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Antioch Extraction: Cost behavior high-low method

Antioch Extraction, which mines ore, 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 depression 25,000
Charitable contributions 11,000 (incurred only in December)
Mining labor/fringe benefits 345,000
Royalties 135,000
Trucking and hauling 275,000

Peak activity of 2,600 tons occurred in June, resulting in mining labor/fringe benefit costs of $598,000 royalties of $201,000, 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

Anitoch uses high-low method to analyze cost.

1. Classify the five costs listed in the terms of their behavior: variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semi variable. 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/hauling 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 contributions cost arise only in December.

Solution Preview

(1) The cost behaviors are summarized as follows:
| Low point 1,500 tons | Peak Point 2,600 tons
Straight Line Depression | $25,000 |
Charitable contributions | $11,000 |
Mining labor/fringe benefits | $345,000 | $598,000
Royalties | $135,000 | ...

Solution Summary

This solution discusses the high-low method used by Antioch Extraction, a mining company.