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:
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 19%, should he acquire the franchise?
3-a. Compute the payback period on the outlet.
3-b. If Mr. Swanson wants a payback of two years or less, will he acquire the franchise?
1) | ||
Contribution Margin Income Statement | ||
Sales | 540000 | |
Variable expenses: | ||
Ingredients (540,000*20%) | 108000 | |
Commissions (540,000*16%) | 86400 | 194400 |
Contribution Margin | 345600 | |
Less: Fixed expenses | ||
Rent (5100*12) | 61200 | |
Depreciation (414,000-27600)/15 | 25760 | |
Insurance | 5900 | |
Utilities | 51000 | |
Salaries | 94000 | 237860 |
Net Operating Income | 107740 |
2-a) |
Simple rate of return = Annual net operating income/Initial investment |
Simple rate of return = 107,740/414000 |
Simple rate of return = 26.0% |
2-b) |
As the simple rate of return computed above is more than the required |
rate of return (19%), Mr. S should acquire the franchise |
3-a) |
Payback period = Initial Investment/ Annual net cash flow |
Payback period = 414,000/(107740+25760) |
Payback period = 414,000/133500 |
Payback period = 3.1 years |
3-b) |
As the payback period computed above is more than the required |
payback period of 2 years, Mr. S should not acquire the franchise |
1) | The Yogurt Place, Inc | ||||
Contribution format Income Statement | |||||
Sales Revenue | 540,000 | ||||
Variable Expenses | |||||
Ingredients | 108,000 | ||||
Sales Commission | 86,400 | 194,400 | |||
Contribution margin | 345,600 | ||||
Fixed Expense: | |||||
Rent | 61,200 | ||||
Depreciation | 25,760 | (414000-27600)/15 | |||
Salaries | 94,000 | ||||
Insurance | 5,900 | ||||
Utilities | 51,000 | 237,860 | |||
Net Operating Income | 107,740 | ||||
2)-A | Simple Rate of Return = Annual Net Income/ Initial Investment | ||||
=(107740/414000) | |||||
26.0% | |||||
2)-B | Yes | ||||
3-A) | payback Period =Initial investment / Annual net cash flow | ||||
=(414000/133500) | |||||
3.1 | Years | ||||
3-B) | No | ||||
Note: Annual net cash flow = net income + depreciation | |||||
=(107740+25760) | |||||
133,500 |
Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc., to dispense...
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 suitable location in a large shopping mall can be rented for $4,300 per month. Remodeling and necessary equipment would cost $366,000. The equipment would have a 20-year life and a $18,300 salvage value. Straight-line depreciation would be used, and the salvage value would be...
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 suitable location in a large shopping mall can be rented for $3,100 per month. 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...
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 suitable location in a large shopping mall can be rented for $3,500 per month. Remodeling and necessary equipment would cost $318,000. The equipment would have a 20-year life and a $15,900 salvage value. Straight-line depreciation would be used, and the salvage value would be...
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 suitable location in a large shopping mall can be rented for $3,600 per month. Remodeling and necessary equipment would cost $324,000. The equipment would have a 15-year life and a $21,600 salvage value. Straight-line depreciation would be used, and the salvage value would be...
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 suitable location in a large shopping mall can be rented for $3,500 per month. Remodeling and necessary equipment would cost $318,000. The equipment would have a 20-year life and a $15,900 salvage value. Straight-line depreciation would be used, and the salvage value would be...
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...
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...
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 $3,500 per month b. Remodeling and necessary equipment would cost $270,000. The equipment would have a 15-year life and an $18,000 salvage value. Straight-line depreciation would be used, and the salvage value...
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...
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 $4,200 per month. b. Remodeling and necessary equipment would cost $360,000. The equipment would have a 15-year life and a $24,000 salvage value. Straight-line depreciation would be used, and the salvage value...