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

Question

Average Rate of Return-New Product Micro Tek Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 4,000 units at $450 per unit. The equipment has a cost of $940,000, residual value of $20,000, and an eight-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Cost per unit: Direct labor Direct materials Factory overhead (including depreciation) $20 205 39 $264 Total cost per unit Determine the average rate of return on the equipment. If required, round to the nearest whole percent

Explanation / Answer

Average rate of return = Average accounting profit / Average Investment

Average accounting profit = Sales - Expenses = (4000 x 450) - (4000 x 264) = 744000

Average Investment = 940000

Average arte of return = 744000/940000 = 79%

Note: Depreciation is already included in factory overheads ans so it is not considered seperately.

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