Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2474169 • 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 $4,100 per month.
Remodeling and necessary equipment would cost $354,000. The equipment would have a 20-year life and an $17,700 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 $440,000 per year. Ingredients would cost 20% of sales.
Operating costs would include $84,000 per year for salaries, $4,900 per year for insurance, and $41,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 14.5% of sales.
Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.
a.A suitable location in a large shopping mall can be rented for $4,100 per month.
b.Remodeling and necessary equipment would cost $354,000. The equipment would have a 20-year life and an $17,700 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 $440,000 per year. Ingredients would cost 20% of sales.
d.Operating costs would include $84,000 per year for salaries, $4,900 per year for insurance, and $41,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 14.5% of sales.
2b If Mr Swanson requires a simple rate of return of at least 20%, should he acquire the franchise? O Yes O No 3a. Compute the payback period on the outlet. (Round your answer to 1 decimal place.) Payback period years 3b. If Mr. Swanson wants a payback of two years or less, will he acquire the franchise? O Yes O NoExplanation / Answer
Statement showing calculation of net operating income
Sales
440000
Variable Expenses
Cost of ingredients
440000*20%
88000
Commissions
440000*14.5%
63800
Contribution Margin
288200
Selling and administration exp
Salaries
84000
Rent
4100*12
49200
Depreciation
(354000-17700)/20
16815
Insurance
4900
Utilities
41000
Net Operating Income
92285
The formula for simple rate of interest is
Simple rate of return = Annual incremental net operating income
---------------------------------------------------------
Initial Investment
= 92285 / 354000
= 26.07%
Yes he should accept franchise because it is more than required rate of interest i.e 20 %.
Pay Back Period = Investment Required
-------------------------------
Annual net cash inflow
= 354000
---------------
109100
= 3.24 years
Net cash flow = 92285 + 16815 = 109100
The payback period calculated is not less than 2 years so it should not be acquired
Statement showing calculation of net operating income
Sales
440000
Variable Expenses
Cost of ingredients
440000*20%
88000
Commissions
440000*14.5%
63800
Contribution Margin
288200
Selling and administration exp
Salaries
84000
Rent
4100*12
49200
Depreciation
(354000-17700)/20
16815
Insurance
4900
Utilities
41000
Net Operating Income
92285