Average Rate of Return-New Product Arrowhead Inc. is considering an investment i

Question

Average Rate of Return-New Product Arrowhead Inc. is considering an investment in new equipment that will be used to manufacture a mobile communications product. The product is expected to generate additional annual sales of 4,600 units at $308.00 per unit. The equipment has a cost of $513,400, residual value of $38,600, and an 8-year life. The equipment only can be used to manufacture the product. The cost to manufacture the product is shown below. Cost per unit: Direct labor Direct materials Factory overhead (including depreciation) $51.00 198.00 34.40 $283.40 Total cost per unit Determine the average rate of return on the equipment.

Explanation / Answer

Average rate of return = average annual profit/average investment

Average investment = (513,400+38,600)/2 = $276,000

Average annual profits = 4600 units*(308 – 283.40)

= $113,160

Thus average rate of return = 113160/276000

= 41.00%

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