Average Rate of Return—New Product Pocket Pilot Inc. is considering an investmen

Question

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 6,300 units at $173.00 per unit. The equipment has a cost of $703,100, residual value of $52,900, 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 $29.00 Direct materials 112.00 Factory overhead (including depreciation) 19.40 Total cost per unit $160.40

Explanation / Answer

Unit Total Sales 173 1089900 Les: Cost Direct Labour 29 182700 Direct Material 112 705600 Factory Overhead 19.4 122220 Total Cost 160.4 1010520 Annual Net Income 12.6 79380 Cost of Machine 703100 Less: Solvage value 52900 Net Investment 650200 12.21% Average Rate of Return = 79380/650200 = 12.21%

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