Problem:
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?