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 suitable location in a large shopping mall can be rented for $4,400 per month.

Remodeling and necessary equipment would cost $372,000. The equipment would have a 10-year life and a $37,200 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.

Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $470,000 per year. Ingredients would cost 20% of sales.

Operating costs would include $87,000 per year for salaries, $5,200 per year for insurance, and $44,000 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:

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.

2-b. If Mr. Swanson requires a simple rate of return of at least 18%, should he acquire the franchise?

3-a. Compute the payback period on the outlet.

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

Complete this question by entering your answers in the tabs below.

Req 1

Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.

The Yogurt Place, Inc.,
Contribution Format Income Statement
Variable expenses:
		0
		0
Fixed expenses:
		0
		0

Req 2A

Compute the simple rate of return promised by the outlet. (Round percentage answer to 1 decimal place.)

Simple rate of return

%

Req 2B

If Mr. Swanson requires a simple rate of return of at least 18%, should he acquire the franchise?

	Yes No

Req 3A

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

Payback period

years

Req 3B

If Mr. Swanson wants a payback of two years or less, will he acquire the franchise?

	Yes No