Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2540609 • 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 $4,600 per month.
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.
Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $490,000 per year. Ingredients would cost 20% of sales.
Operating costs would include $89,000 per year for salaries, $5,400 per year for insurance, and $46,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 13.5% 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. 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?
Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.
Connect e https://newconnect.mheducation.com/flow.connect.html 120% … Chapter 13- Homework 6 Help Save & Exit Submit Saved 3 Check my work 2 Complete this question by entering your answers in the tabs below 33.33 points Req 1 Req 2A Req 2B Req 3A Req 3B Compute the simple rate of return promised by the outlet. (Round percentage answer to 1 decimal place.) eBook Simple rate of return Print Mc Graw HillExplanation / Answer
Req 1:
workings for line items:
cost of ingredienets is 20% of sales = 490,000*20% = 98000
Commission = 490,000*13.5% = 66,150
Depreciation = (cost - salvage value)/useful life = (384000-38400)/10 = 34,560
Rent is 4600 per month, for the year = 4600*12 = 55,200
Below is the contribution format income statement:
Req 2A
simple rate of return = net income / investment *100= 95,690/ 384,000 *100 = 24.9%
Req 2B
Since required rate of return of 20% is delivered by the project (24.9%) it should be accepted
Answer is YES
Req 3A
Payback period = initial investment /annual cash inflow
Annual cash flow = Net operating income plus non cash expenses = 95,690 + 34560(depreciation) = 130250
Payback period = 384000/130250 = 2.95 years = 3 years (rouded off)
Req 3B
Project should not be accepted as payback period is higher than required payback period of 2 years
Answer is NO
The Yogurt Place, Inc., Contribution Format Income Statement Sales $ 490,000 Variable expenses: Cost of ingredients $ 98,000 Commissions $ 66,150 $ 164,150 Contribution margin $ 325,850 Fixed expenses: Salaries $ 89,000 Depreciation $ 34,560 Insurance $ 5,400 Utilities $ 46,000 Rent $ 55,200 Net operating income $ 95,690