a firm that rends DVDs to customers capitalizes the cost of newly released DVDs that it purchases and depreciates them over three years to a value of zero. Based on the underlying economies of the DVD rental business, the most appropriate method of depreciation for the firm to use on its financial statements is: a) straight line b) declining balance c) units of production i selected B and it was correct, but I am still not sure why answer should not be C Given fixed cost of each rental, why is it not better to use units of production method for depreciation?
Because DVD rentals charge a higher price for new releases. The films stop being new releases quicker; so lose a lot of their value earlier on. Declining balance mirrors this by charging a higher rate of depreciation earlier on. (NOTE: the sum of depreciation is the same under declining balance and straight line). A similar analogy is a new car; depreciates a huge amount in its first year (say 20% just for driving it off the forecourt), depreciation levels off after the first few years. Hope this helps.
Also, I’d expect units of production depreciation would only be especially valuable if each DVD was being depreciated separately. A database manager might say “no problem” but an accountant would say “too much detail.”