Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2448156 • Letter: P
Question
Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc., to dispense frozen yogurt products under The Yogurt Place name. Mr. Swanson has assembled the following information relating to the franchise:
A suitable location in a large shopping mall can be rented for $4,900 per month.
Remodeling and necessary equipment would cost $402,000. The equipment would have a 20-year life and an $20,100 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.
Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $520,000 per year. Ingredients would cost 20% of sales.
Operating costs would include $92,000 per year for salaries, $5,700 per year for insurance, and $49,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 15.0% of sales.
Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.
2a. Compute the simple rate of return promised by the outlet.
2b.If Mr. Swanson requires a simple rate of return of at least 20%, should he acquire the franchise?
3a. Compute the payback period on the outlet
3b.If Mr. Swanson wants a payback of two years or less, will he acquire the franchise?
a.A suitable location in a large shopping mall can be rented for $4,900 per month.
b.Remodeling and necessary equipment would cost $402,000. The equipment would have a 20-year life and an $20,100 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.
c.Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $520,000 per year. Ingredients would cost 20% of sales.
d.Operating costs would include $92,000 per year for salaries, $5,700 per year for insurance, and $49,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 15.0% of sales.
Explanation / Answer
Answer: Calculation of depreciation
= (402000-20100)/20
=19095
Answer 2a) Simple rate of return by outlet = profit / Investment
= 113405/402000
= 28.21%
Answer 2 b) if the required return is 20% than the investor should acept this project
Answer 3a) Calculating Cash InFlow for the outlet
= profit + non Cash Charges
= 113405+19095
=132500
Payback Period = 402000/132500
= 3.03 years or 3 years approx
Answer 3b) if the expected payback period is 2 years than this project should not be accepted
Contribution format Income statement Sales 520000 Less: Variable Expenses Ingrediants @ 20% of sales 104000 Commission @ 15% of sales 78000 Contribution 338000 Less : Fixed Expenses Rent 58800 Salaries 92000 insurance 5700 utilities 49000 Depreciation 19095 profit 113405