Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2473278 • 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 $4,200 per month.
Remodeling and necessary equipment would cost $360,000. The equipment would have a 15-year life and an $24,000 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 $450,000 per year. Ingredients would cost 20% of sales.
Operating costs would include $85,000 per year for salaries, $5,000 per year for insurance, and $42,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 15.0% 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 21%, 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
1) Summarizing above we prepare income statement as below
Sale Value 450000 List of Variable cost ( Those expenses which are directly variable to Sales) 1 Ingredients 20 % of sales 90000 2 Commision 15 % of sales 67500.00 Total Variable cost 157500.00 Contribution earned ( Sales - Variable cost) 292500 List of Fixed costs 1 Rent 4200 per month 50400.00 2 Depreciation (Total cost - Salvage Value)/ Life of asset 22400.00 (360000 - 24000) / 15 3 Insurance 5000 per year 5000 4 Salaries 85000 per year 85000 5 Utilities 42000 per year 42000 Total Fixed costs 204800.00 Profit / Net Income ( Contribution - Fixed cost) 87700.00