Paul Swarrior has an opportunity to acquire a franchise from The Yogurt Place, Incorporated, to distribute frozen yogurt products under The Yogurt Place name. He 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 value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.
c. Based on similar outlets elsewhere, Mr. Swarrior estimates sales would total $450,000 per year. Ingredients would cost 20% of sales.
d. Annual operating costs would include $85,000 for salaries, $5,000 for insurance, $42,000 for utilities, and a commission paid to The Yogurt Place, Incorporated, of 10% of sales.
Required:
1. Prepare a contribution format income statement showing the expected net operating income each year from the franchise.
2.a. Compute the simple rate of return promised by the franchise.
2.b. If Mr. Swarrior requires a simple rate of return of at least 21%, should he acquire the franchise?
3.a. Compute the payback period on this investment.
3.b. If Mr. Swarrior wants a payback of three years or less, will he acquire the franchise?
Complete this question by entering your answers in the tabs below.
Required 1
Required 2A
Required 2B
Required 3A
Required 3B
Prepare a contribution format income statement showing the expected net operating income each year from the franchise.
The Yogurt Place, Incorporated
Contribution Format Income Statement
Variable expenses:
Fixed expenses:
