CUTITUP Co., a hypothetical company, purchases a milling machine, a type of machine used for shaping metal, at a total cost of $10,000. $2,000 was estimated to represent the cost of the rotating cutter, a significant component of the machine. The company expects the machine to have a useful life of eight years and a residual value of $3,000 and that the rotating cutter will need to be replaced every two years. Assume the entire residual value is attributable to the milling machine itself, and assume the company uses straight-line depreciation for all assets.

1. How much depreciation expense would the company report in Year 1 if it uses the component method of depreciation, and how much depreciation expense would the company report in Year 1 if it does not use the component method?

2. Assuming a new cutter with an estimated two-year useful life is purchased at the end of Year 2 for $2,000, what depreciation expenses would the company report in Year 3 if it uses the component method and if it does not use the component method?

3. Assuming replacement of the cutter every two years at a price of $2,000, what is the total depreciation expense over the eight years if the company uses the component method compared with the total depreciation expense if the company does not use the component method?
4. How many different items must the company estimate in the first year to compute depreciation expense for the milling machine if it uses the component method, and how does this compare with what would be required if it does not use the component method?