Question 11.5: For purposes of comparison with previous examples, assume th...
For purposes of comparison with previous examples, assume that equipment costing \$900,000 has been purchased for use in a sand and gravel pit. The pit will operate for five years, while a nearby airport is being rebuilt and paved. Then the pit will be shut down and the equipment removed and sold for \$70,000. Compute the UOP depreciation schedule if the airport reconstruction schedule calls for 40,000 cubic metres of sand and gravel as follows:
| Year | Sand and Gravel Required \left( m^{3} \right) |
| 1 | 4,000 |
| 2 | 8,000 |
| 3 | 16,000 |
| 4 | 8,000 |
| 5 | 4,000 |
The cost basis, B, is \$900,000. The salvage value, S, is \$70,000. The total lifetime production for the asset is 40,000 cubic metres of sand and gravel. From the airport reconstruction schedule, the first-year UOP depreciation would be
First-year UOP depreciation =\left( 4,000 m^{3}/40,000 m^{3} \right)×\left( \$900,000-\$70,000 \right)=\$83,000Similar calculations for the subsequent four years give the complete depreciation schedule:
| Year | UOP Depreciation \left( \$000 \right) |
| 1 | \$83 |
| 2 | 166 |
| 3 | 332 |
| 4 | 166 |
| 5 | \frac{83}{\$830} |
Note that the unit-of-production depreciation charge in any year is based on the actual production for the year rather than on the scheduled production.