Homework SourseAverage Rate of ReturnNew Product Pocket Pilot Inc is consid
Average Rate of Return—New Product
Pocket Pilot Inc. is considering an investment in new equipment that will be used to manufacture a mobile communications device. The device is expected to generate additional annual sales of 3,900 units at $173 per unit. The equipment has a cost of $362,700, residual value of $27,300, and an eight-year life. The equipment can only be used to manufacture the device. The cost to manufacture the device is shown below.
Determine the average rate of return on the equipment. If required, round to the nearest whole percent.
%
| Cost per unit: | |||
| Direct labor | $29 | ||
| Direct materials | 111 | ||
| Factory overhead (including depreciation) | 18.5 | ||
| Total cost per unit | $158.5 |
Solution
Answer
average investment = cost of the equipment + residual value / 2
= 362700 + 27300 / 2
= 195000
average rate of return = net income / average investment * 100
= 56550 / 195000 * 100
= 29 %
| total units = 3900 | per unit | total |
| sales | 173 | 674700 |
| LESS | ||
| direct labour | 29 | 113100 |
| direct material | 111 | 432900 |
| factory overhead | 18.5 | 72150 |
| total cost | 158.5 | 618150 |
| net income | 56550 | |
