Reference no: EM132556157

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:

1. A suitable location in a large shopping mall can be rented for $4,800 per month.
2. Remodeling and necessary equipment would cost $396,000. The equipment would have a 10-year life and a $39,600 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.
3. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $510,000 per year. Ingredients would cost 20% of sales.
4. 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.

Required:

Question 1. Create a contribution format income statement that shows the expected net operating income each year from the franchise outlet.

Question 2-a. Calculate the simple rate of return promised by the outlet.

Question 2-b. If Mr. Swanson requires a simple rate of return of at least 22%, should he acquire the franchise?

Question 3-a. Calculate the payback period on the outlet.

Question 3-b. If Mr. Swanson wants a payback of two years or less, will he acquire the franchise?