Question

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 $5,100 per month.

Remodeling and necessary equipment would cost $414,000. The equipment would have a 15-year life and a $27,600 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 $540,000 per year. Ingredients would cost 20% of sales.

Operating costs would include $94,000 per year for salaries, $5,900 per year for insurance, and $51,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 16.0% 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
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Variable expenses:
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not attempted	not attempted	0
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Fixed expenses:
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not attempted	not attempted	0
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2-a. Compute the simple rate of return promised by the outlet.

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

Answer 1

	The Yogurt Place Inc.
	Contribution Income statement
	Sales		$ 5,40,000
	Variable cost
	Component Cost (20% of sales)	$ 1,08,000
	Commission (16% of sales)	$     86,400
Less:	Total Variable cost		$ 1,94,400
	Contribution margin		$ 3,45,600
Less:	Fixed expenses
	Rent ($5,100 X 12)	$     61,200
	Salaries	$     94,000
	Depreciation [($4,14,000 - $27,600) / 15 years]	$     25,760
	Insurance	$       5,900
	Utilities	$     51,000	$ 2,37,860
	Net Operating Income (loss)		$ 1,07,740
	Computation of Simple rate of return:
	Simple rate of return	=	Net Profit / Investment
		=	$1,07,740 / $4,14,000
		=	26%
	Computation of Pay Back Period:
	Pay Back Period	=	Initial Investment / Annual Cash Flow
		=	$4,14,000 / $1,07,740
		=	3.84	years