Question

A suitable location in a large shopping mall can be rented for $5,200 per month.
Remodeling and necessary equipment would cost $420,000. The equipment would have a 20-year life and a $21,000 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 $550,000 per year. Ingredients would cost 20% of sales.
Operating costs would include $95,000 per year for salaries, $6,000 per year for insurance, and $52,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Incorporated, of 16.5% 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 20%, should he acquire the franchise?

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

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

Answer 1

1)	The Yogurt Place, Inc
	Contribution format   Income Statement
	Sales Revenue		550,000
	Variable Expenses
	Ingredients	110,000
	Sales  Commission	90,750	200,750
	Contribution margin		349,250
	Fixed Expense:
	Rent	62,400
	Depreciation	19,950		(420000-21000)/20
	Salaries	95,000
	Insurance	6,000
	Utilities	52,000	235,350
	Net Operating Income		113,900
2)-A	Simple Rate of Return = Annual Net   Income/ Initial Investment
	=(113900/420000)
	27.1%
2)-B	Yes
3-A)	payback Period =Initial investment /   Annual net cash flow
	=(420000/133850)
	3.1	Years
3-B)	No
	Note: Annual net cash flow = net   income + depreciation
	=(113900+19950)
	133,850