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 $3,900 per month b. Remodeling and necessary equipment would cost $342,000. The equipment would have a 15-year life and a $22,800 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 $420,000 per year. Ingredients would cost 20% of sales. d. Operating costs would include $82,000 per year for salaries, $4,700 per year for insurance, and $39,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 13.5% 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? Complete this question by entering your answers in the tabs below. Rca 1 Req 2A Req 2B Req 3A Req 3B 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 Sales $ 420,000 Variable expenses: Cost of ingredients $ 140,700 Commissions 279,300 420,000 Contribution margin 0 Fixed expenses: Salaries Insurance Utilities Depreciation 21,280 Rent Net operating income 21,280 (21,280) ROS Req 2A >

Answer 1

The Yogurt Place, Inc.
Contribution Format Income Statement
Sales		420,000
Variable expenses:
Cost of ingredients	84,000
Commissions	56,700
		140,700
Contribution margin		279,300
Selling and administrative expenses:
Salaries	82,000
Rent	46,800
Depreciation	21,280
Insurance	4,700
Utilities	39,000
		193,780
Net operating income		85,520
Working
Cost of ingredients (420,000 x 20%)
Commissions (420,000 x 13.5%)
Rent (3,900 x 12)
Depreciation [(342,000-22,800)/15]