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 $174,000 
delivered and installed. It would be usable for about 20 years, after which it 
would have a 10% scrap value. Additional information is available:


a. 
Mr. Lugano estimates that purchase of the oven and equipment would allow the 
pizza parlor to bake and sell 82,000 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, $29,000; 
utilities, $7,000; and insurance, $3,000.

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

1. Prepare a contribution format income 
statement showing the net 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.

3. Compute the payback period on the oven and equipment.




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