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# Profit and Break-Even Analysis of Bed and Breakfast Business

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Phil and Carol eloped (at 59 and 46) to New Mexico and then told the kids they were moving there permanently. After 5 years in downtown Albuquerque, Carol made one of her frequent flights east to visit family. She returned to find that Phil had rented out a bedroom, declaring they were in the "Bed and Breakfast" business. In a year, they expanded to a pricy suburb by buying/renovating a larger estate with 6 rooms plus one apartment.

Phil cooked breakfast; Carol bought; they lived in apartment and frequently hosted guests for cocktail hour. The average life-span for B&B owners is about 4 years. After about 3 years, Phil was tired of doing breakfasts. He and Carol build their own home next door, hired Maggie to run the B&B, and pitched in when needed.

You have been asked to help them see where this business is financialy. Use the following information to prepare a two-page analysis.

Room prices range, but average \$85 per night. Last year without Maggie, they generated about \$30,000 in revenue. Expenses this year (e.g., advertising, telephone, mortgage, repairs/maintenance, utilities, Maggie's base salary) are generally fixed (\$34,739) except for breakfast which is variable (last year = \$3,729).

Maggie's salary consists of a base of \$7500 plus a commission of 35% of revenue over \$25.000, and free room (the separate suite).

Questions:

1) Last year, (before Maggie), what was breakeven? Did they make a profit? What was the maximum profit that could be made?

2) With Maggie, what is the new breakeven? Is this a realistic possibility?

3) What should they do?

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#### Solution Preview

See attached Excel file.

1. Break even:\$31105/-No they did not make profit.The operating loss is \$968/-

2. With Maggie, the new BEP is \$42501/-. In my opinion, it is not the realistic possibility as the sales revenue needs to be increased by 41.67% ((42501-30000)/30000)*100.