Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2491640 • 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.
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 24%, 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
Answer:1
The contribution format income statement would be:
Explanation:
1) Cost of the ingredient :20% *$390000 sales revenue = $78000
2) commission: 12.0% * $390000 sales revenue = $46800
3) According to straight-line method, Depreciation is calculated as:
Depreciation = (Initial cost of the equipment - Salvage value)/ Estimated life of the equipment
Depreciation = ($324000 - $21600)/15 years
= $302400 / 15 years = $20160
4) Rent expenses= Monthly expenses * No. of months in a year
Rent expenses = $3600 per month * 12 months in a year = $43200
Answer: 2- a
Simple rate of return = Annual incremental net operating income/ Initial investment
Simple rate of return = $82440 / $324000 = 25.4%
Answer: 2 -b
Yes, the franchise would be acquired because it promises a rate of return in excess of 24%.
Answer: 3- a
Payback period = Initial investment/ Annual net cash inflow
Payback period = $324000 / $102600 = 3.2 years
Explanation:
Annual net cash inflow = Annual net opearting income + Depreciation
Annual net cash inflow = $82440 + $20160 = $ 102600
Answer: 3- b
According to the payback computations, the franchise would not be acquired. The 3.2 years is more than the maximum 3 years allowed.
Sales 390000 Variable expenses: Cost of the ingredient 78000 Commissions 46800 124800 Contribution margin 265200 Selling and administrative expenses: Rent 43200 Salaries 79000 Insurance 4400 Utilities 36000 Depreciation 20160 182760 Net operating income 82440