Question

The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines and has asked the accountant to analyze them to determine the best average rate of return.
Machine A Machine B Machine C
Estimated average income $40,000 $50,000 $75,000
Average investment $300,000 $250,000 $500,000

a. Machine B
b. Machine A
c. Machine B or C
d. Machine C

Answer 1

Answer: the correct answer is a. Machine B

Explanation:

Machine A average rate return

40000 out of 300000. It means that 300000 is 100% and $ 40000 is X. We apply a simple three rule:

40000       X                     X= 4000000/300000

300000     100%               X= 13.33%

Machine B average rate return

50000 out of 250000. It means that 250000 is 100% and $ 50000 is X. We apply a simple three rule:

50000       X                     X= 5000000/250000

250000     100%               X= 20%

Machine C average rate return

$75,000 out of $500,000. It means that $500,000 is 1005 and $75,000 is X. We apply a simple three rule

$75,000     X                       X=7500000/500000

$500,000  100%                 X= 15%

The highest average is the one onf Machine B