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Cost Behavior, Classification Smith Concrete Company owns enough ready-mix trucks to deliver up to 107,500 cubic yards of concrete per year (considering each truck's capacity, weather, and distance to each job). Total truck depreciation is $350,000 per year. Raw materials (cement, gravel, and so on) cost about $26 per cubic yard of cement.

Required:

1. On your own paper, prepare a graph for truck depreciation. Use the vertical axis for cost and the horizontal axis for cubic yards of cement. Select the following amounts from the graph. Depreciation cost of truck if it delivers 30,000 cubic yards of concrete in one year: __________

Depreciation cost of truck if it delivers 70,000 cubic yards of concrete in one year: ___________

2. On your own paper, prepare a graph for raw materials. Use the vertical axis for cost and the horizontal axis for cubic yards of cement. Select the following amounts from the graph. Cost of raw materials for 2,000 cubic yards of concrete: ____________

3 Cost of raw materials for 5,000 cubic yards of concrete: ____________

Assume that the normal operating range for the company is 90,000 to 96,000 cubic yards per year. Classify truck depreciation and raw materials as variable or fixed costs.

Truck depreciation: Variable or Fixed

Raw materials cost: Variable or Fixed

4. What action could Smith management take to reduce the truck depreciation cost from year to year?

• The cost of truck depreciation could be reduced (or increased) by changing the depreciation method that is used to allocate the cost to each accounting period.
• The company could manage the depreciation cost by arranging to rent (rather than purchase) additional trucks.
• Obtain on-site mixing equipment for large jobs (and thus not be responsible for providing the trucks).
• All of the above.

5. What action could Smith management take to reduce the total raw materials cost from year to year.

• Using fewer cubic yards of cement per job.
• Discover different, cheaper materials that can be used in the business that yield the same quality of output as the existing materials.
• Paying less to purchase or manufacture each cubic yard of cement (i.e., more efficient purchasing or manufacturing of cement)..
• All of the above.

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