 tones * Variable cost per ton )		900000	132000
Fixed cost component		0	98400
Type		Variable cost because there is no fixed cost.	Semi variable nature

Total cost for next February when 1,700 tons are expected to be extracted
Straight-line depreciation		30000
Mining labor/fringe benefits (300*1700)		510000
Royalties - fixed components	98400
Royalties - variable component (44*1700)	74800
Total Royalties		173200
Trucking and hauling (As per table)		250000
Total cost for next February when 1,700 tons are expected to be extracted		963200