HBSP Product Number TCG057

THE CRIMSON PRESS CURRICULUM CENTER

THE CRIMSON GROUP, INC.

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Larkin Motel
These figures show a profit of 21 percent. Our profit last year was $95,718 on sales of $174,615, or 55 per-
cent. We think 2012 was our best year to date, but we can’t make our figures jibe with those in the maga-
zine, and we wonder if we really are 34 percent ahead of the industry average. Can you help us?

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The speaker was Mrs. Ilyong Kim. She and her husband had purchased the Larkin Motel in
2008 with their life savings, supplemented by a loan from a close personal friend. The motel
consisted of 20 rentable rooms and was located near a vacation area that was popular during the
summer and winter seasons. The Kims had long wanted to run a business of their own.
Mr. and Mrs. Kim felt that they had been successful. Each year had seen a growth in revenue

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from room rentals. Furthermore, their bank balance had increased. Many of their customers re-
turned each year, which they attributed to both their location and their efforts to provide consis-
tently clean rooms and up-to-date furnishings.
The Kims had no formal business training but felt their experience since acquiring the motel
had alerted them to the management problems involved. Both Mr. and Mrs. Kim devoted their
full time to operating the motel. In addition, they hired part-time help for daily room-cleaning
work. They had no dining facilities but had installed vending machines with a variety of snacks.
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The vending machines posed no inventory or maintenance problems as the vending machine
company provided servicing and maintenance.
A frequent guest at Larkin Motel was Marcus Carter, the controller of a large company, who
visited a company branch plant near the motel several times a year. He stayed at the motel during
these trips, and had become acquainted with the Kims. In May 2013, Mrs. Kim showed Mr.
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Carter the current issue of a motel trade journal that contained operating data for the calendar
year 2012 for motels with 40 or fewer rooms. Her comment about these data is shown above.
Mr. Carter was interested and willing to help, and told Mrs. Kim to get the available figures for
2012 so he could look them over that evening. The main records the Kims kept to reflect the mo-
tel’s financial transactions were listings of receipts from the cash register and a check-book
showing cash paid out. In addition, they had a rough idea of other expenses incurred.
That evening Mrs. Kim showed Mr. Carter the cash summary for 2012 (Exhibit 1). Mr. Carter
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immediately noted that the difference between receipts and expenditures was $34,218, and asked
Mrs. Kim to explain why she had stated the profit was $95,718.
Mrs. Kim replied,
Oh, that’s easy. Our drawings aren’t expenses because we are the owners. My husband and I have consis-
tently taken out only about $60,000 a year because we want the profits to accumulate in the business. As I
said, our bank balance has steadily risen. Furthermore, I have a local accountant prepare the annual income
tax statements so I don’t have to worry about them. That income tax stuff is so complicated that I avoid it.

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_____________________________________________________________________________________________
This case was prepared by Professor David W. Young based on a case prepared by Professor James E. Reece. It is
intended as a basis for class discussion and not to illustrate either effective or ineffective handling of an administra-
tive situation.
Copyright © 2017 by The Crimson Group, Inc. To order copies or request permission to reproduce this document,
contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of United States and in-
ternational copyright laws, no part of this document may be reproduced, stored, or transmitted in any form or by any
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The Crimson Group (www.thecrimsongroup.org)
or 617.783.7860
 TCG057 • Larkin Motel 2 of 4
_____________________________________________________________________________________________
Mr. Carter worked with the trade journal’s figures (Exhibit 2) and the cash summary (Exhibit
1) that evening and quickly found he needed more information. He told Mrs. Kim that he was
returning to the home office the next morning but would be back in two weeks for another visit

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to the branch plant. Meanwhile, he wanted Mrs. Kim to prepare some additional information. Mr.

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Carter pointed out that an important non-cash expense was depreciation. He also wanted to know
about expenses that had been incurred in 2011 but not paid until 2012. He told Mrs. Kim to
check on wages and salaries, insurance, advertising, taxes, utilities, and any other items paid in
2012 but applicable to 2011.
In addition, Mr. Carter instructed Mrs. Kim to try to find items of expense properly chargeable

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to 2012 but not paid before December 31, 2012. Mrs. Kim told Mr. Carter the same types of ex-
penses were involved, that is, wages and salaries, insurance, advertising, taxes, and so forth. Also
Mr. Carter inquired about income from room rentals. He asked if any of the cash receipts during
2012 related to rentals during 2011 and if there were any rentals during 2012 that had not been
collected.
During the two weeks Mr. Carter was back at the home office, Mrs. Kim checked the records
and compiled the additional information requested by Mr. Carter. The evening Mr. Carter re-

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turned to the Larkin Motel, Mrs. Kim gave him a summary of the information she had gathered
(Exhibit 3). With this additional information, Mr. Carter knew that he could construct an operat-
ing statement in the same format as the one appearing in the trade journal. To do so, he would
need to calculate the dollar amount for each revenue and expense line, and then compute the per-
centages in the same was as the trade journal had done.
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Assignment

1. As Mr. Carter, make the computations discussed in the last sentence of the case.

2. What should Mr. Carter tell the Kims about the motel’s financial performance in
2012?
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This document is authorized for educator review use only by Noor Afza Amran, Universiti Utara Malaysia until Feb 2020. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 TCG057 • Larkin Motel 3 of 4
_____________________________________________________________________________________________
LARKIN MOTEL
Exhibit 1. Cash Register and Checkbook Summary for 2012
Receipts

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From rooms $169,113

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From vending machines 5,502
Total $174,615

Checks Written
Owners' drawings $61,500

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Wages and salaries 18,789
Paid to laundry 6,285
Replacement of glasses, bed linens, and towels 1,185
Advertising 1,668
Payroll taxes 2,067
Fuel for heating 8,718
Repairs and maintenance 6,414

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Cleaning and other supplies 4,872
Telephone 1,992
Electricity 4,008
Property taxes 7,050
Insurance 8,274
Interest 7,575
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Total $140,397

Difference $34,218

Exhibit 2. 2012 Operating Percentages for Motels with 40 or Fewer Units

Revenues:
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Room rentals 98.7%

Other revenue 1.3
Total 100.0
Operating expenses:
Payroll costs 22.5
Administrative and general 4.2
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Direct operating expenses 5.9

Fees and commissions 3.3
Advertising and promotion 1.2
Repairs and maintenance 4.8
Utilities 7.5
Total 49.4
Fixed expenses:
Property taxes, fees 4.4
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Insurance 2.5
Depreciation 12.5
Interest 7.7
Rent 2.8
Total 29.9

Profit (pretax) 20.7 


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Permissions@hbsp.harvard.edu or 617.783.7860
 TCG057 • Larkin Motel 4 of 4
_____________________________________________________________________________________________
LARKIN MOTEL
Exhibit 3. Additional Information about the Business

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Chargeable to 2011 but paid in January 2012:

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Wages and salaries $795
Advertising 600
Payroll taxes 84
Fuel for heating 933
Telephone 105

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Electricity 360
Property taxes 1,005
Insurance 2,025
Interest 687

Chargeable to 2012 but not paid by December 31, 2012:

Wages and salaries 1,128

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Advertising 996
Payroll taxes 126
Fuel for heating 840
Cleaning and other supplies 75
Telephone 153
Electricity 492
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Property taxes 1,119
Interest 579

Also, 2012 depreciation charges of $21,630

Also, 2012 cash receipts included a $1,185 payment from a company that had rented several
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units during December 2011 for a convention in the nearby city. There were no such uncollected
rentals as of December 31, 2012.
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This document is authorized for educator review use only by Noor Afza Amran, Universiti Utara Malaysia until Feb 2020. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860