Problem $7-19($Algo$)$ Simple Rate of Return; Payback Period $[$LO$7-1,$ L$07-6]$

Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Incorporated, 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 $$4,600$ per month.

b$.$ Remodeling and necessary equipment would cost $$384,000.$ The equipment would have a $10-$year life and a $$38,400$ 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 $$490,000$ per year. Ingredients would cost

$20\%$ of sales.

d$.$ Operating costs would include $$89,000$ per year for salaries, $$5,400$ per year for insurance, and $$46,000$ per year for utilities.

In addition, Mr$.$ Swanson would have to pay a commission to The Yogurt Place, Incorporated, of $13\mathrm{.}5\%$ of sales.

Required:

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 $20\%,$ 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?