Exercise : Cost Behavior, Classification

Smith Concrete Company owns enough ready-mix trucks to deliver up to 100,000 cubic yards of concrete per year (considering each truck's capacity, weather, and distance to each job). Total truck depreciation is $200,000 per year. Raw materials (cement, gravel, and so on) cost about $25 per cubic yard of cement.

Required:
1. Prepare a graph for truck depreciation. Use the vertical axis for cost and the horizontal axis for cubic yards of cement.

2. Prepare a graph for raw materials. Use the vertical axis for cost and the horizontal axis for cubic yards of cement.

3. Assume that the normal operating range for the company is 90,000 to 96,000 cubic yards per year. Classify truck depreciation and raw materials as variable or fixed costs.

4. CONCEPTUAL CONNECTION Briefly describe actions that Smith management could take to reduce the truck depreciation cost from year to year.

5. CONCEPTUAL CONNECTION Briefly describe actions that Smith management could take to reduce the total raw material cost from year to year.