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 $3,100 per month. b. Remodeling and necessary equipment would cost $294,000. The equipment would have a 20-year life and a $14,700 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 $340,000 per year. Ingredients would cost 20% of sales. d. Operating costs would include $74,000 per year for salaries, $3,900 per year for insurance, and $31,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 14.5% 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 three years or less, will he acquire the franchise?

Answer 1

X foc i AB н The Yogurt Place, Inc. Contribution Format Income Statement sales revenue $ 340,000 variable expenses: cost of ingredients $68,000 sales commission $ 49,300 total variable expenses $ 117,300 contribution margin $ 222,700 fixed expenses: rent expense $ 37,200 depreciation expense $ 13,965 salaries expense $ 74,000 insurance expense $ 3,900 utilities expense $ 31,000 total fixed expenses $ 160,065 net operating income $ 62,635 simple rate of return = annual net operating income / initial investment simple rate of return = $62,635 / $294,000 simple rate of return = 21.3% 2B should he acquire the franchise YES reason - because the simple rate of return is greater than the required 18%

B26 | x fc 3A AB C D E F G H 3A annual cash inflow = annual net operating income + annual depreciation expense annual cash inflow = $62,635 + $13,965 annual cash inflow = $ 76,600 payback period = initial investment/ annual cash inflow payback period = 294,000 / $76,600 payback period years 3.8 3B will he acquire the franchinse NO reason - because the payback period is greater than the required 3 years

for formulas and calculations, refer to the images below -

B2 X fa 1 F G H The Yogurt Place, Inc. Contribution Format Income Statement sales revenue 340000 variable expenses: cost of ingredients =E4*20% sales commission =E4*14.5% total variable expenses =D6+D7 contribution margin =E4-E8 fixed expenses: rent expense =3100*12 depreciation expense =(294000-14700)/20 salaries expense 74000 insurance expense 3900 utilities expense 31000 total fixed expenses =SUM(D11:D15) net operating income =E9-E16 2A simple rate of return = annual net operating income / initial investment simple rate of return = $62,635 / $294,000 simple rate of return = =62635/294000 2B should he acquire the franchise YES reason - because the simple rate of return is greater than the required 18%

B26 x for 3A BCO E F G H 3A annual cash inflow = annual net operating income + annual depreciation expense annual cash inflow = $62,635 + $13,965 annual cash inflow = =62635+13965 payback period = initial investment/ annual cash inflow payback period = 294,000 / $76,600 payback period = =294000/76600 years will he acquire the franchinse NO reason - because the payback period is greater than the required 3 years

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