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 2007. You are presented with the following income statement information for 2006:

You are also given the following data on the three divisions:

You may choose to allocate indirect costs based on direct costs, square feet, or the number of employees. Total fixed overhead for 2006 was $14,550,000.
1. Calculate division margins in percentage terms prior to allocating fixed overhead costs.
Required
2. Allocate indirect costs to the three divisions using each of the three allocation bases suggested. Calculate division margins in dollar and percentage terms with each allocation base.
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?

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Hotel Restaurant Casino Revenues Direct costs Segment margin $16,425,000 9,819,260 6,605,740 $5,256,000 3,749,172 $1,506,828 $12,340,000 ,248,768 S 8,091,232 Hotel Restaurant Casino 64,000 250 16,000 Floor space (square feet) Number of employees 80,000 200 50