RUNNING HEAD: COST ALLOCATION CONCEPTS

Problem 6.37- Antioch Extraction: Cost behavior high-low method

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 depression 25,000 Royalties 135,000

Charitable contributions 11,000 Trucking and hauling 275,000
Mining labor/fringe benefits 345,000

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 1,500 - 1,899 tons......................275,000
From 1,900 - 2,299 tons......................300,000
From 2,300 - 2,699 tons......................325,000

Antioch 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
(Hilton, R. & Platt, D. 2017).

*Straight line Depression= Committed Fixed

*Charitable Contributions= Discretionary Fixed
*Mining labor/ Fringe Benefits= Variable
*Royalties= Semi-Variable
*Trucking and Hauling= Step-Fixed

 Mining Labor/Fringe benefits

345,000/1,500 tons= $230.00
598,000/2,600 tons= $230.00
It is reliable at the specified volume levels which the outcome is variable cost

 Royalties
Variable Coast = ($201,000-135,000) / (2,600 tons – 1,500 tons)
= $66,000 / 1,100 tons
=$$60/ton
Fixed Cost June December
Total Cost 201,000 135,000
Variable Cost ($60/ton) (156,000) (90,000)
Fixed Cost Total $45,000 $45,000
It involves both fixed costs and variables; which results to a semi-variable cost.
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2. Calculate the total cost for next February when 1,650 tons are expected to be extracted
(Hilton, R. & Platt, D. 2017).

 Depreciation 25,000
 Charitable Contributions --
 Mining Labor ($230 per ton) 379,500 – ($230 * 1650)
 Royalties Variable ($60 per ton) 99,000 – ($60 * 1650)
 Fixed 45,000
 Trucking & Hauling 275,000

Overall Cost $830,000

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?
(Hilton, R. & Platt, D. 2017).

The hauling of 1,500 tons isn’t going to be cost-effective. Antioch Extraction would have

done better if they hauled 1,490 tons to decrease their costs by approximately $25,000 since not

as much of 1,500 tons only incur a fee of $250,000. The Firm’s efficiency can be enhanced by

working on the precise maximum sector of a step.

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? (Hilton, R. & Platt, D. 2017).

Committed fixed costs pretty much always result after an individual’s proprietorship or from the

utilization of lavatories and the intricate executive structure. The depreciation on buildings, its’

property taxes/equipment (the price for renting each), as also the administration wages are all

occurrences regarding this kind of cost. Whearas, discretionary fixed costs increase from the
RUNNING HEAD: COST ALLOCATION CONCEPTS

choice to apply a guaranteed sum of currency aimed for a precise purpose. Outlays for

marketing, benevolent donations, and research and development all fall into this category.

If Antioch were to experience severe economic difficulties, the firm should try and condense the

discretionary costs. By doing so this will allow the cost to be effortlessly changed in a short

period of time. The company can also try to decrease it by not providing donations to assist

charities, or advertise with reduced prices.

5. Speculate as to why the company's charitable contributions cost arises only in December
(Hilton, R. & Platt, D. 2017).

Antioch Extraction utilize a fiscal year for tax policy purposes; during the fiscal year-end

Antioch may possibly have an extra reserve and decide to contribute it to different charities. This

can now become a deductible for their tax purposes.

Problem 7.38 Sales Mix and Employee Compensation; Operating Changes

Lawrence Corporation sells two ceiling fans, Deluxe and Basic. Current sales total 60,000 units,
consisting of 39,000 Deluxe units and 21,000 Basic units. Selling price and variable cost
information follow.

Deluxe Basic
Selling price ..................................................................................................$86 $74
Variable cost ................................................................................................. $65   $41

Salespeople currently receive flat salaries that total $400,000. Management is contemplating a
change to a compensation plan that is based on commissions in an effort to boost the company’s
presence in the marketplace. Two plans are under consideration:

Plan A: 10% commission computed on gross dollar sales. Deluxe sales are expected to
total 45,500 units; Basic sales are anticipated to be 19,500 units.
Plan B: 30% commission computed on the basis of production contribution margins.
Deluxe sales are anticipated to be 26,000 units; Basic sales are expected to total 39,000 units.

Required:
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1. Define the term sales mix (Hilton, R. & Platt, D. 2017).

Quantity of over-all sales that each product line or product produces, and which requires to be

well-adjusted to accomplish the maximum sum of gross revenue.

2. Comparing Plan A to the current compensation arrangement (Hilton, R. & Platt, D.

2017):

a. Will Plan A achieve management’s objective of an increased presence in the

marketplace? Briefly explain.

Yes, plan A will achieve management’s objective of an increased presence in the marketplace.

This is due to Plan A sales opportunities to total (45,500 + 19,500) = 65,000 units. This relates

positively compared to the existing sales of 60,000 units.

b. From a sales-mix perspective, will the salespeople be promoting the product that one
would logically expect? Briefly discuss.
Yes, from a sales-mix perspective, the salespeople will promote products that one would

logically expect. Sales employees receive a commission created from their gross dollar

transactions. The following figures below demonstrates how the deluxe sales will consist of a

better percentage of the total sales under Plan A; which is not a surprise seeing that the deluxe

sales have a better marketing price than the basic; $86 as opposed to $74.

Current Units Sales Mix

Deluxe 39000 65%
Basic 21000 35%
Total 60000 100%

Plan A Units Sales Mix

Deluxe 45500 70%
Basic 19500 30%
Total 65000 100%
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c. Will the sales force likely be satisfied with the results of Plan A? Why?
Yes, the sales force will likely be satisfied with the results of Plan A. Reason being is because

the commissions overall will amount to $535,600 ($5,356,000 x 10%), which equates positively

in contrast to the existing leveled wages of $400,000.

Deluxe sales = 45,500 (units) * $86 $3,913,000

Basic sales =19,500 (units) * $74 $1,443,000
Over-all total $5,356,000

d. Will Lawrence likely be satisfied with the resulting impact of Plan A on company
profitability? Why?
No, Lawrence will not likely be satisfied with the resulting impact of Plan A on company

profitability. Reason being is because the company will profit less underneath the new plan.

Sales Revenue Current Plan A

Deluxe (39,000 units * $86); (45,500 units x $86) 3,354,000 3,913,000
Basic (21,000 units * $74); (19,500 units x $74) 1,554,000 1,443,000
Total $4,908,000 $5,356,000

Less variable cost

Deluxe (39,000 units x $65); (45,500 units x $65) 2,535,000 2,957,500
Basic: (21,000 units x $41); (19,500 units x $41) 861,000 799,500
Sales commissions (10% of sales profits) 535,600
Total variable cost $3,396,000 $4,292,600

Contribution margin 1,512,000 1,063,400

Salaries 400,000 ------
(1,512,000- 400,000) (1,063,400- 0)
Net Income $1.112,000 $1,063,400
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Reference
Hilton, R. & Platt, D. (2017). Managerial accounting: Creating value in a dynamic business
environment (11th ed.). New York, NY: McGraw-Hill Education