Joe Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc. to dispense frozen yogurt products under the name The Yogurt Place. Swanson has assembled the following information relating to the franchise:

1. A suitable location in a large shopping mall can be rented for $5,440 per month.
2. Remodelling and necessary equipment would cost $395,500. The equipment would have a 15-year life and an $14,500 salvage value. Straight-line depreciation would be used.
3. On the basis of similar outlets elsewhere, Swanson estimated that sales would total $442,000 per year. Ingredients would cost 20% of sales.
4. Operating costs would include $123,000 per year for salaries, $3,900 per year for insurance, and $32,000 per year for utilities. In addition, Swanson would have to pay a commission to The Yogurt Place of 12.5% 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. (Round your answer to 2 decimal places. (i.e., 0.1234 should be considered as 12.34%).)

2-b. If Swanson requires a simple rate of return of at least 10.5%, should he acquire the franchise?

multiple choice 1

• Yes

• No

3-a. Compute the payback period on the outlet. (Round your answer to 1 decimal place.)

3-b. If Swanson wants a payback of four years or less, will he acquire the franchise?

multiple choice 2

• Yes

• No