P7.5 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 the three operations during this period and is contemplating closing one of the three motels. The sales revenue and breakdown of costs during this period are as follows:

Motel A Motel B Motel C Sales revenue $265,000 $325,000 $425,000 Variable costs 160,000 150,000 135,000 Fixed costs 110,000 167,000 260,000

a. Assuming 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.

b. Would your answer be the same if sales revenue remained as shown above and the variable and fixed costs changed as shown below?

Motel A Motel B Motel C Variable costs $100,000 $167,000 $250,000 Fixed costs 110,000 113,000 112,000