Final answer:
The missing part in the units-of-production depreciation formula is 'current-year activity or production.' This method ties the asset's cost allocation to its productivity, impacting the firm's accounting profit and decisions on economies of scale.
Step-by-step explanation:
The formula to calculate the depreciation using the units-of-production method, also known as activity-based depreciation, is ((cost - residual value) / total estimated production) x current-year activity or production. This method allocates the cost of an asset over its useful life based on the amount of use or production level each year.
Understanding how to apply this formula is crucial for businesses in managing their accounting profit, which is defined as total revenues minus explicit costs, including depreciation. The residual value represents the estimated salvage value of the asset at the end of its useful life, while the total estimated production reflects the asset's productivity output during its lifespan.
Businesses use such calculations to make informed decisions regarding the economies of scale, average total cost, and to determine if the firm's average cost of production is competitive with the market price, which influences profitability.