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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.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 26, Problem 26.3EX
Textbook Problem

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.

Expert Solution
To determine

Average Rate of Return:

Average rate of return is a method that measures the average earnings of a particular business, as a percentage of the average investment. It is also known as accounting rate of return.

Calculation of Average rate of return:

AverageRateofReturn}=(EstimatedAverageAnnualIncome)(AverageInvestment)×100

To determine: The average rate of return on equipment.

Explanation of Solution

The average rate of return on the equipment is 155%.

Working Notes:

Calculation of Average Rate of Return on equipment:

AverageRateofReturn}=(AverageAnnualIncome)(AverageInvestment)×100=(AverageRevenues-AnnualProductCosts)(BeginningCost

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Chapter 26 Solutions

Accounting
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