Question

# Average Rate of Return—New Product Hana Inc. is considering an investment in new equipment that will...

Average Rate of Return—New Product Hana 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 4,100 units at \$227 per unit. The equipment has a cost of \$381,300, residual value of \$28,700, and an 8-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Cost per unit: Direct labor \$37.00 Direct materials 145.00 Factory overhead (including depreciation) 25.00 Total cost per unit \$207.00 Determine the average rate of return on the equipment. If required, round to the nearest whole percent. %

Cost of equipment = \$381,300

residual value = \$28,700

Average investment = (Cost of equipment + Residual value)/2

= (381,300 + 28,700)/2

= 410,000/2

= \$205,000

Income statement

 sales (4,100 x 227) 930,000 Expenses : Direct material (4,100 x 145) -594,500 Direct labor (4,100 x 37) -151,700 factory overhead (4,100 x 25) -102,500 Net income \$81,300

Average rate of return = Annual net income/Average investment

= 81,300/205,000

= 40% (Rpunded to whole percentage)

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