Question

Beacon Company is considering automating its production facility. The initial investment in automation would be $9.60 million, and the equipment has a useful life of 8 years with a residual value of $1,120,000. The company will use straight-line depreciation. Beacon could expect a production increase of 38,000 units per year and a reduction of 20 percent in the labor cost per unit.

	Current (no automation)			Proposed (automation)
	77,000 units			115,000 units
Production and sales volume	Per Unit		Total	Per Unit		Total
Sales revenue	$	93	$ ?	$	93	$ ?
Variable costs
Direct materials	$	16		$	16
Direct labor		20			?
Variable manufacturing overhead		11			11
Total variable manufacturing costs		47			?
Contribution margin	$	46	?	$	50	?
Fixed manufacturing costs			$ 1,090,000			$ 2,290,000
Net operating income			?			?

PA11-2 Part 2

2. Determine the project's accounting rate of return. (Round your answer to 2 decimal places.)

Answer 1