ogurt products under The Paul Swanson has an opportunity to acquire a franchise

ID: 2577703 • Letter: O

Question

ogurt products under The Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place. Inc to dispense frozen y Yogurt Place name Mr Swanson has assembled the following information relating to the franchise al A suitable location in a large shopping mall can be rented for $3.500 per month b. Remodeling and necessary equipment would cost $270.000. The equipment would have a 15 year life and an $18.000 salvage poinms value, Straight-ine depreciation wou ld be used. and the salvage value would be considered in computing depreciation. d on similar outlets elsewhere. Mr. Swanson estimates that sales would total $300.000 per year Ingredients would c of sales addit per year for utilities. In eBook d. Operating costs would include e $70.000 per year for salaries. $3.500 per year for insurance, and $27,000 tion, 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 t the expected net operating income each year from the franchise outlet Compute the simple rate of return promised by the outlet RelererxeS anson requires a simple rate of return of at least 12% should he acquire the franchise? 3-a. Compute the payback period on the outlet f Mt. Swanson wants a payback of four years or less, will he acquire the franchise? Complete this question by entering your answers in the tabs below Req 1 Req 2A Req 2B Prepare a contribution form franchise outlet at income statement that shows the expected net operating income each year from the Contribution Format Income Statement Sales Vanable expenses Commissicns on margin Fixed expenses Salanes

Explanation / Answer

Answer:

The yougert place Inc

Contribution format income statement

Amount $

Sales

300,000

less:

variable cost

Cost of ingredient (20%*300,000)

60,000

Commission (12.5%*300,000)

37,500

97,500

Contribution Margin

202,500

Less: Selling and admin Exp

Salary

70,000

rent (3500x12)

42,000

Depreciation (270000-18000)/15

16,800

Insurance

3,500

Utilities

27,000

159,300

Net operating income

43,200

______________________________

Simple rate of return

Annual incremental Net operating income / Initial Investment

=43200/270,000

=16%

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If it required rate of return is 12% then Swanson should acquired the franchise because it gives 16 % return

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Payback period

For calculation Payback period we need to calculate annual net cash flow

annual net cash flow

=43200+16800(dep)

=60,000

=Investment / annual net cash flow

= 270,000/60,000

=4.5 years

. If Payback period is 4 year or less then it then Swanson should not acquired the franchise because it has payback period of 4.5 years