Question

Problem 12-19 Simple Rate of Return; Payback Period [LO12-1, LO12-6]

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:

1. A suitable location in a large shopping mall can be rented for $3,500 per month.
2. 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.
3. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $300,000 per year. Ingredients would cost 20% of sales.
4. 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, Inc., of 12.5% of sales.

****Only need help on 3A*****

Required:

1. 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 S 300,000 Sales Variable expenses Cost of ingredients 60,000 Commissions 37,500 97,500 Contribution margin 202,500 Fixed expenses: Salaries 70,000 Depreciation 16,800 3,500 Insurance Utilities 27,000 Rent 42,000 159,300 43,200 Net operating income

2-a. Compute the simple rate of return promised by the outlet.

Simple rate or return is 16% is the correct answer

2-b. If Mr. Swanson requires a simple rate of return of at least 12%, should he acquire the franchise?

Yes is the correct answer

3-a. Compute the payback period on the outlet.

Not sure how else to calculate this, have tried several ways and can't seem to get the correct answer

3-b. If Mr. Swanson wants a payback of four years or less, will he acquire the franchise?

No is the correct answer

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

Answer In the given question all the parts has been solved correctly except Part 3a Payback period = cost of equipment/annual cash inflow = 270000/(43200+16800) = 4.5 5 3 Note annual cash inflow = net income + depreciation = 43200+16800 0 = $ 60000 2 Thus the correct answer is 3 Payback Period = 4.5 Years 5 For any help please comment in the comment box