P7.2 A restaurant operatoris contemplating branching out into the taver business. He has narrowed the choice down to two similar operations, cach of which has sales revenue averaging $30,000 a month. Tim's tavern has variable costs averaging 60% of sales revenue and annual fixed costs totaling $108,000. Tom's taver las variable costs averaging 50% of sales revenue and annual fixed costs of $144,000. Regardless of which tavem is purchased, the operator estimates he can increase sales revenues by 10% Purchase price would be the same in cither case. If you were advising the operator. which tavern would you suggest he purchase? Explain. Calculation Tim's Tom's Explanation: 3 With reference to P7.2, the operator, after further consideration, thinks that if he purchased Tom's tavern he could reduce the fixed costs by $14,000 a year and cut the variable costs from 50% to 48% of revenue. On the other hand, if he purchased Tim's tavern, variable costs could be reduced to 55%, and an annual savings of $3,000 on fixed costs could be made. Note that revenue would still increase by 10% over present level. Would your decision change under these circumstances? Calculations: Tim's Tom's Explanation