PB.5 Consider the following data on two motels which are both for sale Operating

Question

PB.5 Consider the following data on two motels which are both for sale

Operating Income

After purchase it is believed that both motel could have sales increased by 25%. Motel Six could have interest expense lowered by $100,000. Courtyard could have variable expenses reduced to 40%. Calculate the new income statement for each motel.

Operating Income

Make a recommendation on which to buy and give any cautions you feel appropriate:

Present Condition Motel Six Courtyard Revenue $2,000,000 $2,000,000 Variable Costs 50.0% 45.0% Fixed Costs 800,000 900,000

Operating Income

After purchase it is believed that both motel could have sales increased by 25%. Motel Six could have interest expense lowered by $100,000. Courtyard could have variable expenses reduced to 40%. Calculate the new income statement for each motel.

After Purchase and Changes Motel Six Courtyard Revenue $2,500,000 $2,500,000 Variable Costs Fixed Costs

Operating Income

Make a recommendation on which to buy and give any cautions you feel appropriate:

Explanation / Answer

Variable Cost is 50% on sales of Motel Six and 40% on sales of Courtyard.

Interest expense is reduced from fixed cost

Conclusion:- Courtyard is the best option to purchase as it earns 50000 more that Motel Six

Motel Six Courtyard Revenue 2500000 2500000 variable cost 1250000 1000000 Fixed cost 800000 900000 Interest expense 100000 700000 Operating Income 550000 600000

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