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 6,200 units at $311.00 per unit. The equipment has a cost of $518,900, residual value of $39,100, 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 $54.00 Direct materials 209.00 Factory overhead (including depreciation) 35.85 Total cost per unit $298.85

Explanation / Answer

Depreciation = (518900 -39100)/ 8

                      = 59975

AVerage income [(75330* 8) + 39100 ] /8

                         = [602640+ 39100]/8

                       = 80217.5

Average rate of return = Average income /investment

                                        = 80217.5 / 518900

                                        = .1546 or 15.46%

sales     (6200 * 311) 1928200 less:Direct labor   (6200*54) (334800) Direct material   (6200*209) (1295800) Factory overhead   (6200*35.85) (222270) net income 75330

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