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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
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.

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

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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