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 1,250 tons of ore were extracted: Straight-line depreciation $ 27,500 Charitable contributions* 7,500 Mining labor/fringe benefits 200,000 Royalties 151,250 Trucking and hauling 201,195 *Incurred only in December. Peak activity of 2,550 tons occurred in June, resulting in mining labor/fringe benefit costs of $408,000, royalties of $274,750, and trucking and hauling outlays of $256,195. The trucking and hauling outlays exhibit the following behavior: Less than 1,250 tons $ 173,695 From 1,250–1,749 tons 201,195 From 1,750–2,249 tons 228,695 From 2,250–2,749 tons 256,195 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. 2. Calculate the total cost for next February when 1,550 tons are expected to be extracted. 3-a. Is hauling 1,250 tons with respect to Antioch’s trucking/hauling cost behavior cost-effective? 3-b. Given the current scenario at what number of tons can cost-effectiveness be achieved? 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? 5. Speculate as to why the company’s charitable contribution cost arises only in December.

Answer 1