Question

Lone Mountain Extraction, which mines ore in Idaho, 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 $ 35,000
  Charitable contributions* 10,000
  Mining labor/fringe benefits 277,500
  Royalties 145,000
  Trucking and hauling 279,915

*Incurred only in December.

Peak activity of 2,800 tons occurred in June, resulting in mining labor/fringe benefit costs of $518,000, royalties of $236,000, and trucking and hauling outlays of $364,915. The trucking and hauling outlays exhibit the following behavior:

  
  Less than 1,500 tons $ 237,415
  From 1,500–1,999 tons 279,915
  From 2,000–2,499 tons 322,415
  From 2,500–2,999 tons 364,915

Lone Mountain Extraction 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.

a. straight-line depreciation b. charitable contributions c. mining labor / fringe benefits d. royalties e. trucking and hauling

         

2.

Calculate the total cost for next February when 1,800 tons are expected to be extracted.

         

3-a. Is hauling 1,500 tons with respect to Lone Mountain’s trucking/hauling cost behavior cost effective?

Yes
No

3-b. Given the current scenario at what number of units cost effectiveness can be achieved?

          

4. In times of economic difficulties, the management will cut which type of fixed costs?

Committed fixed costs.
Discretionary fixed costs.

5. Speculate as to why the company’s charitable contribution cost arises only in December. Choose the most relevant reason from the given options.

To demonstrate social responsibility.
To claim tax deduction.
To promote business.

Answer 1

1. Classification of Cost
Cost	Classification	Remark
Straight Line Depreciation	Commiteed Fixed Cost	Already spent on Purchase of Equipmnet. Hence depreciation will be calculated over the period.
Charitable contribution	Discretionary Fixed Cost	It's Not directly associated with operation
Mining Labour/ Fringe Benefit	Variable Cost	It's directly associated with operation
Royalties	Semi Variable	Consist Fixed and Variable component
Trucking & Hauling	Step Fixed	Fixed cost will be same upto the specific limit
2. Computation of Total Cost for production of 1800 tonn
Nature of Cost	Amount	Remark
Depreciation	$35,000.00
Charitable Contribution	$10,000.00
Minining Labour/ Fringe benfit	$333,000.00	($279915/1500 tonn* 1800 tonn)
Royalities:
Variable @ $ 91 / Tonn	$163,800.00	1800 tonn *$91/Tonn
Fixed	$8,500.00
Truking and Hauling	$279,915.00
Total Cost	$830,215.00
Working Note for calculation of Royalty
Variable cost= Difference in cost/Differenc ein tonn
($236000-$145000)/(2800-1800 tonn)
$91000/1000 tonn= $91
Fixed Royalty= $145000- (1500tonn*$91)
=$8500
3. to Hauling 1500 tonn, cost will be $279915 and for hauling less than 1500 or 1499 tonn , cost will be $237415 . It reflect that for producing 1 more tonn, it need to incurred additional cost of $42500 Hence it's is not cost effective . 4. In case of economic difficulty of temporary nature, managment should try to reduce the discretinary fixed cost, which are not directly associated to run the operation. However, if economic difficulty of permanent nature, it need to reduce the committed fixed cost which indicate the shut down intiation of the company.