Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc., to dispense frozenyogurt products under The Yogurt Place name. Mr. Swanson has assembled the following informationrelating to the franchise:a. A suitable location in a large shopping mall can be rented for $3,500 per month.b. Remodeling and necessary equipment would cost $270,000. The equipment would have a 15-yearlife and an $18,000 salvage value. Straight-line depreciation would be used, and the salvage valuewould be considered in computing depreciation.c. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $300,000 per year.Ingredients would cost 20% of sales.d. Operating costs would include $70,000 per year for salaries, $3,500 per year for insurance, and$27,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to TheYogurt Place, Inc., of 12.5% of sales.Required:(Ignore income taxes.)1. Prepare a contribution format income statement that shows the expected net operating income eachyear from the franchise outlet.2. Compute the simple rate of return promised by the outlet. If Mr. Swanson requires a simple rate ofreturn of at least 12%, should he acquire the franchise?3. Compute the payback period on the outlet. If Mr. Swanson wants a payback of four years or less, willhe acquire the franchise?
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 $3,500 per month.
b. Remodeling and necessary equipment would cost $270,000. The equipment would have a 15-year
life and an $18,000 salvage value. Straight-line
would be considered in computing depreciation.
c. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $300,000 per year.
Ingredients would cost 20% of sales.
d. Operating costs would include $70,000 per year for salaries, $3,500 per year for insurance, and
$27,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The
Yogurt Place, Inc., of 12.5% of sales.
Required:
(Ignore income taxes.)
1. Prepare a contribution format income statement that shows the expected net operating income each
year from the franchise outlet.
2. Compute the simple
return of at least 12%, should he acquire the franchise?
3. Compute the payback period on the outlet. If Mr. Swanson wants a payback of four years or less, will
he acquire the franchise?
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