Lugano’s Pizza Parlor is considering the purchase of a large oven and related equipment for mixing and baking “crazy bread.” The oven and equipment would cost $143,200 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:
Mr. Lugano estimates that purchase of the oven and equipment would allow the pizza parlor to bake and sell 80,000 loaves of crazy bread each year. The bread sells for $1.35 per loaf.
The cost of the ingredients in a loaf of bread is 40% of the selling price. Mr. Lugano estimates that other costs each year associated with the bread would be as follows: salaries, $25,000; utilities, $3,000; and insurance, $1,000.
The pizza parlor uses straight-line depreciation on all assets, deducting salvage value from original cost.
(Ignore income taxes.)
Prepare a contribution format income statement showing the net operating income each year from production and sale of the crazy bread. (Input all amounts as positive values. Omit the “$” sign in your response.)
– Sales Revenue $ 108000
– Variable expenses:
Deduct Depreciation 143200
Contribution Margin $35200
Selling and administrative expenses:
– Cost of ingredients 43200
– Salaries 25000
Expenses in total= $72200
– Net Operating Loss $107400
Compute the simple rate of return for the new oven and equipment. (Round your answer to 1 decimal place. Omit the “%” sign in your response.)
Simple rate of return 7.5%
If Mr. Lugano accepts any project with a simple rate of return greater than 13%, will he acquire the franchise?
Compute the payback period on the oven and equipment.
Payback period 18 years
If Mr. Lugano accepts any investment with a payback period of less than five years, will he acquire the franchise?