What is the formula for the amortized rate in the example?

• A. Upfront cost divided by total hours in a year, plus hourly usage rate
• B. Upfront cost divided by total hours in a year, minus hourly usage rate
• C. Upfront cost divided by total hours in a year, times hourly usage rate
• D. Upfront cost divided by total hours in a year, divided by hourly usage rate

Answer: (A)

The idea is to combine a fixed cost that is spread over time with a variable cost that depends on usage. Splitting the upfront cost by the total hours in the period yields the fixed amortized amount per hour, and then you add the hourly usage cost to account for actual usage. This gives a per-hour rate that reflects both the capitalized expense and the ongoing operating expense.

For example, with an upfront cost of $1,200 and 2,000 total hours in a year, the fixed portion is 1,200 divided by 2,000 = $0.60 per hour. If the hourly usage rate is $0.50, the overall amortized rate is $0.60 + $0.50 = $1.10 per hour. The other options (subtracting, multiplying, or dividing by the hourly rate) don’t produce a consistent cost-per-hour measure and don’t reflect how fixed and variable costs combine.