Question

Real Wood Structures Company has invested $1,040,000 in a plant to build small tool sheds. The target operating income desired from the plant is $156,000 annually. The company plans annual sales of 1200 sheds at a selling price of $1100 each.

What is the target rate of return on investment for Real Wood Structures Company?

Answer 1

The target rate of return on investment for Real Wood Structures Company is 15%.

Explanation

Rate of return for any investment is the rate on which the return is achieved of any investment made.
It is achieved by using the formula of rate of return on investment as

Net operating income / Initial investment cost x 100

Given,

• Real Wood Structures Company has invested $1,040,000 in a plant to build small tool sheds.
• The target operating income desired from the plant is $156,000 annually.

So,  

Rate of Return = $156,000/1,040,000 x 100 = 15%

This is actual target rate of return that would be achieved by the Real Wood Structures Company.

Note : Here the company plans annual sales of 1200 sheds at a selling price of $1100 each would not affect the rate of return as the target operating income desired from the plant is given.