Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2499990 • 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 $5,000 per month.
Remodeling and necessary equipment would cost $408,000. The equipment would have a 20-year life and an $20,400 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 $530,000 per year. Ingredients would cost 20% of sales.
Operating costs would include $93,000 per year for salaries, $5,800 per year for insurance, and $50,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 15.5% 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 18%, should he acquire the franchise?
Compute the payback period on the outlet
If Mr. Swanson wants a payback of two years or less, will he acquire the franchise?
a.A suitable location in a large shopping mall can be rented for $5,000 per month.
b.Remodeling and necessary equipment would cost $408,000. The equipment would have a 20-year life and an $20,400 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.
c.Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $530,000 per year. Ingredients would cost 20% of sales.
d.Operating costs would include $93,000 per year for salaries, $5,800 per year for insurance, and $50,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 15.5% of sales.
Explanation / Answer
Ans 1 Sales 5,30,000.00 Less Variable Costs Ingredients 1,06,000.00 Commision 82,150.00 Total Variable Costs 1,88,150.00 Contribution 3,41,850.00 Less Fixed cost Rent 60000 Depreciation -408000-20400/20 19380 Salaries 93000 Insurance 5800 Utilities 50000 Tootal Opeating Fixed cost 2,28,180.00 Operating Margin 1,13,670.00 Ans 2 a Simple rate of return Operating Margin/Initial Investment net off Salvage value 113670/387600 29.33% Ans 3 a Annual Cash inflow=Contribution-Fixed cost+Depreciation 1,33,050.00 Initial Investment less salvage value 387600 Pay Back Period=Initial Investmet less Salavage value/Annual Cash inflow 2.91 Ans 3b Will not aquire since the pay back required is less than the actual payback.