Pocket Pilot Inc. is considering an investment in new equipment that will be use

Question

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 6,400 units at $253.00 per unit. The equipment has a cost of $654,700, residual value of $49,300, 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 $42.00 Direct materials 163.00 Factory overhead (including depreciation) 28.20 Total cost per unit $233.20

Explanation / Answer

Answer is 36%

Average rate of return on the equipment = Average annual income /Average investment

Aveage annual income =(253-233.20)*6400 units =126720

Average investment = (Beginning Cost+Residual cost)/2) =(654700+49300)/2 =352000

Average rate of return on the equipment = =126720/352000 =36%

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