Question

Dexter Industries purchased packaging equipment on January 8 for $98,000. The equipment was expected to have a useful life of three years, or 20,000 operating hours, and a residual value of $6,000. The equipment was used for 8,980 hours during Year 1, 6,930 hours in Year 2, and 4,090 hours in Year 3. Required: 1. Determine the amount of depreciation expense for the three years ended December 31 by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method. (Note: For STRAIGHT-LINE ONLY, round the first two years to the nearest whole dollar, then round the third year as necessary. For DECLINING BALANCE ONLY, round the multiplier to five decimal places. Then round the answer for each year to the nearest whole dollar.) 2. What method yields the highest depreciation expense for Year 1? 3. What method yields the most depreciation over the three-year life of the equipment?

Answer 1

The best production method based on the initial costs of labor ($100/unit) and capital ($400/unit) is Method 1, with a total cost of $9,000. Even after the cost of labor rises to $200/unit, Method 1 is still the most cost-effective option with a total cost of $14,000.

Step-by-step explanation:

Cost Calculation of Different Production Methods

When assessing the cost of production methods that require different amounts of labor and capital, it is important to calculate the total cost for each method based on the current costs of labor and capital. The cost of labor and capital are given as $100/unit for labor and $400/unit for capital, and the quantity of each required for the three methods is provided.

For Method 1: The total cost is calculated as 50 units of labor multiplied by $100/unit plus 10 units of capital multiplied by $400/unit, which equals $5,000 for labor and $4,000 for capital, resulting in a total cost of $9,000.

For Method 2: The total cost is 20 units of labor at $100/unit and 40 units of capital at $400/unit, amounting to $2,000 for labor and $16,000 for capital, with a total cost of $18,000.

For Method 3: It involves 10 units of labor at $100/unit and 70 units of capital at $400/unit, tallying up to $1,000 for labor and $28,000 for capital, amounting to a total cost of $29,000.

Thus, based on the costs provided, Method 1 is the most cost-effective, being the cheapest option. If the cost of labor rises to $200/unit, then:

Method 1 would cost 50 units of labor at $200/unit plus 10 units of capital at $400/unit, totaling $10,000 for labor and $4,000 for capital, resulting in a total cost of $14,000.

Method 2 would then cost 20 units of labor at $200/unit plus 40 units of capital at $400/unit, which equals $4,000 for labor and $16,000 for capital, yielding a total cost of $20,000.

Method 3 would be 10 units of labor at $200/unit plus 70 units of capital at $400/unit, resulting in $2,000 for labor and $28,000 for capital, which gives a total cost of $30,000.

Therefore, with the increase in labor costs, Method 1 still remains the cheapest and thus the best production method to use.

Answer 2

Answer:

1.

A. Years 1 =$30,667

Year 2 = $30,667

Years 3 =$30,666

B. Year 1 = $41,308

Year 2 = $31,878

Year 3 = $18,814

C. Year 1 = $65,333

Year 2 = $21,778

Year 3 = $7260

2. The double declining method

3. The double declining method

Step-by-step explanation:

Straight line depreciation =( Cost of equipment - Salvage value) / useful life

($98,000 - $6,000) / 3 = $30,666.67

Depreciation expense each year = $30,666.67

Deprecation expense for

Year 1 =$30,667

Year 2 = $30,667

Year 3 = $92,000 - $30667 = $30,666

Total depreciation = $92,000

Deprecation expense under the unit of activity method = actual operating hours each year × (cost of asset - Salvage value) / estimated total operating hours

For year 1 = 8,980 × ($92,000 / 20,000) = 8980 × 4.6 = $41,308

For year 2 = 6,930 × 4.6 = $31,878

For year 3 = 4090 × 4.6 = $18,814

Total depreciation = $92,000

For double declining method :

Depreciation expense = Net book value × multiplier

Multiplier = 2 × (1 / useful life)

2 × (1/3) = 0.66667

Net book value × multiplier

For year 1 = 0.66667 × $98,000 =$65,333

Net book value = $98,000 - $65,333 = $32,667

For year 2 = 0.66667 × $32,667 = $21,778

Net book value = $32,667 - $21,778 = $10,889

For year 3 = 0.66667 × $10,889= $7260

Total depreciation = $94,371