A contractor owns a bulldozer that cost $180,000 new, has a useful life of 8 years, and an estimated salvage value of $36,000. Using straight-line depreciation, what is the hourly ownership cost if the machine operates 1,500 hours per year?
Correct Answer
B) $12.00 per hour
Annual depreciation: ($180,000 - $36,000) ÷ 8 years = $18,000/year. Hourly depreciation: $18,000 ÷ 1,500 hours = $12.00/hour. This represents the ownership cost component for equipment costing.
Why This Is the Correct Answer
The correct answer is B ($12.00 per hour) because it properly applies the straight-line depreciation formula to calculate hourly ownership cost. First, we calculate annual depreciation by subtracting salvage value from original cost and dividing by useful life: ($180,000 - $36,000) ÷ 8 = $18,000 per year. Then we divide the annual depreciation by annual operating hours: $18,000 ÷ 1,500 hours = $12.00 per hour. This represents the depreciation component of equipment ownership cost.
Why the Other Options Are Wrong
Option A: $10.00 per hour
Option A ($10.00) is too low and would result from an incorrect calculation, possibly using the wrong depreciation amount or operating hours.
Option C: $15.00 per hour
Option C ($15.00) is too high and might result from forgetting to subtract the salvage value or using incorrect operating hours in the calculation.
Option D: $18.00 per hour
Option D ($18.00) is too high and could result from dividing the total depreciable amount by 1,000 hours instead of 1,500 hours, or other calculation errors.
Memory Technique
Remember 'CASH': Cost minus salvage, Annual depreciation, Split by hours = Hourly rate
Reference Hint
Look up equipment depreciation and ownership costs in construction estimating chapters, typically found in project management or cost estimation sections.
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