Calculating Average Depletion Cost per Board Foot of Lumber

What is the average depletion cost per board foot of lumber?

To calculate the average depletion cost per board foot of lumber, we need to divide the total cost of acquiring and developing the land by the estimated total units available. Total cost = $3,700,000 (purchase of land) + $300,000 (construction costs) = $4,000,000 Expenses = Total cost - Residual value = $4,000,000 - $880,000 = $3,120,000 Total cost of asset = Total cost - Residual value = $4,000,000 - $880,000 = $3,120,000 Estimated total units available = 6,500,000 board feet Average depletion cost = Total cost of asset / Estimated total units available Average depletion cost = $3,120,000 / 6,500,000 board feet

Explanation:

To calculate the average depletion cost per board foot of lumber: We start by determining the total cost incurred by Sequoia Timber Company in acquiring and developing the land. The purchase of land cost $3,700,000, and an additional $300,000 was spent on constructing access roads and a company depot, resulting in a total cost of $4,000,000. Next, we calculate the expenses by subtracting the residual value of $880,000 from the total cost, which gives us $3,120,000. This amount represents the total cost of the asset, which is also $3,120,000. The estimated total units available, in this case, the lumber board feet, is 6,500,000. By dividing the total cost of the asset by the estimated total units available, we arrive at the average depletion cost per board foot of lumber, which is approximately $0.48. Therefore, the average depletion cost per board foot of lumber for Sequoia Timber Company is $0.48.

If 782,000 board feet were cut in the second year of operation, what is the amount of the depletion cost for that year?

To calculate the depletion cost for the second year of operation when 782,000 board feet were cut, we can use the previously calculated average depletion cost per board foot. Second year depletion = Average depletion cost * Amount cut in the second year Second year depletion = ($3,120,000 / 6,500,000) * 782,000 board feet Second year depletion = $0.48 * 782,000 board feet Second year depletion = $375,360

Explanation:

To determine the depletion cost for the second year of operation: We utilize the average depletion cost per board foot of lumber, which we calculated earlier to be $0.48. When the company cut 782,000 board feet in the second year, we multiply this quantity by the average depletion cost. By multiplying the average depletion cost of $0.48 by the amount of lumber cut in the second year (782,000 board feet), we arrive at a depletion cost of $375,360 for that specific year. In conclusion, the depletion cost for the second year of operation at Sequoia Timber Company, with 782,000 board feet cut, is $375,360.
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