Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2470994 • 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 $4,000 per month.
Remodeling and necessary equipment would cost $348,000. The equipment would have a 20-year life and an $17,400 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 $430,000 per year. Ingredients would cost 20% of sales.
Operating costs would include $83,000 per year for salaries, $4,800 per year for insurance, and $40,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 14.0% 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 19%, should he acquire the franchise?
No
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
1)Income statement
2a)simple rate of return = net income / Investment
= 89670 / 384000
=.2335 or 23.35%
2b)yes , as actual return is more than required return.
3a)cash flow = net income +depreciation
= 89670+18330
= 108000
Pay back period = year up to which cummulative cash flow is negative+ (cummulative cash flow of that year /cash flow of next year)
cummulative cash flow up to year 3 = - 384000 + (108000 *3) = - 60000
up to year 4 = -384000+ (108000*4) = 48000
Payback period = 3 + (60000 / 108000)
= 3 + .56
= 3.56 years
3b)No,As payback period is more than required payback period of 3 years or less.
sales 430,000 less:Variable expense Cost of sales (430,000* .20) (86,000) Sales commission (430,000 * .14) (60200) contribution margin 283,800 less:Fixed expense Rent (4000*12) (48000) salary (83000) Insurance (4800) Utilities (40000) Dpreciation [(384000-17400) /20] (18330) Total fixed cost (194130) Net income 89,670