Chapter 6, Problem 37P

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:

*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:

Antioch uses the high-low method to analyze costs.

Required:

1. 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. 2. Calculate the total cost for next February when 1,650 tons are expected to be extracted.
3. 3. Comment on the cost-effectiveness of hauling 1,500 tons with respect to Antioch’s trucking/hauling cost behavior. Can the company’s effectiveness be improved? How?
4. 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. 5. Speculate as to why the company’s charitable contribution cost arises only in December.