Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2527900 • 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 suitable location in a large shopping mall can be rented for $4,600 per month. b. Remodeling and necessary equipment would cost $384,000. The equipment would have a 10-year life and a $38,400 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation. sales addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 13.5% of sales. c. Based on similar outlets elsewhere. Mr. Swanson estimates that sales would total $490,000 per year. Ingredients would cost 20% of d. Operating costs would include $89,000 per year for salaries, $5,400 per year for insurance, and $46,000 per year for utilities. In 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. If Mr. Swanson requires a simple rate of return of at least 20%, 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?Explanation / Answer
1. Simple Rate of return by investment
Simple Rate of return = Net income earned / Total Investment
Total Investment = 384,000
Net Income = Operating Income - Sales commission - rent paid
= 217,040 - 490,000 x 13.5% - 4,600 x 12 = 95,690
Simple Rate of return = 95,690 / 384,000 = 24.9%
NOTE: In the given case, we can also take rent of 4,600 per month to be investment made. Moreover, I think franchise cost is not given in question which is required to give complete solution. In absence of franchise purchase cost, we are assuming cost of equipment to be investment cost.
2. Payback period
Cash outflows = 384,000
Net Cash INflows = 217,040 + Depreciation - Sales commission - Rent per month
= 217,040 + 34,560 - 66,150 - 4,600 x 12 = $130,250
Payback Period = 130,250 / 384,000 = 0.40 years.
NOTE: Franchise cost not given in question, therefore it is assumed that equipent cost is only cash outflows on investment.