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 $3,000 per month. b. Remodeling and necessary equipment would cost $288,000. The equipment would have a 15-year life and a $19,200 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation. C. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $330,000 per year. Ingredients would cost 20% of sales. d. Operating costs would include $73,000 per year for salaries, $3,800 per year for Insurance, and $30,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 14.0% of sales. Required: 1. Prepare a contribution format Income statement that shows the expected net operating Income each year from the franchise outlet 12-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 17%, should he acquire the franchise? 13-a. Compute the payback period on the outlet. 3-b. If Mr. Swanson wants a payback of three years or less, will he acquire the franchise? Complete this question by entering your answers in the tabs below. Rega Reg 1 Req 2A Regza Reg 28 Reg ze Reg 3A Reg 3A Reg 3B Reg 38 Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet. The Yogurt Place, Inc., Contribution Format Income Statement Variable expenses: Fixed expenses:

Answer 1

Solution 1:

Contribution format income statement - Paul Swanson
Particulars		Amount
Sales		$3,30,000.00
Variable costs:
Ingredients	$66,000.00
Commisions	$46,200.00
Total variable costs		$1,12,200.00
Contribution margin		$2,17,800.00
Fixed costs:
Rent	$36,000.00
Depreciation	$17,920.00
Salaries	$73,000.00
Insurance	$3,800.00
Utilities	$30,000.00
Total fixed costs		$1,60,720.00
Net operating income		$57,080.00

Solution 2a:

Simple rate of return = Net operating income / Initial investment =$57080/ $288,000 = 19.82%

Solution 2b:

As simple rate of return exceeded the required rate of return, therefore swanson should acquired the franchise

Solution 3a:

Annual cash inflows = Net operating income + Depreciation = $57080 + $17920 = $75,000

Payback period = Initial investment / annual cash inflows = $288,000 / $75,000 = 3.84 years

Solution 3b:

As payback period is higher than 3 year, therefore Swanson should not acquire the franchise.