Profitability Revenue and Cost Analysis

Profitability Revenue and Cost Analysis

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. Thesales 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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