Question

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. %

Answer 1

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)