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 1,750 tons of ore were extracted: Straight-line depreciation $ 42,500 Charitable contributions* 12,500 Mining labor/fringe benefits 367,500 Royalties 126,250 Trucking and hauling 362,390 *Incurred only in December. Peak activity of 3,050 tons occurred in June, resulting in mining labor/fringe benefit costs of $640,500, royalties of $184,750, and trucking and hauling outlays of $472,390. The trucking and hauling outlays exhibit the following behavior: Less than 1,750 tons $ 307,390 From 1,750–2,249 tons 362,390 From 2,250–2,749 tons 417,390 From 2,750–3,249 tons 472,390 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 2,050 tons are expected to be extracted. 3-a. Is hauling 1,750 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