3. 200 points value: Paul Swanson has an opportunity to acquire a franchise from

Question

3. 200 points value: 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 $3,900 per month. b. Remodeling and necessary equipment would cost $342,000. The equipment would have a 15-year life and an $22,800 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation Ingredients would cost 20% of sales. per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., c. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $420,000 per year. d. Operating costs would include $82,000 per year for salaries, $4,700 per year for insurance, and $39,000 of 13.5% of sales. Required: 1. Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.

Explanation / Answer

Sales 420000 Variable expenses: Cost of ingredients 84000 Commissions 56700 140700 Contribution margin 279300 Selling and administrative expenses: Rent 46800 Salaries 82000 Insurance 4700 Utilities 39000 Depreciation 21280 193780 Net operating income 85520 2a Simple rate of return = 85520/342000= 25.0% 3a Payback period =342000/(85520+21280)= 3.2

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