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 1,450 tons of ore were extracted:

Straight-line depreciation	$	33,500
Charitable contributions*		9,500
Mining labor/fringe benefits		261,000
Royalties		147,250
Trucking and hauling		255,175

*Incurred only in December.

Peak activity of 2,750 tons occurred in June, resulting in mining labor/fringe benefit costs of $495,000, royalties of $244,750, and trucking and hauling outlays of $330,175. The trucking and hauling outlays exhibit the following behavior:

Less than 1,450 tons	$	217,675
From 1,450–1,949 tons		255,175
From 1,950–2,449 tons		292,675
From 2,450–2,949 tons		330,175

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 1,750 tons are expected to be extracted.

3. a. Is hauling 1,450 tons with respect to Antioch’s trucking/hauling cost behavior cost-effective?

   b. If the company plans to extract 1,450 tons, 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

A. Classification of Cost

1. Variable Cost = Minor Labor/Fringe Benefits

$261000/1450Tons =$495000/2750Tons

$180/ Ton = $180/ Ton

2. Step Variable = Trucking and Hauling Outlays

As per Table provided in the question

3. Committed Fixed Cost = Straight Line Depreciation

4. Discretionary Fixed Cost = Charitable Contributions

As it is a yearly periodic cost.

5. Semi Variable = Royalties

=Change in cost/Change in output

=$244750-$147250/2750-1450

=$97500/1300

=$75 per ton (Variable Cost)

Total Royalties Cost = Variable + Fixed

$244750 = 2750 per ton*$75 + Fixed Cost

Fixed Cost = $244750 – $206250

Fixed Cost = $38500

B. Calculate the total cost for next February when 1,750 tons are expected to be extracted

For 1750 Tons
Particulars	Amount ($)
Straight Line Depreciation	33500
Minor Labor/Fringe Benefits (1750*180)	315000
Royalties (1750*75+38500)	169750
Trucking and Hauling Outlays	255175
Total Cost	773425

C. No, hauling 1450 tons will not be cost effective as per ton cost at 1450 ton is around $176. However hauling cost at 1949 ton would be $130 only for the same amount of fixed cost i.e. $255175

D. The company should extract 1449 tons to make antioch’s trucking/hauling cost behavior cost-effective as the fixed cost would reduce to $217675 i.e. $150 per ton

E. The key difference between discretionary and committed fixed Cost is that discretionary fixed cost are periodic cost(either monthly or yearly) that can be nullify or lessened without having a direct impact on operating profitability of the business unlike committed fixed cost are cost that a business has already incurred or liable to incurred in near future.

F. If Antioch were to experience severe economic difficulties, the two types of fixed costs management try to cut would be discretionary fixed cost and variable cost as these cost can be reduced if efforts are made and profitability can be maintained or increased in economic difficulties.

G. Company’s charitable contribution cost arises only in December because its year-end expense made to get a deduction in the income tax. Also company may be required to made a CSR obligation to be fulfilled.