Question

My next question is question 3-a. Is hauling 1,000 tons with respect to Antioch’s trucking/hauling cost behavior cost-effective?

I'm thinking the answer would be no because they need to be hauling more although trucking and hauling is cheaper being 144,970 for 1000 ton's, if they arent hauling enough material,

they arent selling as much ore.

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 1,000 tons of ore were extracted:

Straight-line depreciation	$	20,000
Charitable contributions*		5,000
Mining labor/fringe benefits		135,000
Royalties		145,000
Trucking and hauling		144,970

*Incurred only in December.

Peak activity of 2,300 tons occurred in June, resulting in mining labor/fringe benefit costs of $310,500, royalties of $301,000, and trucking and hauling outlays of $174,970. The trucking and hauling outlays exhibit the following behavior:

Less than 1,000 tons	$	129,970
From 1,000–1,499 tons		144,970
From 1,500–1,999 tons		159,970
From 2,000–2,499 tons		174,970

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 1,300 tons are expected to be extracted.

3-a. Is hauling 1,000 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

1. Classification of Costs:

Straight Line Depreciation	Committed Fixed
Charitable Contributions	Discretionary Fixed
Mining Labor / Fringe Benefits	Variable
Royalties	Semi Variable
Trucking and Hauling	Step Fixed

2. Total Costs in February when 1,300 tons are expected to be extracted: $ 521,470

	$
Straight Line Depreciation	20,000
Charitable Contributions	0
Mining Labor / Fringe Benefits ( 310,500 / 2,300 x 1,300)	175,500
Royalties*	181,000
Trucking and Hauling	144,970
Total Cost	521,470

* Segregation of Royalties into Variable and Fixed:

Change in Cost from High to Low = $ ( 301,000 - 145,000) = $ 156,000

Change in Output = 2,300 - 1,000 = 1,300

Variable cost per ton = $ 156,000 / 1,300 = $ 120

Fixed Cost = $ 301,000 - $ 120 x 2,300 = $ 25,000

For 1,300 tons, total Royalties cost = $ 120 x 1,300 + $ 25,000 = $ 181,000

3a. No.

Hauling 999 tons costs $ 129,970.

Hauling 1,000 tons costs $ 144,970.

Therefore, the marginal cost of hauling the 1000th ton is $ ( 144,970 - 129,970) = $ 15,000.

But otherwise, it costs $ 15,000 for hauling 500 tons at a rate of $ 15,000 / 500 = $ 30 a ton.

3b. The company's maximum cost effectiveness can be achieved on the right most portion of each step, i.e 999 tons, 1,499 tons, 1,999 tons and 2,499 tons.

4. Committed fixed costs arise from an entity's ownership or use of assets. It is very difficult to curtail these expenses during the commitment period, e.g depreciation, lease rent.

On the other hand, discretionary fixed costs arise from a commitment to spend a sum of money for a specific purpose, and it is dependent on the discretion of the management as to whether the sum is to be spent at all for the purpose or what sum to be spent. In lean times, mangement should try to cut discretionary fixed costs.

5. The company's charitable contribution cost arises only in December, possibly because clarity emerges as to the net income likely to be earned for the current year, and the income tax expense to be incurred. The management then decides whether it should incur the cost or not, depending on whether a tax deduction is needed or not.