Wear Depreciation 



Scoville distinguishes between the fixed and variable elements of depreci- 

 ation of equipment. "Wear depreciation" is associated with the extent of 

 use. "Time depreciation" is defined as that arising, even when equipment 

 is not in use, from rust, decay, or obsolescence.'^ Sammet subscribed to the 

 division into "wear" and "time" depreciation but regards obsolescence as 

 an unpredictable factor, accounting for which must be heavily weighted 

 by prudence." ' 



In the poultry processing industry, technology has been changing rapid- 

 ly since World War II. Plant operators anticipate further changes in the 

 near future, both in technology and in the size and structure of individual 

 firms. Hence, in many instances, equipment may be depreciated at a rapid 

 rate for reasons of technological and structural obsolescence rather than 

 from time or wear depreciation. 



Some larger plants, which operate at close to 90 percent of capacity, de- 

 preciate equipment in four years, or at 25 percent a year. No firm in the 

 study used less than a 20 percent rate. There is widespread variation with 

 plant size in the percentage of capacity at which plants are operated, but 

 it appears that obsolescence is considered by all operators in deciding the 

 depreciation rate. True, the maximum rate permitted by the Internal Revenue 

 Service is involved, but eventually this rate must bear close relationship 

 to industry conditions. 



Figure 4 shows the method used in establishing depreciation charges on 

 poultry processing plant equipment. The time depreciation rate is set at 

 5 percent for all levels of operation since the equipment is well protected 

 from the elements and damage over time can be minimized. A fixed factor 

 (mainly obsolescence) of 20 percent governs the aggregate rate up to 70 

 percent of capacity. From that level on, the effects of wear depreciation 

 govern the magnitude of the increasing charges. 



Constant-unit Operating Costs 



These items are, for any given size of plant, used in direct proportion 

 to volume. Major items included are packages, ice, feed and expendable 

 supplies. Quantity discounts which exist in the purchasing of these items 

 determine the unit-cost associated with plant size. 



Packages 



This item includes wire-bound boxes, liners and marking. For purposes of 

 standardization, it is assumed all outgoing poultry is packed wholesale-style 

 in wire-bound boxes. In practice, some plants prepare consumer packs and 

 smaller plants may use second-hand boxes or crates. 



Ice 



Present technology prescribes the use of ice for cooling and packing. While 

 the rate of use is held constant in this report, the form of ice and the re- 



6 Scoville, 0. J.: Fixed and Variable Elements in Calculation of Machine Depreciation, 

 Agric. Econ. Res., U.S.D.A., Vol. 1, No. 3, July 1949, p. 69-77. 



7 Sammet, L. L., Letter and notes to W. F. Henry, May 27, 1953. 



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