Question

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. A suitable location in a large shopping mall can be rented for $4,500 per month.
b. Remodeling and necessary equipment would cost $378,000. The equipment would have a 10-year life and a $37,800 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.
c. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $480,000 per year. Ingredients would cost 20% of sales.
d. Operating costs would include $88,000 per year for salaries, $5,300 per year for insurance, and $45,000 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?

Answer 1

To prepare a contribution format income statement, calculate the costs and expenses, then subtract them from the sales to calculate the net operating income. To calculate the simple rate of return, divide the net annual operating income by the initial investment. If Mr. Swanson requires a simple rate of return of at least 21%, he should acquire the franchise if the calculated simple rate of return is higher. To calculate the payback period, divide the initial investment by the net annual cash inflow. If Mr. Swanson wants a payback period of three years or less, he should acquire the franchise if the payback period is less than three years.

Step-by-step explanation:

To prepare a contribution format income statement, we will first need to calculate the various costs and expenses associated with the franchise. Here are the calculations and the resulting income statement:

1. Contribution Format Income Statement:

Sales: $480,000

Ingredients (20% of sales): $96,000

Salaries: $88,000

Insurance: $5,300

Utilities: $45,000

Commission to The Yogurt Place, Inc. (13% of sales): $62,400

Total costs and expenses: $296,700

Net operating income: $480,000 - $96,000 - $88,000 - $5,300 - $45,000 - $62,400 = $183,300

2-a. Simple Rate of Return:

To calculate the simple rate of return, we will use the formula:

Net Annual Operating Income / Initial Investment

Net Annual Operating Income: $183,300

Initial Investment: $378,000

Simple Rate of Return: $183,300 / $378,000 = 48.5%

2-b. Decision:

If Mr. Swanson requires a simple rate of return of at least 21%, he should compare it to the calculated simple rate of return. Since the calculated simple rate of return is 48.5%, which is greater than 21%, Mr. Swanson should acquire the franchise.

3-a. Payback Period:

To find the payback period, we will calculate the time it takes to recoup the initial investment:

Payback Period = Initial Investment / Net Annual Cash Inflow

Initial Investment: $378,000

Net Annual Cash Inflow: Net Annual Operating Income = $183,300

Payback Period: $378,000 / $183,300 = 2.06 years

3-b. Decision:

If Mr. Swanson wants a payback period of three years or less, we can see that the payback period is 2.06 years, which is less than three years. Therefore, he should acquire the franchise.

Answer 2

1.) check attached picture

2a)Simple rate of return = 25.2%

2b) Yes

3a)2.92 years

3b) Yes

Step-by-step explanation:

Kindly check attached picture