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 $4,100 per month. b. Remodeling and necessary equipment would cost $354,000. The equipment would have a 20-year life and an $17,700 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. Swanson estimates that sales would total $440,000 per year. Ingredients would cost 20% of sales. d. Operating costs would include $84,000 per year for salaries, $4,900 per year for insurance, and $41,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 14.5% of sales

. Required:

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

2a. Compute the simple rate of return promised by the outlet. (Round percentage answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.)

Simple rate of return

%

2b. If Mr. Swanson requires a simple rate of return of at least 20%, should he acquire the franchise?

Yes

No

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

Payback period

years

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

Yes

No