Lugano%u2019s Pizza Parlor is considering the purchase of a large oven and relat
ID: 2372856 • Letter: L
Question
Lugano%u2019s Pizza Parlor is considering the purchase of a large oven and related equipment for mixing and baking %u201Ccrazy bread.%u201D The oven and equipment would cost $284,800 delivered and installed. It would be usable for about 15 years, after which it would have a 10% scrap value. The following additional information is available:
Mr. Lugano estimates that purchase of the oven and equipment would allow the pizza parlor to bake and sell 70,000 loaves of crazy bread each year. The bread sells for $1.40 per loaf.
The cost of the ingredients in a loaf of bread is 30% of the selling price. Mr. Lugano estimates that other costs each year associated with the bread would be as follows: salaries, $22,000; utilities, $7,000; and insurance, $4,000.
The pizza parlor uses straight-line depreciation on all assets, deducting salvage value from original cost.
Prepare a contribution format income statement showing the net operating income each year from production and sale of the crazy bread. (Input all amounts as positive values. Omit the "$" sign in your response.)
Compute the simple rate of return for the new oven and equipment. (Round your answer to 1 decimal place. Omit the "%" sign in your response.)
If Mr. Lugano accepts any project with a simple rate of return greater than 5%, will he acquire the franchise?
Compute the payback period on the oven and equipment.
If Mr. Lugano accepts any investment with a payback period of less than nine years, will he acquire the franchise?
Lugano%u2019s Pizza Parlor is considering the purchase of a large oven and related equipment for mixing and baking %u201Ccrazy bread.%u201D The oven and equipment would cost $284,800 delivered and installed. It would be usable for about 15 years, after which it would have a 10% scrap value. The following additional information is available:
Explanation / Answer
1. Dep using SLN = (Initial cost-Salvage)/Life
= (284800-28480)/15 =17088
Sale price 70000*$1.40 = $98,000
Less Cost of Ingred = 30%*98000 =$29400
--------------------------
Cont Margin $68,600
S&Admin exp :
salaries $22,000
utilities $7,000
insurance $4,000
Dep $17088
----------------------
Net Op Income $18,512
2a. SImple rat eof Return = Net Inc/Inital Inv
= 18512/284800 =6.50%
2b.Yes. As Simple rate is greater than 5%.
3a. OCF = Net Inc + Dep written back = 18512+17088 = 35,600
So Payback period = Initial Inv/CF = 284800/35600 = 8.00 yrs
3b Yes. As payback period is 8 yrs.
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