Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2448223 • 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 $2,800 per month.
Remodeling and necessary equipment would cost $276,000. The equipment would have a 20-year life and an $13,800 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 $310,000 per year. Ingredients would cost 20% of sales.
Operating costs would include $71,000 per year for salaries, $3,600 per year for insurance, and $28,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 13.0% of sales.
Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.
Compute the simple rate of return promised by the outlet. (Round percentage answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.)
If Mr. Swanson requires a simple rate of return of at least 15%, should he acquire the franchise?
Compute the payback period on the outlet. (Round your answer to 1 decimal place.)
If Mr. Swanson wants a payback of three years or less, will he acquire the franchise?
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:
Explanation / Answer
Solution:
(1). Contribution Income Statement:
The Yogurt Place, Inc
Contribution Income Statement
(2)a. Simple Rate of Return Promised by the Outlet:
The formula for the simple rate of return is:
Rate of Return = $ 58,390 / $ 2,76,000 * 100
= 21.15%
(2)b. Yes the Franchise whould be acquired Because it Promises a Rate of Return Excess the 15 %.
(3)a. Pay Back Period:
Pay Back Period = $2,76,000 / $ 71,500
= 3.9 Years
Annual Net Cash Inflows = Net Income + Depreciation
= 58,390 + 13,110
= $ 71,500
(3)b.
According to the payback computation, the franchise would be Not acquired. Because the 3.9 years payback is Higher than themaximum 3 years allowed.
Particulars Amount Amount Sales $ 3,10,000 Less: Variable Expencess Commission ( 3,10,000 * 13 / 100 ) 40,300 Ingrediens ( 3,10,000 * 20 / 100 ) 62,000 $1,02,300 Contribution Margin $ 2,07,700 Less: Depreciation 13,110 Less: Insurencess 3,600 Less: Salaries 71,000 Less: Utilities 2 8,000 Less: Rent ( 2,800 * 12 ) 33,600 $1,49,310 Net Income $ 58,390