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,
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 1,7502,249 tons | 362,390 | ||
From 2,2502,749 tons | 417,390 | ||
From 2,7503,249 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 Antiochs trucking/hauling cost behavior cost-effective? 3-b. If the company plans to extract 1,750 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 companys charitable contribution cost arises only in December.
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