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Paul Swanson has an opportunity to acquire a franchise from TheYogurt Place, Inc., to...

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Accounting

Paul Swanson has an opportunity to acquire a franchise from TheYogurt Place, Inc., to dispense frozen yogurt products under TheYogurt Place name. Mr. Swanson has assembled the followinginformation relating to the franchise:

  1. A suitable location in a large shopping mall can be rented for$4,900 per month.
  2. Remodeling and necessary equipment would cost $402,000. Theequipment would have a 20-year life and a $20,100 salvage value.Straight-line depreciation would be used, and the salvage valuewould be considered in computing depreciation.
  3. Based on similar outlets elsewhere, Mr. Swanson estimates thatsales would total $520,000 per year. Ingredients would cost 20% ofsales.
  4. Operating costs would include $92,000 per year for salaries,$5,700 per year for insurance, and $49,000 per year for utilities.In addition, Mr. Swanson would have to pay a commission to TheYogurt Place, Inc., of 15.0% of sales.

Required:

1. Prepare a contribution format income statement that shows theexpected net operating income each year from the franchiseoutlet.

2-a. Compute the simple rate of return promised by theoutlet.

2-b. If Mr. Swanson requires a simple rate of return of at least20%, 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, willhe acquire the franchise?

Answer & Explanation Solved by verified expert
4.1 Ratings (572 Votes)

Solution 1:

Contribution format income statement - Paul Swanson
Particulars Amount
Sales $5,20,000.00
Variable costs:
Ingredients $1,04,000.00
Commisions $78,000.00
Total variable costs $1,82,000.00
Contribution margin $3,38,000.00
Fixed costs:
Rent $58,800.00
Depreciation $19,095.00
Salaries $92,000.00
Insurance $5,700.00
Utilities $49,000.00
Total fixed costs $2,24,595.00
Net operating income $1,13,405.00

Solution 2a:

Simple rate of return = Net operating income / Initial investment  =$113,405 / $402,000 = 28.21%

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 = $113,405 + $19095 = $132500

Payback period = Initial investment / annual cash inflows = $402000 / $132500 = 3.03 years

Solution 3b:

As payback period is higher than 2 year, therefore Swanson should not acquire the franchise.
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In: AccountingPaul Swanson has an opportunity to acquire a franchise from TheYogurt Place, Inc., to dispense...Paul Swanson has an opportunity to acquire a franchise from TheYogurt Place, Inc., to dispense frozen yogurt products under TheYogurt Place name. Mr. Swanson has assembled the followinginformation relating to the franchise:A suitable location in a large shopping mall can be rented for$4,900 per month.Remodeling and necessary equipment would cost $402,000. Theequipment would have a 20-year life and a $20,100 salvage value.Straight-line depreciation would be used, and the salvage valuewould be considered in computing depreciation.Based on similar outlets elsewhere, Mr. Swanson estimates thatsales would total $520,000 per year. Ingredients would cost 20% ofsales.Operating costs would include $92,000 per year for salaries,$5,700 per year for insurance, and $49,000 per year for utilities.In addition, Mr. Swanson would have to pay a commission to TheYogurt Place, Inc., of 15.0% of sales.Required:1. Prepare a contribution format income statement that shows theexpected net operating income each year from the franchiseoutlet.2-a. Compute the simple rate of return promised by theoutlet.2-b. If Mr. Swanson requires a simple rate of return of at least20%, 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, willhe acquire the franchise?

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