Luganos Pizza Parlor is considering the purchase of a large oven

Luganos 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 $104,000 delivered and installed. It would be usable for about 20 years, after which it would have a 10% scrap value. The following additional information is available:

a. Mr. Lugano estimates that purchase of the oven and equipment would allow the pizza parlor to bake and sell 60,000 loaves of crazy bread each year. The bread sells for $1.30 per loaf.

b. 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, $17,000; utilities, $7,000; and insurance, $2,000.

c. The pizza parlor uses straight-line depreciation on all assets, deducting salvage value from original cost. (Ignore income taxes.)

Required: 1. 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.)

2a. Compute the simple rate of return for the new oven and equipment. (Round your answer to 1 decimal place.) Simple rate of return %

2b. If a simple rate of return above 12% is acceptable to Mr. Lugano, will he purchase the oven and equipment? No Yes

3a. Compute the payback period on the oven and equipment. Payback period ________ years

3b. If Mr. Lugano purchases any equipment with less than a six year payback, will he purchase this equipment? Yes No

Here’s the SOLUTION

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