Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2497234 • 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 $4,500 per month.
Remodeling and necessary equipment would cost $378,000. The equipment would have a 10-year life and an $37,800 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 $480,000 per year. Ingredients would cost 20% of sales.
Operating costs would include $88,000 per year for salaries, $5,300 per year for insurance, and $45,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 13.0% 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
1) The Yogurt Place (Mr Swanson) Sales 480,000 Less: Cost of Material 96,000 (480,000*20%) Gross Profit 384,000 Less: Salaries 88,000 Less: Insurance 5,300 Less: Utilities 45,000 Less: Rent 54,000 (4500*12) Less: Depreciation 34020 (378,000- 37,800)/10 Less: Commission 62,400 (480,000 * 13%) Net Income 95,280 2a) Rate of Return 25.2% (Net Income/Initial Investment) (95,280/378,000) 2b) Required rate of return is 19% and expected is 25.21% so Mr Swanson so go ahead with acquisition 3a) Cash flow each year: Net Income 95,280 Add: Depreciation 34,020 Cash inflow each year 129,300 Pay Back Period =Cash outflow/Cash inflow =378,000/129,300 2.92 3b) Required pay back period is two year or less but expected pay back period is 2.92 years so Mr Swanson will not acquire the Franchise.