Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2598522 • 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 $3,600 per month b. Remodeling and necessary equipment would cost $324,000. The equipment would have a 15-year life and an $21,600 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 $390,000 per year. d. Operating costs would include $79,000 per year for salaries, $4,400 per year for insurance, and $36,000 Inc., of 12.0% of sales Required: 1. Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.Explanation / Answer
Contribution Format income statement Sales 3,90,000 Variable Expenses Cost of Goods Sold 78,000 Comission on sales 46,800 1,24,800 Contribution 2,65,200 Selling & Admn Exp (fixed) Rent 43,200 Salaries 79,000 Insurance 4,400 Depreciation 20,160 Utilities 36,000 1,82,760 Net operating Income 82,440 Cost of Equipment 3,24,000 Less: Salvage Value 21,600 Net cost for Depn 3,02,400 Life 15 Depn P.a. 20,160 Simple ROI 82440/324000 25.44% Yes, since the simple rate of return is 25.44% which is greater than required ROR 24% Payback period Initial investment 324000 Net oprating income 102600 Add; Depn P.a. 20,160 Net Cash Flow 1,22,760 Payback period=324000/122760 2.64 Years yes, Since payback is less than 3 years i.e. 2.64 years