Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc., to dispense frozen...

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Paul Swanson has anopportunity to acquire a franchise from The Yogurt Place, Inc., todispense frozen yogurt products under The Yogurt Place name. Mr.Swanson has assembled the following information relating to thefranchise:
A suitable location in a large shopping mall can be rented for$3,200 per month.
Remodeling and necessary equipment would cost $300,000. Theequipment would have a 20-year life and a $15,000 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 $350,000 per year. Ingredients would cost 20% ofsales.
Operating costs would include $75,000 per year for salaries,$4,000 per year for insurance, and $32,000 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 acontribution format income statement that shows the expected netoperating income each year from the franchise outlet.
2-a. Compute thesimple rate of return promised by the outlet.
2-b. If Mr. Swansonrequires a simple rate of return of at least 19%, should he acquirethe franchise?
3-a. Compute thepayback period on the outlet.
3-b. If Mr. Swansonwants a payback of three years or less, will he acquire thefranchise?

Answer & Explanation Solved by verified expert

3.8 Ratings (466 Votes)

1.
Contribution format income statement
Sales		$350,000
Variable expenses
Cost of ingredients	$70,000		350000*20%
Commissions	$52,500	$122,500	350000*15%
Contribution margin		$227,500
Selling and administrative expenses:
Rent	$38,400		3200*12
Salaries	$75,000
Insurance	$4,000
Utilities	$32,000
Depreciation	$14,250	$163,650
Net operating income		$63,850

Straight line depreciation = (300000-15000)/20	14250

2.a
Simple rate of return = 63850/300000	21.28%

2.b
Yes, swanson should acquire the franchise as the simple rate of return of franchise is higher than 19%.

3.a
Payback period = Intial investment/Annual cash inflow
Payback period	300000/(63850+14250)
Payback period	3.84	yrs

3b.
No Swanson will not acquire the franchise if payback period required is 3 or less as currently the payback period is 3.84 years which is more than the required payback period

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Paul Swanson has anopportunity to acquire a franchise from The Yogurt Place, Inc., todispense frozen yogurt products under The Yogurt Place name. Mr.Swanson has assembled the following information relating to thefranchise:A suitable location in a large shopping mall can be rented for$3,200 per month.Remodeling and necessary equipment would cost $300,000. Theequipment would have a 20-year life and a $15,000 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 $350,000 per year. Ingredients would cost 20% ofsales.Operating costs would include $75,000 per year for salaries,$4,000 per year for insurance, and $32,000 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 acontribution format income statement that shows the expected netoperating income each year from the franchise outlet.2-a. Compute thesimple rate of return promised by the outlet.2-b. If Mr. Swansonrequires a simple rate of return of at least 19%, should he acquirethe franchise?3-a. Compute thepayback period on the outlet.3-b. If Mr. Swansonwants a payback of three years or less, will he acquire thefranchise?