Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2471995 • 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 $3,500 per month.
Remodeling and necessary equipment would cost $318,000. The equipment would have a 20-year life and an $15,900 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 $380,000 per year. Ingredients would cost 20% of sales.
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:
Required: 1. Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet. PAUL SWANSON Contribution Format Income Statement Variable expenses Selling and administrative expensesExplanation / Answer
1)
2a)
Simple rate of Return
= Net income / (initial investment - slavage value)
= $85895 / ($318000 - $25900)
= 29.41%
2b) Mr. Swansomn should accept the project
3a) Annual net cash flow = net income + depreciation = $85895 + 15105 = $101000
Paybacke period
= Initial investment / net annual cash inflow
= $318000 / $101000
= 3.15 years
3b) No. Mr. Swansom should not accept the project as the payback period of the project is more than three years.
Sales $ 3,80,000.00 Variable expenses: Ingredients (20% of sales) $ 76,000.00 commission (11.5% of sales) $ 43,700.00 $ 1,19,700.00 Contribution $ 2,60,300.00 Selling and administrative expenses: Rent (3500x 12) $ 42,000.00 salaries $ 78,000.00 Depreciation [(318000-15900)/20] $ 15,105.00 Insurance $ 4,300.00 utilities $ 35,000.00 $ 1,74,405.00 Net Income $ 85,895.00