Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2474775 • 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 $5,100 per month.
Remodeling and necessary equipment would cost $414,000. The equipment would have a 15-year life and an $27,600 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 $540,000 per year. Ingredients would cost 20% of sales.
Operating costs would include $94,000 per year for salaries, $5,900 per year for insurance, and $51,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 16.0% 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?
Compute the payback period on the outlet. (Round your answer to 1 decimal place.)
If Mr. Swanson wants a payback of two 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
Answer :
1. Net operating income each year from the franchise outlet is computed as under :
Sales 540,000
Cost Of Sales 108,000
Gross Profit 432,000
Expenses:
Salaries 94,000
Rent 61,200 (5,100*12)
Commissions 86,400 (540,000*16%)
Utilities 51,000
Depreciation 25,760 {(414,000 - 27,600)/15}
Insurance 5,900
Total Expenses 324,260
Net Income 107,740
2a. Simple rate of return promised by outlet = Net income / Sales * 100
= 107,740/540,000 * 100 = 0.199 (rounded off)
2b. Yes, Mr. Swanson should acquire the franchise if he requires a simple rate of return of at least 19% because at present the franchisee is earning more than 19 % i.e. 19.9% which is above the expectations.
3a. Payback period for an outlet = Initial investment / Annual cash inflow
= $ 414,000 / 107,740 = 4 years (rounded off)
3b. No, Mr. Swanson should not purchase the franchise If Mr. Swanson wants a payback of two years or less because the current payback period of 4 years is much higher than expected payback period i.e. of 2 yearsor less.