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PRO Motel A Motel B Motel C $265,000 100,000 110,000 Sales revenue $325,000 167,000 113,000 $425,000 250,000 112,000 Variable costs Fixed costs P7.6 Two entrepreneurs are contemplating purchasing one of two similar competitive motels and have asked for your advice. Present sales rev- enue of each motel is $550,000 per year. Jack's motel has annual vari- able costs of 55% of sales revenue and fixed costs of $212,500; Jock's motel has annual variable costs of 60% of sales revenue and fixed costs of $185,000. The entrepreneurs think that, if they purchased Jack's motel, they could save $12,000 a year on interest expense (a fixed cost). Alternatively, if they purchased Jock's motel, they could im- prove staff scheduling to the point that the wage saving would reduce total variable cost to 54%. In the case of purchasing either operation, they think that sales revenue can be increased by 25% a year. Calcu- late the present net income of each motel. Then, given these assump- tions, advise the entrepreneurs which one they should buy, including any cautionary comments.

PRO Motel A Motel B Motel C $265,000 100,000 110,000 Sales revenue $325,000 167,000 113,000 $425,000 250,000 112,000 Variable costs Fixed costs P7.6 Two entrepreneurs are contemplating purchasing one of two similar competitive motels and have asked for your advice. Present sales rev- enue of each motel is $550,000 per year. Jack's motel has annual vari- able costs of 55% of sales revenue and fixed costs of $212,500; Jock's motel has annual variable costs of 60% of sales revenue and fixed costs of $185,000. The entrepreneurs think that, if they purchased Jack's motel, they could save $12,000 a year on interest expense (a fixed cost). Alternatively, if they purchased Jock's motel, they could im- prove staff scheduling to the point that the wage saving would reduce total variable cost to 54%. In the case of purchasing either operation, they think that sales revenue can be increased by 25% a year. Calcu- late the present net income of each motel. Then, given these assump- tions, advise the entrepreneurs which one they should buy, including any cautionary comments.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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PRO Motel A Motel B Motel C $265,000 100,000 110,000 Sales revenue $325,000 167,000 113,000 $425,000 250,000 112,000 Variable costs Fixed costs P7.6 Two entrepreneurs are contemplating purchasing one of two similar competitive motels and have asked for your advice. Present sales rev- enue of each motel is $550,000 per year. Jack's motel has annual vari- able costs of 55% of sales revenue and fixed costs of $212,500; Jock's motel has annual variable costs of 60% of sales revenue and fixed costs of $185,000. The entrepreneurs think that, if they purchased Jack's motel, they could save $12,000 a year on interest expense (a fixed cost). Alternatively, if they purchased Jock's motel, they could im- prove staff scheduling to the point that the wage saving would reduce total variable cost to 54%. In the case of purchasing either operation, they think that sales revenue can be increased by 25% a year. Calcu- late the present net income of each motel. Then, given these assump- tions, advise the entrepreneurs which one they should buy, including any cautionary comments.
Transcribed Image Text:PRO Motel A Motel B Motel C $265,000 100,000 110,000 Sales revenue $325,000 167,000 113,000 $425,000 250,000 112,000 Variable costs Fixed costs P7.6 Two entrepreneurs are contemplating purchasing one of two similar competitive motels and have asked for your advice. Present sales rev- enue of each motel is $550,000 per year. Jack's motel has annual vari- able costs of 55% of sales revenue and fixed costs of $212,500; Jock's motel has annual variable costs of 60% of sales revenue and fixed costs of $185,000. The entrepreneurs think that, if they purchased Jack's motel, they could save $12,000 a year on interest expense (a fixed cost). Alternatively, if they purchased Jock's motel, they could im- prove staff scheduling to the point that the wage saving would reduce total variable cost to 54%. In the case of purchasing either operation, they think that sales revenue can be increased by 25% a year. Calcu- late the present net income of each motel. Then, given these assump- tions, advise the entrepreneurs which one they should buy, including any cautionary comments.
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