(1)

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 1,500 tons of ore were extracted:

Straight-line depreciation ..........................$ 25,000Royalties .....................................$135,000

Charitable contributions* ...........................11,000Trucking and hauling ...........................275,000

Mining labor/fringe benefits .......................345,000

*Incurred only in December.

Peak activity of 2,600 tons occurred in June, resulting in mining labor/fringe benefit costs of $598,000, royalties of $201,000, and trucking and hauling outlays of $325,000. The trucking and hauling outlays exhibit the following behavior:

Less than 1,500 tons .............................................................................................$250,000

From 1,500-1,899 tons ............................................................................................ 275,000

From 1,900-2,299 tons .............................................................................................300,000

From 2,300-2,699 tons .............................................................................................325,000

Antioch uses the high-low method to analyze costs.

To do:

1. Classify the five costs listed in terms of their behavior: variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semivariable. Show calculations to support your answers for mining labor/fringe benefits and royalties.

2. Calculate the total cost for next February when 1,650 tons are expected to be extracted.

3. Comment on the cost-effectiveness of hauling 1,500 tons with respect to Antioch's trucking/haul-ing cost behavior. Can the company's effectiveness be improved? How?

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? Why?

5. Speculate as to why the company's charitable contribution cost arises only in December.

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(2)

Lawrence Corporation sells two ceiling fans, Deluxe and Basic. Current sales total 60,000 units, consist-ing of 39,000 Deluxe units and 21,000 Basic units. Selling price and variable cost information follow.

DeluxeBasic

Selling price ............................................................................................$86$74

Variable cost ............................................................................................6541

Salespeople currently receive flat salaries that total $400,000. Management is contemplating a change to a compensation plan that is based on commissions in an effort to boost the company's presence in the marketplace. Two plans are under consideration:

Plan A:10% commission computed on gross dollar sales. Deluxe sales are expected to total 45,500 units; Basic sales are anticipated to be 19,500 units.

Plan B:30% commission computed on the basis of production contribution margins. Deluxe sales are anticipated to be 26,000 units; Basic sales are expected to total 39,000 units.

To do

1. Define the term sales mix.

2. Comparing Plan A to the current compensation arrangement:

a. Will Plan A achieve management's objective of an increased presence in the marketplace? Briefly explain.

b. From a sales-mix perspective, will the salespeople be promoting the product that one would logically expect? Briefly discuss.

c. Will the sales force likely be satisfied with the results of Plan A? Why?

d. Will Lawrence likely be satisfied with the resulting impact of Plan A on company profitability? Why?