Cards: Econ 312 Farley Final Qulzlet (no subject) - emmle.hearne@gmail.com-Gmail
ID: 2488480 • Letter: C
Question
Cards: Econ 312 Farley Final Qulzlet (no subject) - emmle.hearne@gmail.com-Gmail 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 $3,000 per month. Remodeling and necessary equipment would cost $288,000 The equipment would have a 15-year life and an $19,200 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 $330,000 per year. Ingredients would cost 20% of sales. Operating costs would include $73,000 per year for salaries, $3,800 per year for insurance, and $30,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 14.0% of sales. a. b. c. d. d. 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 Sales $330,000 Variable expenses: Cost of ingredients Commissions 66,000 46,200 112,200 Contribution margin Selling and administrative expenses: 217,800 Salaries Rent Depreciation Insurance Utilities 73,000 36,000 17,920 3,800 30,000 160,720 57,080 Net operating incomeExplanation / Answer
2a ) the formula to calculate simple rate of return is given below
Simple rate of return = (Incremental revenues Incremental expenses, including depreciation
= Incremental net operating income) / Initial investment]
Where
Net operating income = $57080
Investment = $288,000
Simple rate of return = $57,080 / $288,000
Simple rate of return = 0.1981 or 19.8%
3a ) the payback period is when the cumulative cash inflows are equal to investment . The formula to calculate payback if there is even cash inflow and annual cash inflow is Net profit before depreciation and after tax. It is annual cash flows.
Payback Period = Initial Investment ÷ Annual Cash Flow
Initial investment = $288,000
Annual cash flow = net operating income + depreciation
annual cash flow = $57,080 + $19,920
Annual cash flow = $77,000
Payback Period = 288,000 ÷ 77,000 = 3.74 years or 3.7 years