Reference no: EM132760286
Cost Behavior and Analysis; High-Low Method
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 ............................................ $ 25.000 Royalties ............................................. $135,000
Charitable contributions' .................................................. 11.000 Trucking 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. Required:
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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