Purchasing a large oven and related equipment for mixing and baking “crazy bread” is being considered by Perotti’s Pizza. The oven and equipment would cost $170,000 delivered and installed. It would be usable for about 10 years, after which it would have a 10% scrap value. The following additional information is available:
a. Perotti, the owner, estimates that purchase of the oven and equipment would allow the pizza parlour to bake and sell 60,000 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 30% of the selling price. Perotti estimates that other costs each year associated with the bread would be as follows: salaries, $18,000; utilities, $8,000; and insurance, $3,000.
c. The pizza parlour uses straight-line depreciation on all assets, deducting salvage value from original cost.
d. Perotti would like all projects to provide a return of at least 10%.
(Ignore income taxes.)
Required:
1. Prepare a contribution format income statement showing the operating income each year from production and sale of the crazy bread.
2-a. Compute the simple rate of return for the new oven and equipment. (Round your answer to 2 decimal places.)
2-b. Will this return be acceptable to Perotti?
No
Yes
3-a. Compute the payback period on the oven and equipment.
3-b. If any of the equipment has less than a seven-year payback, will Perotti purchase it?
No
Yes