Question

Two entrepreneurs are contemplating purchasing one of two similar competitive motels and have asked for your advice. Present sales revenue of each motel is $550,000 per year. Jack's motel has annual variable costs of 55% of sales revenue and fixed costs of $212,500; Jock's motel has annual variable of 60% of sales revenue and fixed costs of $185,000. The entrepreneur thinks that, if they purchased Jack's motel, they could save $12,000 a year on interest expenses, a fixed cost. Alternately, if they purchased Jock's motel, they could improve staff scheduling to the point that the wage saving would reduce total variable cost of 54%. In the case og purchasing either operation, they think that sales revenue can be increased by 25% a year. calculate the present net income of each motel, Then, give these assumptions, advise the entrepreneurs which one they should buy, including any cautionary comments.

Answer 1

Answer:

Sales revenue :

• Present motel = $ 5,50,000
• Jock's motel = $ 6,87,500 ( $ 5,50,000 + $ 5,50,000*25%)

Variable Costs :

• Present motel= $ 3,02,500
• Jock's motel = $ 3,71,250 ($ 6,87,500*54%)

Fixed cost :

• Present motel = $ 2,12,500
• Jock's motel = $ 1,73,000 ( $ 1,85,000 - $ 12,000)

Calculation of Net income of both present motel and Jock's motel:

Description	Present motel	Jock's motel
Sales revenue	$ 5,50,000	$ 6,87,500
Less: Variable cost	$ 3,02,500	$ 3,71,250
Contribution margin	$ 5,50,000 - $ 3,02,500 = $ 2,47,500	$ 6,87,500 - $ 3,71,250 = $ 3,16,250
Less: Fixed cost	$ 2,12,500	$ 1,73,000
Net income	$ 2,47,500 - $ 2,12,500 = $ 35,000	$ 3,16,250 - $ 1,73,000 = $ 1,43,250

The entrepreneur's are encouraged to move to jock's motel as the overall gain (net income ) is increased by $ 1,43,250 - $ 35,000 = $ 1,08,250