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. A suitable location in a large shopping mall can be rented for $4,800 per month. b. Remodeling and necessary equipment would cost $396,000. The equipment would have a 10-year life and an $39,600 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 $510,000 per year. Ingredients would cost 20% of sales. d. Operating costs would include $91,000 per year for salaries, $5,600 per year for insurance, and $48,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 14.5% of sales.
Compute the payback period on the outlet

Answer 1

Ans- 1- The income statement would be :-

Sales		$510,000
Variable expenses:
Cost of ingredients ($510,000*20%)	$102,000
Commissions ($510,000*14.5%)	$73,950	$175,950
Contribution Margin		$334,050
Selling and administrative expenses:
Salaries	$91,000
Rent ($4,800*12)	$57,600
Depreciation *	$35,640
Insurance	$5,600
Utilities	$48,000	$237,840
Net Operating Income		$96,210

* Depreciation- $396,000-$39,600= $356,400

$356,400/ 10 years= $35,640 per year

2- The formula for the simple rate of return is:-

Simple rate of return = Annual incremental net operating income / Initial Investment

=$96,210/ $396,000

=24.3%

3- The formula for the payback period is:-

Payback period= Investment required/ Annual net cash inflow

=$396,000/ $131,850

=3 years

Annual net cash inflow= Net Operating Income +Depreciation

=$96,210+$35,640

=$131,850

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