A small company is using the unit-of- production method for determining deprecia
ID: 700807 • Letter: A
Question
A small company is using the unit-of- production method for determining depreciation costs. The original value of the property is $110,000. It is estimated that the company can produce 11,000 units before the equipment will have a salvage or scrap value of zero, that is the depreciation cost per unit produced is $10.The equipment produces 200 units during the first year and the production rate is double each year for the first 4 years. The production rate obtained in the fourth year is then held constant until the value of the equipment is paid off. What would have been the annual depreciation cost if the straight line method based on this same time period had been used?
Explanation / Answer
Units produced in first year = 200
production rate is double each year for the first 4 years
Units produced in second year = 200 x 2 = 400
Units produced in third year = 400 x 2 = 800
Units produced in fourth year = 800 x 2 = 1600
Total units produced = 3000
Fourth year onwards production rate is constant
Remaining units can be produced = 11000 - 3000 = 8000
Remaining 8000 units will produce in
= 8000 units/1600 units/year
= 5 years
Total years of equipment = 4 + 5 = 9 years
annual depreciation cost (straight line method based)
= $110,000 / 9 years
= $12,222.22 per year