Question

Lone Mountain Extraction, which mines ore in Idaho, 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 1,400 tons of ore were extracted:


Peak activity of 2,700 tons occurred in June, resulting in mining labor/fringe benefit costs of $607,500, royalties of $224,500, and trucking and hauling outlays of $360,000. The trucking and hauling outlays exhibit the following behavior:
Less than 1,400 tons ................................................................ $240,000
From 1,400–1,899 tons............................................................. 280,000
From 1,900–2,399 tons............................................................. 320,000
From 2,400–2,899 tons............................................................. 360,000
Lone Mountain Extraction 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. Show calculations to support your answers for mining labor/fringe benefits and royalties.
2. Calculate the total cost for next February when 1,700 tons are expected to be extracted.
3. Comment on the cost-effectiveness of hauling 1,400 tons with respect to Lone Mountain’s trucking/hauling cost behavior. Can the company’s effectiveness be improved? How?
4. Distinguish between committed and discretionary fixed costs. If the company 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 contribution cost arises only inDecember.


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  • CreatedApril 22, 2014
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