Assume that at the beginning of 2000 Speedy Delivery a Fed Ex competitor purchased a 737 aircraft at a cost of 60,000,000 Speedy Delivery expects the plane to remain useful for 5 years (5 million miles) and to have a residual value of 5,000,000 Speedy Delivery expects to fly the plane for 750,000 miles the first year 1,250,000 miles 2 through 4 and 500,000 miles that last year What is Speedy Delivery first year of depreciation using the Units of Production Method. Should I multiply by 5,000,000 or by 750,000 miles and then divide by by the rate. Please he me I am confused.
To calculate the first year depreciation using the Units of Production Method, you need to determine the depreciation rate per mile. This can be done by dividing the initial cost of the aircraft ($60,000,000) by the total expected mileage over the aircraft's useful life (5 million miles).
Depreciation rate per mile = Initial cost / Total expected mileage
= $60,000,000 / 5,000,000 miles
= $12 per mile
Next, you multiply the depreciation rate per mile by the actual mileage flown in the first year to find the first year depreciation expense.
First year depreciation = Depreciation rate per mile * Actual mileage flown in the first year
= $12 per mile * 750,000 miles
= $9,000,000
Therefore, Speedy Delivery's first-year depreciation using the Units of Production Method would be $9,000,000.
You do not need to multiply by 5,000,000 (the residual value) or divide by the rate when calculating the first year depreciation using the Units of Production Method. The depreciation expense is based on the actual mileage flown in the first year multiplied by the depreciation rate per mile.