GiottoGiotto

Hotel & Casino is situated on beautiful Lake Tahoe in Nevada. The complex includes a 300-room hotel, a casino, and a restaurant. As

GiottoGiotto 's

new controller, your manager asks you to recommend the basis the hotel should use for allocating fixed overhead costs to the three divisions in

20172017.

You are presented with the following income statement information for

20162016 :

1 (Click

the icon to view the data.)

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

2 (Click

the icon to view the data.) 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

20162016

were

$ 14 comma 640 comma 000$14,640,000.

Read the

requirements3.

Requirement 1. Calculate division margins in percentage terms prior to allocating fixed overhead costs. (Round your answers to two decimal places, X.XX.)

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	Hotel		Restaurant		Casino
Division margin	48.61	%	53.40	%	62.73	%

Requirement 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.

Allocate the indirect costs, then calculate the division operating margin in dollars and as a percentage of revenue for each segment.

Begin with cost allocation based on direct costs. (Round percentages, including intermediate calculations, to two decimal places, X.XX%. Round dollar amounts to the nearest dollar. Use parentheses or a minus sign for negative amounts.)

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	Hotel		Restaurant		Casino		Giotto
Allocated fixed overhead costs	7832400		3081720		3724416
Operating margin
Operating margin %	7.22	%	15.86	%	32.72	%

Next, allocate costs based on floor space. (Round percentages, including intermediate calculations, to two decimal places, X.XX%. Round dollar amounts to the nearest dollar. Use parentheses or a minus sign for negative amounts.)

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	Hotel		Restaurant		Casino		Giotto
Allocated fixed overhead costs
Operating margin
Operating margin %		%		%		%

Now allocate costs based on number of employees. (Round percentages, including intermediate calculations, to two decimal places, X.XX%. Round dollar amounts to the nearest dollar. Use parentheses or a minus sign for negative amounts.)

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	Hotel		Restaurant		Casino		Giotto
Allocated fixed overhead costs
Operating margin
Operating margin %		%		%		%

Requirement 3. Discuss the results. How would you decide to allocate indirect costs to the divisions? Why?

There is

(1)

in the operating margin percentages depending upon which allocation base is chosen. Where cost allocation is required, the

(2)

and

(3)

criteria are recommended. The

$ 14 comma 640 comma 000$14,640,000

is a

(4)

overhead cost. This means that on a short-run basis, the

(5)

criterion is not appropriate but

GiottoGiotto

could attempt to identify the cost drivers for these costs in the long run.

GiottoGiotto

should look at how the

$ 14 comma 640 comma 000$14,640,000

cost

(6)

the three divisions. This will help guide the choice of an allocation base in the short run.

Requirement 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?

The analysis in requirement 2

(7)

guide the decision on whether to shut down any of the divisions. The overhead costs are

(8)

costs in the short run. It

(9)

how these costs would be affected in the long run if

GiottoGiotto

shut down one of the divisions. Also, each division

(10)

independent of the other two. A decision to shut down the restaurant, for example,

(11)

the attendance at the casino and the hotel. 1: Data Table

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	Hotel	Restaurant	Casino
Revenues	$18,924,000	$8,210,000	$12,410,000
Direct costs	9,725,000	3,826,100	4,624,900
Segment margin	$9,199,000	$4,383,900	$7,785,100

2: Data Table

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	Hotel	Restaurant	Casino
Floor space (square feet)	110,000	22,000	88,000
Number of employees	240	60	300

3: Requirements

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?

(1)

a dramatic difference

no difference

(2)

cause-and-effect

direct-cost

nonfinancial

(3)

benefits-received

division-costs

floor-space

(4)

fixed

variable

(5)

cause-and-effect

direct-cost

nonfinancial

(6)

benefits

is a detriment to

(7)

should

should not

(8)

fixed

variable

(9)

is clear

is not clear

(10)

is

is not

(11)

would have no affect on

would likely have a negative effect on