Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2472018 • 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 $5,200 per month.
Remodeling and necessary equipment would cost $420,000. The equipment would have a 20-year life and an $21,000 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 $550,000 per year. Ingredients would cost 20% of sales.
Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc., to dispense frozen yogurt products under The Yogurt Place name. Mr. Swanson has assembled the following information relating to the franchise:
Required 1. Prepa re a contribution format income statement that shows the expected net operating income each year from the franchise outlet. PAUL SWANSON Contribution Format Income Statement Variable expenses Selling and administrative expenses 2a. Compute the simple rate of return promised by the outlet. (Round percentage answer to 1 decimal of retum promised by the place, i.e. 0.123 should be considered as 12.3%.) Simple rate of returnExplanation / Answer
1 PAUL SWANSON Contribution format Income statement Amount ($) Amount ($) c Estimited Sales per year 550000 Less: Varriable Expenses: Ingredients 20% of sales 110000 a Rent 5200 per month 62400 d Operating costs: salaries 95000 insurance 6000 Utilities 52000 Selling And administrative Exp: Selling Comision 16.5% of sales 90200 Total variable Cost 415600 Contribution Margin 134400 Less Fixed Cost b Depreciation per year($420000-21000)/20 19950 expected Net operating Income each year 114450 2a Rate of return = return / investement or say 114450/420000 or say 27.25 27.25% second option Return on sales = profit / sales X 100 or say 114450/550000 or say ( in %) 20.81 2b required return 20% Since rate of return is more then the required, he shous acquire the franchies 3a Payback period = cash outflow/cash inflow or say 420000/114450 or say ( in years) 3.670 3b required payback 2 year or less then he shoud not acquire as the current pay back year is more than required period