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

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%