Hana 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 4,300 units at $275 per unit. The equipment has a cost of $399,900, residual value of $30,100, and an 8-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows:Cost per unit:  Direct labor$47.00 Direct materials184.00 Factory overhead (including depreciation)32.50  Total cost per unit$263.50Determine the average rate of return on the equipment. If required, round to the nearest whole percent. %

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Asked Dec 6, 2019
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Hana 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 4,300 units at $275 per unit. The equipment has a cost of $399,900, residual value of $30,100, and an 8-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows:

Cost per unit:  
  Direct labor $47.00
  Direct materials 184.00
  Factory overhead (including depreciation) 32.50
    Total cost per unit $263.50

Determine the average rate of return on the equipment. If required, round to the nearest whole percent.
 %

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Expert Answer

Step 1

Average Rate of Return

Average Rate of Return measures the profitability of the investments on the basis of the information taken from the financial statements rather than the cash flow. It is also called accounting rate of return.

Step 2

Calculation of Average Rate of Re...

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Amount ($) 1,182,500 Particulars Sales (4,300 units x $275) Less: Manufacturing Cost (4,300 units ×$263.50) Annual Operating Income 1,133,050 49.450 Initial Cost + Residual Value Average Investment = $399,900 + $30,100 $430,000 = $215,000

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