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Vadim26 [7]
3 years ago
7

Super Saver Groceries purchased store equipment for $25,000. Super Saver estimates that at the end of its 10-year service life,

the equipment will be worth $4,000. During the 10-year period, the company expects to use the equipment for a total of 10,000 hours. Super Saver used the equipment for 1,600 hours the first year.
Required: Calculate depreciation expense of the equipment for the first year, using each of the following methods.

1. Straight-line.

2. Double Declining Method.

3. Activity Based.
Business
1 answer:
MatroZZZ [7]3 years ago
3 0

Answer:

Depreciation expense for the first year under each method is,

1. Straight line method = $2100

2. Double declining balance method = $5000

3. Activity based method = $3360

Explanation:

1.

The straight line method of depreciation charges a constant amount of depreciation expense through out the useful life of the asset. The formula for depreciation expense per year under this method is,

The depreciation rate under this method is,

Depreciation rate = 100% / 10 = 10%

Depreciation expense = (Cost - Salvage value) / estimated useful life

Depreciation expense = (25000 - 4000) / 10    = $2100 per year

2.

Double declining method is an accelerated method of allocating the depreciation expense. The initial years depreciation is higher in this method. The formula for depreciation expense per year under this method is,

Depreciation expense = 2 * Straight line rate * Carrying value of asset at start of period

Depreciation expense = 2 * 0.1 * 25000        = $5000 for the first year

3.

Under activity based method, we simply allocate depreciation based on the activity level for which asset is used this year. The formula for this method is,

Depreciation expense = Units of activity for the year * (Cost - Salvage value) / Total estimated life in units of activity

Depreciation expense = 1600 * (25000 - 4000) / 10000

Depreciation expense = $3360 for the first year

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Answer:

With the information in the question, we can make the following table:

Number of        Output of     Marginal  Marginal  Marginal

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0                        0                    0              $0             $0

1                         10                   10            $20           $15

2                        26                  16            $32           $15

3                        36                  10            $20           $15

4                        44                  8              $16            $15

5                        49                  5             $10            $15

6                        52                  3             $6             $15

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As it can be seen in the table, after the third worker is hired, the diminishing marginal returns begin, because while the marginal product of the second worker is 16 hats, the marginal product of the third worker is 10 hats.

(b) Calculate the marginal physical product of the fifth worker.

The marginal product of the fifth worker is 5 hats.

(c) Calculate the marginal revenue product of the third worker.

The marginal revenue of the third worker is $20.

(d) How many workers will GW hire to maximize profit?

It should hire four workers. By the fourth worker, the marignal revenue is $16, while the marginal cost of hiring the additional fourth worker is $15. In a perfectly competitive market, the profit maximization point is obtained where marginal revenue = marginal cost, which is almost the case here.

(e) if GW Company has fixed costs equal to $20, what will be the company's short-run economic profits from hiring two workers?

If two workers are hired, the total revenue is $52. If the company has fixed costs of $20, and hires two workers costing each $15, the total costs are $50, therefore, in the short-run, the profit is $2.

(1) If the price of hats increases, what will happen to the number of workers hired in the short run?

The number of workers hired will increase because a higher price for hats means a higher marginal revenue for each worker.

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Answer:

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