Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2519815 • 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. A sultable location in a large shopping mall can be rented for $4,400 per month b. Remodeling and necessary equipment would cost $372.000. The equipment would have a 10-year life and a $37,200 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 $470,000 per year. ingredients would cost 20% of sales. d. Operating costs would include $87,000 per year for salaries, $5,200 per year for insurance, and $44,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc. of 12.5% of sales. Required: 1 Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet 2-a. Compute the simple rate of return promised by the outlet 2-b lf Mr. Swanson requires a simple rate of return of at least 18%, should he acquire the franchise? 3-a. Compute the payback period on the outlet 3-b. If Mr. Swanson wants a payback of two years or less, will he acquire the franchise? Complete this question by entering your answers in the tabs below Req 1 Req 2A Req 28 Req 3A Req 38 Prepare a contrjbution format income statement that shows the expected net operating income each year from the franchise 3 4 1Explanation / Answer
1. INCOME STATEMENT
Depreciation = (total cost - salvage value) / no. of years
=(372000 - 37200) /10 = $ 33480
2-a) simple rate of return = annual incremental net operating income / initial investment
= 94770 / 372000 = 25.48%
b) Yes, the franchise would be acquired because it promises a rate of return in excess of 18%.
3-a) Payback period = investment Requuired / annual net cash inflow
= 372000 / 128250
= 2.9 years
*annual net cash inflow = net opearting income + depreeciation = 94770 +33480 = 128250
b) According to the payback computation, the franchise would not be acquired. The 2.9 years payback is greater than the maximum 2 years allowed.
Sales 470000 variable expenses: cost of ingredients (20% of sales) 94000 commission(12.5% of sales) 58750 152750 Contribution margin 317250 Selling and administrative exp.: salaries 87000 rent (4400*12) 52800 Insurance 5200 Utilities 44000 Depriciation 33480 222480 Net Operating Income $ 94770