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?

Answer 1

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