Profitability Revenue and Cost Analysis
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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 Sales Revenue Variable Costs Fixed Cost
Motel A $265,000 160,000 110,000
Motel B $325,000 150,000 167,000
Motel C $425,000 135,000 260,000
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 Sales Revenue Variable Costs Fixed Cost
Motel A 265,000 100,000 110,000
Motel B 325,000 165,000 113,000
Motel C 425,000 250,000 112,000
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Solution Summary
Determining which business unit will remain open based on sales revenue, variable cost and flexible cost. In the first analysis, a decision is made to keep a business unit open based on the revenue and cost analysis. In the second analysis, the sales revenue remains constant but the variable and flexible costs changing.
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