Average Rate of Return—New Product Pocket Pilot Inc. is considering an investmen

Question

Average Rate of Return—New Product

Pocket Pilot Inc. is considering an investment in new equipment that will be used to manufacture a mobile communications device. The device is expected to generate additional annual sales of 3,900 units at $173 per unit. The equipment has a cost of $362,700, residual value of $27,300, and an eight-year life. The equipment can only be used to manufacture the device. The cost to manufacture the device is shown below.

Determine the average rate of return on the equipment. If required, round to the nearest whole percent.

%

Cost per unit: Direct labor $29 Direct materials 111 Factory overhead (including depreciation) 18.5 Total cost per unit $158.5

Explanation / Answer

Answer   

average investment = cost of the equipment + residual value / 2

= 362700 + 27300 / 2

= 195000

average rate of return = net income / average investment * 100

= 56550 / 195000 * 100

= 29 %

total units = 3900 per unit total sales 173 674700 LESS direct labour 29 113100 direct material 111 432900 factory overhead 18.5 72150 total cost 158.5 618150 net income 56550

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