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 1,900 tons of ore were extracted: Straight-line depreciation Charitable contributions* Mining labor/fringe benefits Royalties Trucking and hauling $ 47,000 14,000 427,500 109,000 417,875 *Incurred only in December. Peak activity of 3,200 tons occurred in June, resulting in mining labor/fringe benefit costs of $720,000, royalties of $148,000, and trucking and hauling outlays of $542,875. The trucking and hauling outlays exhibit the following behavior: Less than 1,900 tons From 1,900-2,399 tons From 2,400-2,899 tons From 2,900–3,399 tons $ 355, 375 417,875 480, 375 542,875 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 2,200 tons are expected to be extracted. 3-a. Is hauling 1,900 tons with respect to Antioch's trucking/hauling cost behavior cost-effective? 3-b. If the company plans to extract 1,900 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

Req 1. Classification a. Straight line depreciation Committed fixed b. Charitable contributions Discretionary fixed c. Mining labor/fringe benefit Variable d. Royalties Semi-variable e. Trucking and hauling Step fixed Req 2. Total cost for next february (2200 tones) Straight line depreciation 47000 Mining labor/fringe benefits 495000 Royalties 136000 Trucking and hauling 480375 Total cost 1158375 Req. 3a No Req. 3b 1899 tones Req.4 A Commited fixed cost is because of entity's ownership or use of their facilities and discretionary fixed cost is because of Spending of money for a specific purpose 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. Req. 5 To demonstrate Social responsibility and to claim tax deduction