2-9 Distinguish between discretionary fixed costs and committed fixed costs.
Related questions
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 | |
| Charitable contributions* | 11,000 | ||
| Mining labor/fringe benefits | 345,000 | ||
| Royalties | 135,000 | ||
| Trucking and hauling | 275,000 | ||
*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 1,500â1,899 tons | 275,000 | ||
| From 1,900â2,299 tons | 300,000 | ||
| From 2,300â2,699 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.
2. Calculate the total cost for next February when 1,650 tons are expected to be extracted.
3-a. Is hauling 1,500 tons with respect to Antiochâs trucking/hauling cost behavior cost-effective?
3-b. Given the current scenario 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 companyâs charitable contribution cost arises only in December.
