Question

PlasticWorks Corporation bought a machine at the beginning of the year at a cost of $22,150. The estimated useful life was five years, and the residual value was $3,450. Assume that the estimated productive life of the machine is 18,700 units. Expected annual production was: year 1, 5,900 units; year 2, 5,900 units; year 3, 3,450 units; year 4, 1,870 units; and year 5, 1,580 units.

Required:
1. Complete a depreciation schedule for each of the alternative methods. (Enter all values as positive amount.)
a. Straight-line.
b. Units of production.
c. Double declining balance.
2-a. Which method will result in the highest net income in year 2?
a. Double declining balance.
b. Straight-line.
c. Units of production.
2-b. Does this higher net income mean the machine was used more efficiently under this depreciation method?
a. Yes
b. No

Answer 1

The best production method when labor costs $100/unit and the capital costs $400/unit is Method 1, which costs $9,000. When the labor cost rises to $200/unit, Method 1 is still the most cost-effective at $14,000, and thus the company should continue using it.

Step-by-step explanation:

To determine the best production method based on the costs of labor and capital, we must calculate the total cost for each method. First, let's do this when the cost of labor is $100/unit, and the cost of capital is $400/unit.

Method 1: (50 units of labor × $100) + (10 units of capital × $400) = $5,000 + $4,000 = $9,000

Method 2: (20 units of labor × $100) + (40 units of capital × $400) = $2,000 + $16,000 = $18,000

Method 3: (10 units of labor × $100) + (70 units of capital × $400) = $1,000 + $28,000 = $29,000

Given these calculations, Method 1 is the best production method as it has the lowest total cost of $9,000.

Now, if the cost of labor rises to $200/unit while the cost of capital remains the same, we need to recalculate:

Method 1: (50 units of labor × $200) + (10 units of capital × $400) = $10,000 + $4,000 = $14,000

Method 2: (20 units of labor × $200) + (40 units of capital × $400) = $4,000 + $16,000 = $20,000

Method 3: (10 units of labor × $200) + (70 units of capital × $400) = $2,000 + $28,000 = $30,000

With the increased labor cost, Method 1 remains the most cost-effective option with a total cost of $14,000. Therefore, the company should continue using Method 1.