Answer:
$12,600
Explanation:
If Olivia Company uses the units of production depreciation method, we must calculate the depreciation cost per mile:
depreciation cost per mile = (purchase cost - salvage value) / total miles driven
depreciation cost per mile = ($50,000 - $5,000) / 250,000 miles
depreciation cost per mile = $45,000 / 250,000 = $0.18 per miles
Now we multiply by the total miles driven the first year times the depreciation cost per mile = 70,000 units x $0.18 per unit = $12,600
The correct answer is $12,600
The unit of production depreciation method is to determine the level at which value of assets has depreciated over time. The units of production depreciation enable company to determine the value of assets upon usage.
The depreciation cost per miles can be calculated by subtracting the purchased cost from the salvage value and divide the quotient by the total miles.
This can be expressed as:
Depreciation cost per miles = (purchase cost - salvage value) / total miles driven
From the given question:
Substituting the value, then we have:
Depreciation cost = ($50,000 - $5,000) / 250,000 miles
= $45,000 / 250,000 miles
=$0.18 per miles
Recall the total miles driven in first year (2008) is 7000 miles; therefore, you have to multiply the value derived and the total mines driven in first year.
Therefore, you have:
7000 x 0.18
= $12,600
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