Average Rate of Return-New Product Micro Tek 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 4,000 units at $450 per unit. The equipment has a cost of $940,000, residual value of $20,000, and an eight-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Cost per unit: Direct labor $20 Direct materials 205 Factory overhead (including depreciation) 39 Total cost per unit $264 Determine the average rate of return on the equipment. If required, round to the nearest whole percent.

Question

Business

Lea Suarez

7 September, 10:56

Average Rate of Return-New Product Micro Tek 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 4,000 units at $450 per unit. The equipment has a cost of $940,000, residual value of $20,000, and an eight-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Cost per unit: Direct labor $20 Direct materials 205 Factory overhead (including depreciation) 39 Total cost per unit $264 Determine the average rate of return on the equipment. If required, round to the nearest whole percent.

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Malcolm Friedman · Answer 1

155%

Explanation:

The computation of Average rate of return is shown below:-

Annual operating income = Sales - Manufacturing cost

= (4,000 * $450) - (4,000 * $264)

= $744,000

Average investment = (Initial cost + Residual value) : 2

= ($940,000 + $20,000) : 2

= $480,000

Average rate of return = Average annual operating income : Average investment

= $744,000 : $480,000

= 155%