Problem:
Cost allocation to divisions. Rembrandt Hotel & Casino is situated on beautiful Lake Tahoe in Nevada. The complex includes a 300-room hotel, a casino, and a restaurant. As Rembrandt's new controller, you are asked to recommend the basis to be used for allocating fixed overhead costs to the three divisions in 2012. You are presented with the following income statement information for 2011:
|
Hotel
|
Restaurant
|
Casino
|
|
Revenues
|
$16,425,000
|
$5,256,000
|
$12,340,000
|
|
Direct costs
|
9,819,260
|
3,749,172
|
4,248,768
|
|
Segment margin
|
$6,605,740
|
$1,506,828
|
$8,091,232
|
You are also given the following data on the three divisions:
|
Hotel
|
Restaurant
|
Casino
|
|
Floor space (square feet)
|
80,000
|
16,000
|
64,000
|
|
Number of employees
|
200
|
50
|
250
|
You are told that you may choose to allocate indirect costs based on one of the following: direct costs, floor space, or the number of employees. Total fixed overhead costs for 2011 was $14,550,000.
1. Calculate division margins in percentage terms prior to allocating fixed overhead costs.
2. Allocate indirect costs to the three divisions using each of the three allocation bases suggested. For each allocation base, calculate division operating margins after allocations in dollars and as a percentage of revenues.
3. Discuss the results. How would you decide how to allocate indirect costs to the divisions? Why?
4. Would you recommend closing any of the three divisions (and possibly reallocating resources to other divisions) as a result of your analysis? If so, which division would you close and why?