Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2450081 • 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.A suitable location in a large shopping mall can be rented for $3,400 per month.
b.Remodeling and necessary equipment would cost $312,000. The equipment would have a 20-year life and an $15,600 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 $370,000 per year. Ingredients would cost 20% of sales.
d.Operating costs would include $77,000 per year for salaries, $4,200 per year for insurance, and $34,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 11.0% of sales.
Required:
1.Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.
2.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%.)
3a.Compute the payback period on the outlet. (Round your answer to 1 decimal place.)
Explanation / Answer
RENT PER YEAR=$3,400*12=$40,800
REMODELLING AND NECESSARY EQUIPMENT=$3,12,000
LIFE=20 YEARS
SALVAGE=$15,600
DEPRECIATION=$3,12,000-$15,600/20=$14,820
SALES=$3,70,000
INGREDIENT COST=20%OF SALES=$3,70,000*20%=$74,000
SALARIES=$77,000
INSURANCE=$4,200
UTILITIES=$34,000
COMMISSION=11%OF SALES=$3,70,000*11%=$40,700
1. INCOME STATEMENT OF FRANCHISE OUTLET
2.SIMPLE RATE OF RETURN PROMISED BY THE OUTLET=NET OPERATING INCOME/SALES
=$84,480/$3,70,000
=0.228=22.8%
3.PAYBACK PERIOD ON THE OUTLET=$3,12,000/$84,480=3.69 YEARS
PARICULARS AMOUNT($) SALES 3,70,000 LESS:INGREDIENT COST 74,000 LESS:SALARIES 77,000 LESS:RENT 40,800 LESS:DEPRECIATION 14,820 LESS:INSURANCE 4,200 LESS:UTILITIES 34,000 LESS:COMMISSION 40,700 NET OPERATING INCOME 84,480