Interpreting Segment Margins The Plevna Hotel is a full-service hotel that provides rooms, extensive restaurant and banquet facilities, and convention meeting rooms and facilities. The hotel is organized into five responsibility units: rooms, meal services, other hotel services, maintenance, and administration.

Rooms, meal services, and other hotel services are operated as profit centers.

The hotel's accounting system accumulates revenues and' costs by organization unit. The costs of maintenance and administration are charged to the three profit centers. Maintenance is charged on the basis of hours worked. Administration charges are divided into two groups: hotel-related costs such as depreciation and electricity are assigned to the three profit centers on the basis of space occupied; other costs, primarily administrative personnel costs, are charged to the profit centers on the basis of the direct cost of each unit. The rationale for administrative cost allocation is that the allocation base is regarded as the cost driver for the allocated costs.

Under this system, the accounting reports indicate that the rooms profit center is always very profitable, the other hotel services profit center breaks even, and the meal services profit center always operates with quite large losses.

This situation has continued for several years and, because bonuses and promotions are based on realized profit center profit, has caused concern and discouragement among the staff in the hotel services division and meal services division.

Recently, there have been suggestions that the extensive meal and convention facilities be closed down and the freed space be used to put in luxury suites and rooms. A profit analysis of the hotel several years ago suggested that the ratio of profit reported by the hotel to square feet occupied was about average for this type of hotel and higher than accommodation-

only hotels.

Required You have been hired to evaluate the current system and suggest improvements. Prepare a report.