Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2585038 • 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 $4,200 per month b. Remodeling and necessary equipment would cost $360,000. The equipment would have a 15-year life and an $24,000 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation Ingredients would cost 20% of sales per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place c. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $450,000 per year. d. Operating costs would include $85,000 per year for salaries, $5,000 per year for insurance, and $42,000 Inc., of 15.0% of sales Required: 1. Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet. PAUL SWANSON Contribution Format Income Statement Variable expenses Selling and administrative expensesExplanation / Answer
Requirement 1: Contribution format Income Statement Paul Swanson Contribution Format Income Statement Amount in $ Expected Sales Revenue 450,000 Less: Variable Cost Cost of Ingredients (450,000*20%) 90000 Sales commission (450,000*15%) 67500 Contribution Margin 292,500 Less: Selling and Administrative Expense Rent of Mall (4200*12) 50,400 Annual Salaries 85,000 Annual Insurance 5,000 Utilities Expense 42,000 Annual Depreciation(See note) 22400 Net Operating Income 87,700 Note: Annual Depreciation under SLM as follows: Original Cost of Asset : 360,000 Salvage value : 24,000 Estimated Life : 15 years Annual Depreciation = Original Cost-Salvage Value / Estimated life (360,000-24,000) /15 = $ 22,400 Req 2A: Simple Rate of return promised by Outlet Simple rate of return = Net operating income from project / Initial Investment *100 ( 87,700 / 360,000) *100 = 24.4% Req 2B: If Mr. Swanson requires a simple rate of return of 21%, he should acquire the Franchise YES As, the expectes simple rate of return is 24.4% more than required rate of return of 21% Req 3A: Pay back period of Project Annual Cash inflows of the project: Net Operating Income 87,700 Add: Depreciation 22,400 Annual Cash inflows 110,100 Pay Back period of Project = Initial Investment / Annual Cash inflows ( 360,000 /110,100 ) = 3.3 years Req 3B: If Mr. Swanson wants a payback of 3 years or less, then he should not acquire the Franchise No. As the actual payback period is 3.3 years more than required payback period of 3 years or less.'