Phil and Carol eloped (at 59 and 46) to New Mexico and then toldthe kids they were moving there permanently. After 5 years indowntown Albuquerque, Carol made one of her frequent flights eastto visit family. She returned to find that Phil had rented out abedroom, declaring they were in the \"Bed and Breakfast\" business.In a year, they expanded to a pricy suburb by buying/renovating alarger estate with 6 rooms or apartments.
Phil cooked breakfast; Carol bought; they lived in a separatesuite and frequently hosted guests for cocktail hour. The averagelife-span for B&B owners is about 4 years. After about 3 years,Phil was tired of doing breakfasts. He and Carol built their ownhome next door, hired Maggie to run the B&B, and pitched inwhen needed.
You have been asked to help them see where this business isfinancially. Use the following information to prepare a two-pageanalysis.
Room prices range, but average $85 per night. Last year withoutMaggie, 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 of35% of revenue over $25,000, and a free room (the separatesuite).
Questions:
Last year (before Maggie) what was breakeven (in room/nights and$s)? Did they make a profit? What was the maximum profit that couldbe made?
With Maggie, what is the new breakeven? Is this a realisticpossibility? What should they do?
