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

-Utitilities 3000

-Insurance 1000

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?