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. A suitable location in a large shopping mall can be rented for $3,500 per month. b. Remodeling and necessary equipment would cost $270,000. The equipment would have a 15-year life and an $18,000 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 $300,000 per year. Ingredients would cost 20% of sales. d. Operating costs would include $70,000 per year for salaries, $3,500 per year for insurance, and $27,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Incorporated, of 12.5% of sales.
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. A suitable location in a large shopping mall can be rented for $3,500 per month. b. Remodeling and necessary equipment would cost $270,000. The equipment would have a 15-year life and an $18,000 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 $300,000 per year. Ingredients would cost 20% of sales. d. Operating costs would include $70,000 per year for salaries, $3,500 per year for insurance, and $27,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Incorporated, of 12.5% of sales.
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. A suitable location in a large shopping mall can be rented for $3,500 per month.
b. Remodeling and necessary equipment would cost $270,000. The equipment would have a 15-year life and an $18,000 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 $300,000 per year. Ingredients would cost 20% of
sales.
d. Operating costs would include $70,000 per year for salaries, $3,500 per year for insurance, and $27,000 per year for utilities. In
addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Incorporated, of 12.5% 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 12%, should he acquire the franchise?
3-a. Compute the payback period on the outlet.
3-b. If Mr. Swanson wants a payback of four years or less, will he acquire the franchise?
Complete this question by entering your answers in the tabs below.
Req 1
Req 2A
Variable expenses:
Fixed expenses:
Req 2B
Req 3A
Prepare a contribution format income statement that shows the expected net operating income each year from the franchise
outlet.
The Yogurt Place, Incorporated
Contribution Format Income Statement
Req 3B
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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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