Purchasing a large oven and related equipment for mixing and baking crazy bread is being considered by Perottis Pizza. The oven and equipment would cost $180,800 delivered and installed. It would be usable for about 15 years, after which it would have a 10% scrap value. The following additional information is available:

a.	Perotti, the owner, estimates that purchase of the oven and equipment would allow the pizza parlour to bake and sell 70,000 loaves of crazy bread each year. The bread sells for $1.30 per loaf.
b.	The cost of the ingredients in a loaf of bread is 40% of the selling price. Perotti estimates that other costs each year associated with the bread would be as follows: salaries, $19,000; utilities, $9,000; and insurance, $4,000.
c.	The pizza parlour uses straight-line depreciation on all assets, deducting salvage value from original cost.
d.	Perotti would like all projects to provide a return of at least 5%.
	(Ignore income taxes.)

Required:

1.

Prepare a contribution format income statement showing the operating income each year from production and sale of the crazy bread.

2-a.

Compute the simple rate of return for the new oven and equipment. (Round your answer to 2 decimal places.)

2-b.

Will this return be acceptable to Perotti?

Yes

No

3-a.

Compute the payback period on the oven and equipment.

3-b.

If any of the equipment has less than a nine-year payback, will Perotti purchase it?

	No
	Yes