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 5,100 units at $185.00 per unit. The equipment has a cost of $569,200, residual value of $42,800, 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 $30.00 Direct materials 117.00 Factory overhead (including depreciation) 20.00 Total cost per unit $167.00

Explanation / Answer

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

Net income = Sales-cost per unit = (185-167)*5100 = 91800

Average investment = (569200+42800/2) = 306000

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

= 91800*100/306000

Average rate of return = 30%

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