Chap 13 Prob Paul Swanson has an opportunity to acquire a franchise from The Yog

Question

Chap 13 Prob

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

A suitable location in a large shopping mall can be rented for $3,800 per month.

Remodeling and necessary equipment would cost $336,000. The equipment would have a 20-year life and a $16,800 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.

Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $410,000 per year. Ingredients would cost 20% of sales.

Operating costs would include $81,000 per year for salaries, $4,600 per year for insurance, and $38,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 13.0% of sales.

Required:

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

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

2-b. If Mr. Swanson requires a simple rate of return of at least 21%, should he acquire the franchise?

3-a. Compute the payback period on the outlet.

3-b. If Mr. Swanson wants a payback of three years or less, will he acquire the franchise?

Req 1

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

Req 2A

Compute the simple rate of return promised by the outlet. (Round percentage answer to 1 decimal place.)

Req 2B

If Mr. Swanson requires a simple rate of return of at least 21%, should he acquire the franchise?

Req 3A

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

Req 3B

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

Explanation / Answer

Answer 1. Contribution Format Income Statement Sales          410,000 Variable Expenses: Cost of Ingredients - $410,000 X 20%              82,000 Commission - $410,000 X 13%              53,300 Total Variable Expenses          135,300 Contribution          274,700 Fixed Expenses: Rent - $3,800 X 12              45,600 Salaries              81,000 Insurance                4,600 Utilities              38,000 Depreciation - ($336,000 - $16,800) / 20 Years              15,960 Total Fixed Expenses          185,160 Net Operating Income            89,540 Answer 2-a. Simple Rate of Return = Annual Net Operating Income / Intial Investment Simple Rate of Return = $89,540 / $336,000 Simple Rate of Return = 26.65% Answer 2-b. Yes, it should acquire the franchisee as Simple rate of Return is 26.65%. Answer 3-a. Cash Payback period = Intial Investment / Cash Inflow per annum Annual Cash Inflow: Net Operating income              89,540 Depreciation              15,960 Annual Net Cash Inflow           105,500 Cash Payback period = $336,000 / $105,500 Cash Payback period = 3.18 Years (Approx.) Answer 3-b No, since Cash Payback period is more than 3 years

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