Winners Hotel and Casino is situated in Sunshine Coast. The complex includes a 300-room hotel, a casino, and several restaurants. As Winners' new controller, you are requested to recommend the basis to be used for allocating fixed overhead costs to the three divisions in 2003. You are presented with the following income statement information for the previous year
Hotel Restaurants Casino
Revenue $16,425,000 $5,256,000 $12,340,000
Direct costs 9,819,260 3,749,172 4,248,768
Divisional margin 6,605,740 1,506,828 8,091,232
You are also given the following data on the three divisions:
Hotel Restaurants Casino
Floor space (square meters) 80,000 16,000 64,000
Number of employees 200 50 250
You may choose to allocate indirect costs based on direct costs, square meters, or the number of employees. Total fixed overhead for the previous year was $14,550,000.
Required: (show your calculations)
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. Calculate division margins in dollars and percentage terms with each allocation base.
3. Discuss the results. What is your preferred base for allocating indirect costs to the divisions? Why?
4. Would you recommend shutting any of the three divisions (and probably reallocating resources to other divisions) as a result of your analysis? If so, which division would you close, and why?