Question 1 - A catering service has been asked to provide a lunch buffet the next day for 40 people at a set price of $10.50 per person; no function has been booked for the next two days. The catering service has fixed costs of $150 a day or $54,750 per operating year, and it operates with a variable cost of 65% of sales revenue. Calculate the operating income from the function and justify your decision to accept or reject the booking.
Question 2 - Assume you have a restaurant in operation and the property owner has offered a 5-year fixed lease rental of $42,000 per year or a variable lease rental of 10% of your sales revenue. Your current sales revenue in the new year is projected to be $505,000. Find the indifference point (the break even point of sales revenue at which the fixed rent and variable rent for a year are the same). Explain which alternative you would accept.
Question 3 - 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?
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TABLE 1
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Motel A
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Motel B
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Motel C
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Sales Revenue
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$265,000
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$325,000
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$425,000
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Variable Costs
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$160,000
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$150,000
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$135,000
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Fixed Cost
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$110,000
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$167,000
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$260,000
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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)
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TABLE 2
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Motel A
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Motel B
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Motel C
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Sales Revenue
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$265,000
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$325,000
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$425,000
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Variable Costs
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$100,000
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$165,000
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$250,000
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Fixed Cost
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$110,000
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$113,000
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$112,000
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