# 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 productMicro 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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