Problem 6-37 Cost Behavior and Analysis; High-Low Method (LO 6-2, 6-4, 6-5)

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 1,450 tons of ore were extracted:

Straight-line depreciation$33,500Charitable contributions*9,500Mining labor/fringe benefits261,000Royalties147,250Trucking and hauling255,175

*Incurred only in December. Peak activity of 2,750 tons occurred in June, resulting in mining labor/fringe benefit costs of $495,000, royalties of $244,750, and trucking and hauling outlays of $330,175. The trucking and hauling outlays exhibit the following behavior:

Less than 1,450 tons$217,675From 1,4501,949 tons255,175From 1,9502,449 tons292,675From 2,4502,949 tons330,175

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 1,750 tons are expected to be extracted. 3-a. Is hauling 1,450 tons with respect to Antiochs trucking/hauling cost behavior cost-effective? 3-b. If the company plans to extract 1,450 tons, 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 companys charitable contribution cost arises only in December.