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 $3,400 per month. b. Remodeling and necessary equipment would cost $312,000. The equipment would have a 20-year life and a $15,600 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 $370,000 per year. Ingredients would cost 20% of sales. d. Operating costs would include $77,000 per year for salaries, $4,200 per year for insurance, and $34,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Ic., of 11.0% 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 22%, 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?
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 $3,400 per month. b. Remodeling and necessary equipment would cost $312,000. The equipment would have a 20-year life and a $15,600 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 $370,000 per year. Ingredients would cost 20% of sales. d. Operating costs would include $77,000 per year for salaries, $4,200 per year for insurance, and $34,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Ic., of 11.0% 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 22%, 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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 $3,400 per month.
b. Remodeling and necessary equipment would cost $312,000. The equipment would have a 20-year life and a $15,600 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 $370,000 per year. Ingredients would cost 20% of
sales.
d. Operating costs would include $77,000 per year for salaries, $4,200 per year for insurance, and $34,000 per year for utilities. In
addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 11.0% 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 22%, 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?
Complete this question by entering your answers in the tabs below.
Req 1
Req 2A
Reg 2B
Req 3A
Req 3B
Prepare a contribution format income statement that shows the expected net operating income each year from the franchise
outlet.
The Yogurt Place, Inc.,
Contribution Format Income Statement
Variable expenses:
Fixed expenses:
< Reg 1
Req 2A >
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