Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, In
ID: 2599470 • 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 $3,300 per month b. Remodeling and necessary equipment would cost $306,000. The equipment would have a 15-year life and an $20,400 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, Inc. c. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $360,000 per year. d. Operating costs would include $76,000 per year for salaries, $4,100 per year for insurance, and $33,000 of 15.5% 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 Sellng and administrative expensesExplanation / Answer
SOLUTION
1. Contribution format income statement
2A. Simple rate of return = Annual incremental net operating income / Initial investment
= $60,460 / $306,000 = 19.8%
2B. Yes, he should acquire the franchise, as simple rate of return (19.8%) is more than the required return (17%).
3A. Pay back period = Investment required / Annual net cash flows
=$306,000 / $79,500 = 3.9 years
Annual net cash inflow = Net operating income + Depreciation
= $60,460 + $19,040 = $79,500
3B. No, he will not acquire the franchise, as 3.9 years is more than the maximum 3 years allowed.
Amount ($) Amount ($) Sales 360,000 Variable expenses: Cost of ingredients ($360,000*20%) 72,000 Commissions ($360,000*15.5%) 55,800 127,800 Contribution Margin 232,200 Selling and administrative expenses: Rent ($3,300*12) 39,600 Salaries 76,000 Insurance 4,100 Depreciation [($306,000-$20,400)/15] 19,040 Utilities 33,000 171,740 Net Operating Income 60,460