Question

Problem 7-19 (Algo) Simple Rate of Return; Payback Period (L07-1, L07-6) 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: a. A suitable location in a large shopping mall can be rented for $5,000 per month b. Remodeling and necessary equipment would cost $408.000. The equipment would have a 20-year life and a $20,400 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 $530,000 per year. Ingredients would cost 20% of sales d. Operating costs would include $93.000 per year for salaries, $5.800 per year for insurance, and $50,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 15.5% 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 Mt. Swanson requires a simple rate of return of at least 18%, 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? Complete this question by entering your answers in the tabs below. Reg 1 Req2A Reg 2B teg JA Reg 36 Prepare a contribution format income statement that shows the expected net operating income each year from the franchise

Answer 1

Contribution Format Income Statement
Sales Revenue	530,000
Less: Variable costs
Ingredients	106,000
Commission	82,150
Contribution Margin	341,850
Less: Fixed costs
Rent	60,000
Depreciation	19,380
Salaries	93,000
Insurance	5,800
Utilities	50,000
Operating Income	113,670
Simple rate of return = Operating Income/Average Investment
=113,670/214200
=53.07%
Yes
Payback period = Initial Investment/Annual Inflows
=408000/(113670+19380)
= 3.07	years
No, since payback peirod is higher than 2 years

Answer 2

The simple rate of return is actually 27.86= 113670/408000

408000 being the initial investment