Cost allocation to divisions: Rembrandt Hotel and 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 in 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 employees. Total fixed overhead costs for 2011 was $14,550,000.
Required:
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 reallocation resources to other divisions) as a result of your analysis? If so, which division would you close and why?