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 $281,600 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:
a. Mr. Lugano estimates that purchase of the oven and equipment would allow the pizza parlor to bake and sell 78,000 loaves of crazy bread each year. The bread sells for $1.50 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, $27,000; utilities, $5,000; and insurance, $3,000.
c. The pizza parlor uses straight-line depreciation on all assets, deducting salvage value from original cost.
1. Prepare a contribution format income statement showing the net operating income each year from production and sale of the crazy bread.
2a. Compute the simple rate of return for the new oven and equipment.
2b. If Mr. Lugano accepts any project with a simple rate of return greater than 5%, will he acquire the franchise?
3a. Compute the payback period on the oven and equipment.
3b. If Mr. Lugano accepts any investment with a payback period of less than nine years, will he acquire the franchise?
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