Billy's Pizza Parlor is considering the purchase of a large oven and related equipment for mixing and baking Billy's Favorite Bread. The oven and equipment would cost $180,000 delivered and installed. It would be usable for about 10 years, after which it would have a 10% scrap value. The following additional information is available. Joey estimates that the purchase of the oven and equipment would allow the pizza parlor and restaurant to bake and sell 100,000 loaves of Billy's Favorite Bread each year. Billy's Favorite Bread sells for $2.50 per loaf. The cost of the ingredients in a loaf of bread is 40% of the selling price. Joey estimates that other costs each year associated with the bread would be as follows: salaries, $68,000; utilities, $20,000; and insurance, $9,000. The pizza parlor will use the straight-line depreciation on all assets, deducting salvage value from original cost. Prepare a contribution format income statement showing the net operating income each year from production and sale of Billy’s Favorite Bread. Compute the simple rate of return for the new oven and equipment. If a simple rate of return above 16% is acceptable to Billy, will he purchase the oven and equipment? Compute the payback period on the oven and equipment. If Billy purchases any equipment with less than a 4-year payback, will he purchase this equipment?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Problem 2

Billy's Pizza Parlor is considering the purchase of a large oven and related equipment for mixing and baking Billy's Favorite Bread. The oven and equipment would cost $180,000 delivered and installed. It would be usable for about 10 years, after which it would have a 10% scrap value.

The following additional information is available.

Joey estimates that the purchase of the oven and equipment would allow the pizza parlor and restaurant to bake and sell 100,000 loaves of Billy's Favorite Bread each year. Billy's Favorite Bread sells for $2.50 per loaf.
The cost of the ingredients in a loaf of bread is 40% of the selling price. Joey estimates that other costs each year associated with the bread would be as follows: salaries, $68,000; utilities, $20,000; and insurance, $9,000.
The pizza parlor will use the straight-line depreciation on all assets, deducting salvage value from original cost.

Prepare a contribution format income statement showing the net operating income each year from production and sale of Billy’s Favorite Bread.
Compute the simple rate of return for the new oven and equipment. If a simple rate of return above 16% is acceptable to Billy, will he purchase the oven and equipment?
Compute the payback period on the oven and equipment. If Billy purchases any equipment with less than a 4-year payback, will he purchase this equipment?

Expert Solution

Step 1

Contribution Margin Format Income Statement :— It is the type of income statement in which variable costs and fixed cost are separately deducted from sales to get profit.

Return on Investment :— It is the ratio of net operating income and investment.

Payback Period :— It is calculated by dividing initial investment by cash inflow per period.

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