Units-of-Output Method
During the current year, Central Auto Rentals purchased 60 new automobiles at a c o st of $14,000 per car. The cars will be sold to a wholesaler at an estimated $5,000 each as soon as they have been driven 50,000 miles. Central Auto Rentals computes depreciation expense on its automobiles by the units-of-output method, based on mileage.
a. Compute the amount of depreciation to be recognized for each mile that a rental automobile is driven.
b. Assuming that the 60 rental cars are driven a total of 1,570,000 miles during the current year, compute the total amount of depreciation expense that Central Auto Rentals should recognize on this fleet of cars for the year.
c. In this particular situation, do you believe the units-of-output depreciation method achieves a better matching of expenses with revenue than would the straight-line method? Explain.
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