A Company Is Considering Purchasing a Machine for $21,000

question 127

Multiple Choice

A company is considering purchasing a machine for $21,000.The machine will generate an after-tax net income of $2,000 per year.Annual depreciation expense would be $1,500.What is the approximate accounting rate of return?

• A) 19%
• B) 33%
• C) 17%
• D) 10%
• E) 25%

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Definitions:

Variable Costing

A method of costing that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in the cost of a unit of product.

Absorption Costing

An accounting method that includes all manufacturing costs - direct labor, direct materials, and overhead - in the cost of a product.

Net Operating Income

A company's revenue minus its operating expenses, not including taxes and interest.

Fixed Manufacturing Overhead

The total of all production costs that do not change with the level of production output, such as salaries of managers, rent, and property taxes.