Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Incorporated, 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 $4,200 per month. Remodeling and necessary equipment would cost $360,000. The equipment would have a 15-year life and a $24,000 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 $450,000 per year. Ingredients would cost 20% of sales. Operating costs would include $85,000 per year for salaries, $5,000 per year for insurance, and $42,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Incorporated, of 15.0% 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?
Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Incorporated, 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 $4,200 per month. Remodeling and necessary equipment would cost $360,000. The equipment would have a 15-year life and a $24,000 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 $450,000 per year. Ingredients would cost 20% of sales. Operating costs would include $85,000 per year for salaries, $5,000 per year for insurance, and $42,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Incorporated, of 15.0% 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?
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, Incorporated, 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 $4,200 per month.
Remodeling and necessary equipment would cost $360,000. The equipment would have a 15-year life and a $24,000
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 $450,000 per year. Ingredients would
cost 20% of sales.
Operating costs would include $85,000 per year for salaries, $5,000 per year for insurance, and $42,000 per year for
utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Incorporated, of 15.0% 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?
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Step 1: Introduction of contribution margin income statement
VIEWStep 2: Requirement 1 - Prepare a contribution format income statement
VIEWStep 3: Requirement 2a&2B-Computation of simple rate of return and determine Mr. S acquire the franchise
VIEWStep 4: Requirement 3a&3b-Computation of payback period and determine Mr. S acquire the franchise
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