Joe Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc

Question

Joe Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc. to dispense frozen yogurt products under the name The Yogurt Place. 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.

Remodelling 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.

On the basis of similar outlets elsewhere, Swanson estimated that sales would total $300,000 per year. Ingredients would cost 20% of sales.

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, Swanson would have to pay a commission to The Yogurt Place of 12.5% of sales.

Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.

Compute the simple rate of return promised by the outlet. (Round your answer to 2 decimal places. (i.e., 0.1234 should be considered as 12.34%).)

If Swanson requires a simple rate of return of at least 12%, should he acquire the franchise?

Compute the payback period on the outlet. (Round your answer to 1 decimal place.)

If Swanson wants a payback of four years or less, will he acquire the franchise?

Joe Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc. to dispense frozen yogurt products under the name The Yogurt Place. Swanson has assembled the following information relating to the franchise:

Explanation / Answer

1 Sales 300000 Variable expenses: Cost of ingredients 60000 =300000*20% Commissions 37500 97500 =300000*12.5% Contribution margin 202500 Selling and administrative expenses: Rent 42000 Salaries 70000 Insurance 3500 Utilities 27000 Depreciation 16800 159300 =(270000-18000)/15 Net operating income 43200 2a Simple rate of return = 43200/270000= 16% b Yes 3a Payback period = 270000/(43200+16800)= 4.5 years b No

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