Reference no: EM131507456

Question: Two entrepreneurs are contemplating purchasing one of two similar competitive motels and have asked for your advice. Present sales revenue of each motel is $550,000 per year. Jack's motel has annual variable costs of 55% of sales revenue and fixed costs of $212,500; Jock's motel has annual variable costs of 60% of sales revenue and fixed costs of $185,000. The entrepreneurs think that, if they purchased Jack's motel, they could save $12,000 a year on interest expense (a fixed cost). Alternatively, if they purchased Jock's motel, they could improve staff scheduling to the point that the wage saving would reduce total variable cost to 54%. In the case of purchasing either operation, they think that sales revenue can be increased by 25% a year. Calculate the present net income of each motel. Then, given these assumptions, advise the entrepreneurs which one they should buy, including any cautionary comments.