Question

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.

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 Salesselected answer correct $300,000selected answer correct Variable expenses: Cost of ingredientsselected answer correct $60,000selected answer correct Commissionsselected answer correct 37,500selected answer correct not attempted not attempted 97,500 Contribution marginselected answer correct 202,500 Fixed expenses: not attempted not attempted Salariesselected answer correct 70,000selected answer correct Rentselected answer correct 42,000selected answer correct Depreciationselected answer correct 16,800selected answer correct Insuranceselected answer correct 3,500selected answer correct Utilitiesselected answer correct 27,000selected answer correct not attempted not attempted 159,300 Net operating incomeselected answer correct 43,200

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?

Answer 1