Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2568718 • 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 $4,400 per month.
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.
Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $470,000 per year. Ingredients would cost 20% of sales.
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. If 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
Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.
Req 2A
Compute the simple rate of return promised by the outlet. (Round percentage answer to 1 decimal place.)
Req 2B
If Mr. Swanson requires a simple rate of return of at least 18%, should he acquire the franchise?
Req 3A
Compute the payback period on the outlet. (Round your answer to 1 decimal place.)
Req 3B
If Mr. Swanson wants a payback of two years or less, will he acquire the franchise?
Explanation / Answer
1) Income Statement :-
2)
a). Simple Rate of Return (ROR) :-
ROR = Net Operating Income / Initial Investment
= $94770/$372000
= 25.48%
b). Rate of Return is higher than 18%, he should take franchise.
3)
a). Payback Period :-
Annual Net Cash Flow = $94770 + $33480 = $128250
Payback Period = Initial Investment / Annual Net Cash Flow
= $372000 / $128250
= 2.9 Years
b). Payback Period is more than two years, he will not acquire franchise.
Particulars Amount ($) Amount ($) Sales 470000 Variable Expenses :- Cost of Ingredients ($470000*20%) 94000 Commissions ($470000*12.5%) 58750 (152750) Contribution Margin 317250 Selling and Administrative Expenses:- Salaries 87000 Depreciation($372000-$37200)/10 33480 Insurance 5200 Utilities 44000 Rant 52800 (222480) Net Operating Income 94770