Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place. In
ID: 2491199 • 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 $3.600 per month. Remodeling and necessary equipment would cost $324,000. The equipment would have a 15-year life and an $21.600 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 $390.000 per year. Ingredients would cost 20% of sales. Operating costs would include $79,000 per year for salaries. $4.400 per year for insurance, and $36,000 per year for utilities In addition. Mr. Swanson would have to pay a commission to The Yogurt Place. Inc., of 12.0% of sales. Required: 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%.)Explanation / Answer
1 Yoghurt Place Inc. Contribution Format Income Statement Sales 390000 Less: Variable Expenses: COGS @ 20% of Sales 78000 Sales Commissions @ 12% of sales 46800 Utilities 36000 160800 Contribution 229200 Less: Fixed Operating Expenses: Rent 3600 Depreciation- Equipment (324000-21600)/15 20160 Salaries 79000 Insurance 4400 107160 Net Operating Income 122040 2 Simple Rate of Return from the outlet 122040/390000 0.312923 ie. 31.29%