Question
Problem 13-19 Simple Rate of Return; Payback [LO13-1, LO13-6] Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc., to dispense
Problem 13-19 Simple Rate of Return; Payback [LO13-1, LO13-6]
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 $3,800 per month. |
b. | Remodeling and necessary equipment would cost $336,000. The equipment would have a 20-year life and an $16,800 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 $410,000 per year. Ingredients would cost 20% of sales. |
d. | Operating costs would include $81,000 per year for salaries, $4,600 per year for insurance, and $38,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 13.0% of sales. |
Required: | |
1. | Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet. |
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%.) |
2b. | If Mr. Swanson requires a simple rate of return of at least 21%, should he acquire the franchise? | ||||
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3a. | Compute the payback period on the outlet. (Round your answer to 1 decimal place.) |
3b. | If Mr. Swanson wants a payback of three years or less, will he acquire the franchise? | ||||
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