Sawtooth Manufacturing LLC, manufactures stairway railings. They purchased a $15,000 lathe on January 2, 2015. The lathe was estimated to have a salvage value of $1,000 at the end of its five year useful life. Management is trying to decide on a depreciation method to use for this new asset.

1. Compute the depreciation expense on the new lathe for 2015 and 2016 assuming Sawtooth Manufacturing uses: Straight line method and Double declining balance method

2. Suppose the company decides to apply the units of production method to the new lathe. The lathe will be used to produce approximately 3,500 units over its useful life. Compute the depreciation expense on the lathe for 2015 and 2016 assuming 550 and 670 units of product are made, respectively in 2015 and 2016.

3. Which of the three depreciation methods best satisfies the matching principle? Defend your answer.

4. Under which of the three methods will Sawtooth Manufacturing have the highest net income for 2015 and 2016. Show calculations.

5. If Sawtooth wants to minimize its tax liability, which depreciation method should the company use for 2015 and 2016? Explain your answer.