Lugano\'s Pizza Parlor is considering the purchase of a large oven and related e

Question

Lugano's Pizza Parlor is considering the purchase of a large oven and related equipment for mbxing and baking "crazy bread. 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 info ation is available a. 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 b The cost of the ingredients in a loaf of bread is 30% of the seling price. Mr Lugano estimates that other c. The pizza parlor uses straight-line depreciation on all assets, deducting salvage value from original cost. Required: costs each year associated with the bread would be as follows: salaries, $22,000; utilities, $7,000; and insurance, $4,000 (Ignore income taxes.) 1. 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.) Sales revenue Less: Cost of ingredients Contribution margin Selling and administrative expenses Depreciation Utilities Sales revenue Salaries Net operating income 2a. Compute the simple rate of return for the new oven and equipment (Round your answer to 1 decimal place.) Simple rate of return 2b. If a simple rate of return above 5% is acceptable to Mr Lugano, will he purchase the oven and equipment? O No Yes 3a. Compute the payback period on the oven and equipment Payback period

Explanation / Answer

SALES REVENUE=70000*$1.4 = $98000

LESS: COST OF INGREDINTS (30% OF $98000) =$29400

CONTRIBUTION MARGIN (98000-29400) =$ 68600

SELLING AND ADMINISTRATIVE EXP =$50088

DEP $17088

UTILITIES $ 7000

SALES REVENUE $ 4000

SALARIES $ 22000

NET OPERATIVE INCOME IS ($ 68600-$50088)= $ 18512

DEP= ($ 284800-$28480)/15= $ 17088

2A. SIMPLE RATE OF RETURN IS = $17088/$ 284800= 6%

2B. SIMPLE RATE OF RETURN IS MORE THAN 5% Ie. 6% SO OVEN END EQUIPEMENT PURCHASED

3A. PAY BACK PERIOD IS $284800/$18512= 15.384 YEARS

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.