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 1,000 tons of ore were extracted:
Straight-line depreciation $ 20,000 Charitable contributions* 5,000 Mining labor/fringe benefits 135,000 Royalties 145,000 Trucking and hauling 144,970 *Incurred only in December.
Peak activity of 2,300 tons occurred in June, resulting in mining labor/fringe benefit costs of $310,500, royalties of $301,000, and trucking and hauling outlays of $174,970. The trucking and hauling outlays exhibit the following behavior:
Less than 1,000 tons $ 129,970 From 1,000-1,499 tons 144,970 From 1,500-1,999 tons 159,970 From 2,000-2,499 tons 174,970 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 1,300 tons are expected to be extracted.
- 3-a. Is hauling 1,000 tons with respect to Antioch's trucking/hauling cost behavior cost-effective?
- 3-b. If the company plans to extract1,000tons, 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.
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