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 3,800 units at $174.00 per unit. The equipment has a cost of $388,700, residual value of $29,300, and an eight-year life. The equipment can only be used to manufacture the device. The cost to manufacture the device is shown below Cost per unit: Direct labor Direct materials Factory overhead (including depreciation) $28.00 110.00 19.50 $157.50 Total cost per unit Determine the average rate of return on the equipment. If required, round to the nearest whole percent. 16%

Explanation / Answer

Average investment = (388700+29300)/2 = 209000

Annual return = (174-157.50)*3800 = 62700

Average rate of return = annual income*100/average investment

                               = 62700*100/209000

Average rate of return = 30%

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