Question: Purchasing a large oven and related equipment for mixing and

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 $120,000 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. Perotti, the owner, estimates that purchase of the oven and equipment would allow the pizza parlour to bake and sell 72,000 loaves of crazy bread each year. The bread sells for $1.25 per loaf.
b. The cost of the ingredients in a loaf of bread is 40% of the selling price. Perotti estimates that other costs each year associated with the bread would be as follows: salaries, $18,000; utilities, $9,000; 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 12%.
Ignore income taxes.
1. Prepare a contribution format income statement showing the operating income each year from production and sale of the crazy bread.
2. Compute the simple rate of return for the new oven and equipment. Will this return be acceptable to Perotti? Explain.
3. Compute the payback period on the oven and equipment. If any of the equipment has less than a six-year payback, will Perotti purchase it?

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  • CreatedJuly 08, 2015
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