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 1,300 tons of ore were extracted:
Straight-line depreciation | $ | 29,000 | |
Charitable contributions* | 8,000 | ||
Mining labor/fringe benefits | 214,500 | ||
Royalties | 151,000 | ||
Trucking and hauling | 213,940 | ||
*Incurred only in December.
Peak activity of 2,600 tons occurred in June, resulting in mining labor/fringe benefit costs of $429,000, royalties of $268,000, and trucking and hauling outlays of $273,940. The trucking and hauling outlays exhibit the following behavior:
Less than 1,300 tons | $ | 183,940 | |
From 1,3001,799 tons | 213,940 | ||
From 1,8002,299 tons | 243,940 | ||
From 2,3002,799 tons | 273,940 | ||
Antioch uses the high-low method to analyze costs.
Required:
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1. Classify the five costs listed in terms of their behavior: variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semivariable.
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2. Calculate the total cost for next February when 1,600 tons are expected to be extracted.
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Total Cost:
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3-a. Is hauling 1,300 tons with respect to Antiochs trucking/hauling cost behavior cost-effective?
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Yes/No ?
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3-b. If the company plans to extract 1,300 tons, at what number of tons can cost-effectiveness be achieved?
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Number of Tons:
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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?
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Discretionary Fixed Costs or Committed Fixed Costs?
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5. Speculate as to why the companys charitable contribution cost arises only in December.
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