
Capital Budgeting is used by organisations to determine as to whether the project which they are undertaking is fruitful for the organisation or not. There are various techniques in capital budgeting which an organisation uses to decide on the investment proposal. Most popular ones are Net Present value, Internal Rate of return, Simple rate of return, Payback period etc.
To determine:-:
Here, in the given problem we have to determine whether the decision of Paul Swanson to acquire a franchise from The Yogurt Place inc. is beneficial for the organisation or not by two capital budgeting techniques namely Simple
Given:-

Answer to Problem 19P
Solution:-
Payback period and simple rate of return are the two techniques of capital budgeting which helps an organisation in decision making process whether to enter a project or not. Firstly, we will determine the payback period of the equipment and then the simple rate of return. One major difference between the two methods is that where Payback period method uses net
Therefore, the simple rate of return calculated below is 16%. The payback period shows recovery period of 4.5Years.
Explanation of Solution
Explanation:-
For Contribution Format income statement
Sales | 300000 |
Less Salaries | 70000 |
Less Insurance | 3500 |
Less Utilities | 27000 |
Less Ingredients cost (300000 x 20%) | 60000 |
Less Rent of the Location (3500 x 12) | 42000 |
Less Depreciation (270000-18000) / 15 | 16800 |
Net Operating income | $43, 200 Per year |
For Simple Rate of return:-
Now, here Swanson expected simple rate of return is 12% and what he would get is 16%. Therefore, Swanson should acquire the Franchise.
For Payback period:-
Here, net cash flows are operating income add depreciation amount i.e.
Now, payback period is,
Now, here Swanson expected payback period is 4 years or less and the calculation shows payback period of 4.5 Years. Therefore, according to the payback period Swanson should not acquire the franchise.
Conclusion:-
Swanson can acquire the franchise as per Simple rate of return method. Swanson should not acquire the franchise as per Payback period.
Want to see more full solutions like this?
Chapter 13 Solutions
GEN COMBO LL MANAGERIAL ACCOUNTING; CONNECT ACCESS CARD
- I need the correct answer to this general accounting problem using the standard accounting approach.arrow_forwardPlease discuss and add additional info to what the person has mentioned in the paragraphsarrow_forwardAs a preliminary to requesting budget estimates of sales, costs, and expenses for the fiscal year beginning January 1, 20Y9, the following tentative trial balance as of December 31, 20Y8, is prepared by the Accounting Department of Regina Soap Co.: Account Title Debit Balance Credit Balance Cash $103,500 Accounts Receivable 193,500 Finished Goods 40,600 Work in Process 27,100 Materials 44,500 Prepaid Expenses 3,300 Plant and Equipment 458,500 Accumulated Depreciation—Plant and Equipment $197,200 Accounts Payable 165,300 Common Stock, $10 par 250,000 Retained Earnings 258,500 Total $871,000 $871,000 Factory output and sales for 20Y9 are expected to total 24,000 units of product, which are to be sold at $120 per unit. The quantities and costs of the inventories at December 31, 20Y9, are expected to remain unchanged from the balances at the beginning of the year. Budget estimates of manufacturing costs and operating expenses for the…arrow_forward
- General accountingarrow_forwardIn May, one of the processing departments at Zel Corporation had beginning work in process inventory of $37,000 and ending work in process inventory of $15,000. During the month, the cost of units transferred out from the department was $1,078,000. In the department's cost reconciliation report for May, the total cost to be accounted for under the weighted-average method would be____.arrow_forwardDoom Ltd uses predetermined overhead rates based on labor hours. The monthly budgeted overhead is $470,000 and the budgeted labor hours were 20,000. During the month the company worked a total of 70,000 labor hours and actual overheads totaled $230,000. The overhead at the end of the month would therefore be$?arrow_forward
- Please provide the accurate answer to this general accounting problem using valid techniques.arrow_forwardCole Company has sales revenue of $39,000, cost of goods sold of $24,000, and operating expenses of $9,000 for the year ended December 31. Cole's gross profit is: a. $6,000 b. $15,000 c. $30,000 d. $0arrow_forwardProvide correct answerarrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education





