Question

Ramirez Company installs a computerized manufacturing machine in its factory at the beginning of the year at a cost of \(43,500. The machine’s useful life is estimated at 10 years, or 385,000 units of product, with a \)5,000 salvage value. During its second year, the machine produces 32,500 units of product. Determine the machine’s second-year depreciation using the units-of-production method.

Short answer

The machine’s second-year depreciation expense is $325,000.

Step-by-step solution

Formula of Units-of-production Method

$\mathrm{Depreciation} \mathrm{per} \mathrm{unit}=\frac{\mathrm{cost}-\mathrm{salvage}\mathrm{value}}{\mathrm{total} \mathrm{units} \mathrm{of} \mathrm{production}}$

$\mathrm{Depreciation} \mathrm{expense}=\mathrm{depreciation} \mathrm{per}\mathrm{unit}\times \mathrm{units} \mathrm{poduced} \mathrm{in} \mathrm{period}$

Computation of depreciation

$\begin{array}{rcl}\mathrm{Depreciation} \mathrm{per} \mathrm{unit}& =& \frac{\$43,500-\$5,000}{385,000}\\ & =& \frac{\$38,500}{385,000}\\ & =& 0.1.\end{array}$

$\begin{array}{rcl}\mathrm{Depreciation} \mathrm{expense}& =& 0.1\times 32,500\\ & =& \$325,000\end{array}$