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 3,300 units at $178.00 per unit. The equipment has a cost of $337,600, residual value of $25,400, 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 115.00 Factory overhead (including depreciation) 19.70 Total cost per unit $163.70

Explanation / Answer

Income from the device Annual Sales-3300*178 587400 Cost 3300*163.7 540210 Net Income generated 47190 Net Investment on the equipment Cost 337600 Add: Residual value 25400 363000 Average investment 363000/2 181500 Average rate of return on the equipment Average Income/Av. Investment 47190/181500 26 %

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