Question

Owns machinery that costs $28,400 when purchased. What is the depreciation method used?

A) Straight-line
B) Double-declining balance
C) Sum-of-the-years-digits
D) Units-of-production

Answer 1

The best production method is Method 1 both initially and after the cost of labor rises since it has the lowest total cost in both scenarios.

Step-by-step explanation:

To determine the best production method, we need to calculate the total cost of each method based on the cost of labor and capital.

Original Labor Cost at $100/unit:

• Method 1: Total Cost = (50 units of labor × $100/unit) + (10 units of capital × $400/unit) = $5000 + $4000 = $9000
• Method 2: Total Cost = (20 units of labor × $100/unit) + (40 units of capital × $400/unit) = $2000 + $16000 = $18000
• Method 3: Total Cost = (10 units of labor × $100/unit) + (70 units of capital × $400/unit) = $1000 + $28000 = $29000

The company should use Method 1 as it has the lowest total cost.

Increased Labor Cost at $200/unit:

• Method 1: Total Cost = (50 units of labor × $200/unit) + (10 units of capital × $400/unit) = $10000 + $4000 = $14000
• Method 2: Total Cost = (20 units of labor × $200/unit) + (40 units of capital × $400/unit) = $4000 + $16000 = $20000
• Method 3: Total Cost = (10 units of labor × $200/unit) + (70 units of capital × $400/unit) = $2000 + $28000 = $30000

Even with the cost of labor rising, Method 1 remains the most cost-effective production method.