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. %

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Answer #1
Answer:
Average investment
        = ( Equipemt Cost + Residual Value ) / 2
        =   ( $ 381,300 + $ 28,700 ) / 2
        =      $ 205,000
Net income
     =   ( Sale Price per unit (-) Cost per Unit ) x Units Sold
     =   ( $ 227 (-) $ 207 ) x 4,100 Units
     =      $ 82,000
Average rate of return
          = Net income / Average investment
          =    $ 82,000 / $ 205,000
          =     40%
Average rate of return = 40%
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