90.2K

Verified Solution

Link Copied!

Pie Guy Pizza Parlor is considering the purchase of a large oven and related equipment for mixing and baking "crazy bread." The oven and equipment would cost $288,000 delivered and installed. It would be usable for about 20 years, after which it would have a 10% scrap value. The following additional information is available:

a.	The owner of the pizza parlor estimates that purchase of the oven and equipment would allow the pizza parlor to bake and sell 75,000 loaves of crazy bread each year. The bread sells for $1.20 per loaf.
b.	The cost of the ingredients in a loaf of bread is 30% of the selling price. The owner estimates that other costs each year associated with the bread would be as follows: salaries, $20,000; utilities, $5,000; and insurance, $2,000.
c.	The pizza parlor uses straight-line depreciation on all assets, deducting salvage value from original cost.
	(Ignore income taxes.) Required: 1. Prepare a contribution format income statement showing the net operating income each year from production and sale of the crazy bread. Pie Guy Pizza Parlor Fixed expenses: Total fixed expenses

2a.

Compute the simple rate of return for the new oven and equipment. (Round percentage answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.) Simple rate of return % 2b. If a simple rate of return above 6% is acceptable to the owner, will he purchase the oven and equipment? 3a. Compute the payback period on the oven and equipment. Payback period years 3b. If the owner purchases any equipment with less than a ten-year payback, will he purchase this equipment?

Answer & Explanation Solved by verified expert

See Answer