Bitum Incorporated purchased equipment in 20X1 and at that time the estimated useful life of the equipment was estimated to be 12 years. Management’s estimated maintenance costs would be less than $300 in the first 2 years, $500 in the subsequent 3 years, and $1,000 thereafter.

Bitum Incorporated Equipment Maintenance Costs 20X1–20X8

Required:

1. Interpret the graph, and present your conclusions, with an explanation, on Bitum’s maintenance costs in comparison to management’s estimates.

2. Suggest possible reasons for the trend in maintenance costs.

3. Consider management’s original 12-year useful life estimate of the equipment. What are the implications for management’s estimate given the trend in maintenance costs shown in the graph?

Transcribed Image Text:

Maintenance costs (dollars 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 20x120x2 20x3 20x2 20x3 Actual costs 20x4 20x4 20x5 Year 20x5 20x6 20x7 20X8 ---Management estimate