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Paul Swanson has an opportunity to acquire a franchise from TheYogurt Place, Inc., to dispense frozen yogurt products under TheYogurt Place name. Mr. Swanson has assembled the followinginformation relating to the franchise:

1. A suitable location in a large shopping mall can be rented for$4,700 per month.
2. Remodeling and necessary equipment would cost $390,000. Theequipment would have a 10-year life and a $39,000 salvage value.Straight-line depreciation would be used, and the salvage valuewould be considered in computing depreciation.
3. Based on similar outlets elsewhere, Mr. Swanson estimates thatsales would total $500,000 per year. Ingredients would cost 20% ofsales.
4. Operating costs would include $90,000 per year for salaries,$5,500 per year for insurance, and $47,000 per year for utilities.In addition, Mr. Swanson would have to pay a commission to TheYogurt Place, Inc., of 14.0% of sales.

Required:

1. Prepare a contribution format income statement that shows theexpected net operating income each year from the franchiseoutlet.

2-a. Compute the simple rate of return promised by theoutlet.

2-b. If Mr. Swanson requires a simple rate of return of at least21%, 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, willhe acquire the franchise?