A company owns three motels in a ski resort area. Although there is some busines
ID: 2453147 • Letter: A
Question
A company owns three motels in a ski resort area. Although there is some business during the summer months, the company finds it very difficult to staff all three operations during this period and is contemplating closing one of the three motels. The sales revenue and the breakdown of costs during this period are listed below in Table 1.
Assuming that one of the motels must be closed and that its closing will have no effect on the sales revenue of the other two, explain which motel should be closed and why?
TABLE 1
Motel A
Motel B
Motel C
Sales Revenue
$265,000
$325,000
$425,000
Variable Costs
$160,000
$150,000
$135,000
Fixed Cost
$110,000
$167,000
$260,000
Would you answer be the same if the sales revenue remained the same but the variable and fixed costs changed? (This is demonstrated in Table 2 below)
TABLE 2
Motel A
Motel B
Motel C
Sales Revenue
$265,000
$325,000
$425,000
Variable Costs
$100,000
$165,000
$250,000
Fixed Cost
$110,000
$113,000
$112,000
Assuming that one of the motels must be closed and that its closing will have no effect on the sales revenue of the other two, explain which motel should be closed and why?
TABLE 1
Motel A
Motel B
Motel C
Sales Revenue
$265,000
$325,000
$425,000
Variable Costs
$160,000
$150,000
$135,000
Fixed Cost
$110,000
$167,000
$260,000
Would you answer be the same if the sales revenue remained the same but the variable and fixed costs changed? (This is demonstrated in Table 2 below)
TABLE 2
Motel A
Motel B
Motel C
Sales Revenue
$265,000
$325,000
$425,000
Variable Costs
$100,000
$165,000
$250,000
Fixed Cost
$110,000
$113,000
$112,000
Explanation / Answer
Calculation of Profit levels:
Table 1 Motel A Motel B Motel C
Sales revenue $265,000 $325,000 $425,000
Less: Variable costs $160,000 $150,000 $135,000
Contribution $105,000 $175,000 $ 290,000
Less: Fixed Costs $110,000 $167,000 $270,000
Profit ( $5,000 ) $8,000 $20,000
Decision: Firstly, all the tree motels able to cover its variable costs. i.e. Contribution is positive.
Secondly, profit is negative in case of Motel A. Hence Motel A must be closed.
Alternative table:
Table 2 Motel A Motel B Motel C
Sales revenue $265,000 $325,000 $425,000
Less: Variable costs $100,000 $165,000 $250,000
Contribution $165,000 $160,000 $ 175,000
Less: Fixed Costs $110,000 $113,000 $112,000
Profit $ 55,000 $ 47,000 $ 63,000
Decision: Because of lower profit, Motel B must be closed.
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