apter 13 Homework Saved Help Save & Exit Submi Check my work 4 Paul Swanson has

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apter 13 Homework Saved Help Save & Exit Submi Check my work 4 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 $4.200 per month. b. Remodeling and necessary equipment would cost $360,000. The equipment would have a 15-year life and a $24,000 salvage ints value. Straight-ine 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 $450,000 per year. Ingredients would cost 20% of eBook Print References sales d. Operating costs would include $85,000 per year for salaries, $5.000 per year for insurance, and $42.000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 15.0% 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 21%, should he acquire the franchise? 3-a. Compute the payback period on the outlet 3-b. If Mr. Swanson wants a payback of three years or less, will he acquire the franchise? Complete this question by entering your answers in the tabs below Req 1 Req 2A Req 28 Req 3A Req 38 Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet. The Yogurt Place, Inc. Prev 4 of 4 Next

Explanation / Answer

1 Income Statement Sales $        450,000 Variable Expense Cost of Ingriendients $          90,000 [450000*20%] Commission $          67,500 [450000*15%] Contribution Margin $        292,500 Selling & Administrative Expense Salaries $          85,000 Rent [4200pm*12m] $          50,400 Depreciation ($360000-24000)/15 years $          22,400 Insurance $            5,000 Utilities $          42,000 net Operating Income $          87,700 The formula for the simple rate of return is: 2a Simple rate of return = Annual incremental net operating income/ Initial investment = $87700/360000 24.36% 2b 2b. Yes, the franchise would be acquired because it actual rate of return (24.36%) in excess of required return (21%). 3a The formula for the payback period is: Payback period = Initial investment/ Annual net cash inflow Annual Net Cash Flow = Operating Income + Depreciation = $87,700+22400 $        110,100 Payback Period = 360000/110100           3.27 Years 3b According to the payback computation, the franchise would not be acquired. The 3.27 years payback is greater than the maximum 3 years allowed.

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