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 $3,500 per month 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 would be considered in computing depreciation C. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $300,000 per year. Ingredients would cost 20% of sales d. Operating costs would include $70,000 per year for salaries, $3,500 per year for insurance, and $27,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 12.5% 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 12%, should he acquire the franchise? 3-a. Compute the payback period on the outlet 3-b. If Mr. Swanson wants a payback of four years or less, will he acquire the franchise?

Answer 1

The Yogurt Place, Inc.
Contribution Format Income Statement
Total Revenue		$                  300,000
Variable Expenses
Cost of Ingredients	$              60,000
Commissions	$              37,500
Total Variable Costs		$                    97,500
Contribution		$                  202,500
Fixed Expenses
Rent	$                 3,500
Salaries	$              70,000
Depreciation	$              16,800
Insurance	$                 3,500
Utilities	$              27,000
Total Fixed Costs		$                  120,800
Net Operating Income		$                    81,700

Simple rate of return	81,700 / 270,000	30%
Yes he will accept since the return is more than 12%
Payback period	270,000 / (81,700 + 16,800)	2.74
Yes, he will acquire since payback is less than 4 years