Hello, I see you have an analysis for the case and there are many percentage statistics. You do not show any explanation or calculation on how you came up with those statistics though. Can you please provide a more analytic answer on how you calculated those statistics. Thank you for your time.

ISSN 1940-204X TallTree2 Hotel Casino John R. Mills University of Nevada at Reno Jeffrey Wong University of Nevada, Reno Background could be generated by the players gambling. Thus, room prices as well as food and drink prices were set very low to get the customer in the door and keep them there with the notion that these reduced costs would be recouped with casino customer play. But, as the hotel casino structure expanded into luxury hotel complexes with upscale shopping centers (substantially increasing capital expenditures), management now wants these departments to operate more like profit centers. Whereas 20 years ago the casino department generated over 90% of total property revenues, current property revenues are more spread over a range of departments. The current income statement (Worksheet #1) for TallTree2 Hotel Casino shows that 64% of revenues are generated by gaming while rooms (14%), food (12%), beverage (6%), and other (4%) make up the remaining 36%. Northern Nevada casino operations are cyclical, with peak demands occurring on Friday and Saturday (100% hotel occupancy) and during July, August, September, and October. Hotel room rates can change substantially, with rates during the slow period as low as $49 but the same room selling during the Hot August Night Special event for $350 per night. Special holidays such as Thanksgiving and Christmas have traditionally been very slow for casinos, whereas for holidays such as the Fourth of July, the hotels and casinos are packed. To compensate for the slow periods, casinos have developed a series of special events. Special events are typically more likely to be offered during midweek or in slow months in order to generate incremental gaming revenues. Any weekend or holiday special events are normally reserved for the \"high rollers.\" The TallTree2 Hotel Casino is a 640-room resort complex featuring a full range of Nevada-style gaming: slot machines, table games (twenty-one, craps, poker, roulette, baccarat, and keno). Besides the hotel and casino, it also has four separate restaurants, two entertainment showrooms, and three gift shops. It is located in the extremely competitive Reno, Nevada, market that includes 25 other hotel casino properties within a 10-mile radius. Given the competitive market, the casino management uses a wide range of marketing promotions to attract customers to the casino facilities where, it is hoped, they will try their luck at the slots or table games. Casinos are designed in such a way that customers must walk through or past the gaming area to get to the restaurants or the hotel registration area. The primary objective of a hotel casino property is to keep a gaming customer in the complex. The casino industry is a unique service industry that has created gaming odds that over a period of time will result in the casino generating revenues from its customers. For example, in northern Nevada, the house normally keeps 2.1% of every dollar that a player puts into a slot machine. Other states and Indian properties can retain up to 12% of each dollar played. For table games the normal return is 12% of drop (money lost by players). To maximize the casino profits, the key is to provide services within the property in order to keep the player gambling in the property. Thus, if players are in need of a drink, get them one. If players are hungry, make sure that they eat at one of the casino restaurants. If players want a rest, give them a room. Each of these services is provided at a minimal cost to guests compared with the revenues that IM a Ed u c aTIo na L c a S E JournaL 1 V OL. 2, N O. 1, ART. 2 MARCH 2009 SpEcIaL EvEnTS The tournament used 171 slot machines that normally would have been available to regular players. These were roped off and converted into tournament machines. Tournament machines do not accept any currency or coin, nor do they pay out any currency or coin. Players push the \"play\" button as quickly as possible during the allotted time period and cumulate points based on the winning combinations of the slot machines. The player who has accumulated the most points is declared the winner and paid a cash prize. TallTree2 offers a range of special events at its property. These have included golf tournaments, boxing matches, New Year parties, and a series of pit, keno, and slot tournaments. The special events may be offered to all customers or to a select group of customers. An event such as the New Year party is normally reserved for select preferred customers who are rated as \"high roller\" players and who spend large sums of money. In the past Judy Fitch, the vice president of marketing, always had free rein in offering special casino programs. Increasing competition has caused profit margins to drop. Terrence Wei, the new property president, has just implemented a new policy requiring that all special events and promotions now be looked at in terms of contributions to overall property income. Mr. Wei has indicated that if a specific special event cannot generate a positive net income, it will be discontinued. Special events in the future will have to be approved by the Casino Marketing Committee. For each special event, a proposed event budget of estimated revenues and costs will be submitted using the format devised by the controller, Bill Martino. A performance report comparing actual results with the original budget figures must be filed within 14 days after the event ends. Analysis of the results will be used to make a decision about whether to continue holding the special event. Mr. Wei wanted to use the Stars and Stripes Slot Tournament as the basis for defining what types of cost and revenue information should be included in the evaluation of future special events. He asked his controller, Bill Martino, to provide a schedule with the relevant information. Evaluating the profitability of an event such as the Stars and Stripes tournament requires casino, hotel, restaurant, and beverage segments to charge their costs separately to the special event. The resulting Work Sheet #2 was prepared by Martino for the Stars and Stripes event. STarS and STrIpES WorkShEET caLcuLaTIonS Direct revenues of a special event consist of the entry fees (A) plus room revenues (B) for players not provided complimentary rooms. Marketing's Judy Fitch expected that 100 customers would pay the fee of $129 to play in the tournament. She also expected that these customers would bring additional guests and she therefore projected having 240 room nights for the event. She thought that 194 of the room nights would be paid for by players, while 40 regular room nights (D) and 6 suites (C) would be complimentary (\"comped\"). The players who paid for their rooms would get the discounted casino rate of $45 per night. The normal rack rate1 for rooms being charged over this holiday period is $55. Any player who obtained a suite would be charged the discounted casino rate of $125 per night. The normal rack rate for a suite is $137. When the Stars and Stripes Slot Tournament was completed, Ms. Fitch found that the tournament actually generated entry fee revenue of $129 per player for 171 participants. Only 168 rooms were paid for by the players. Four suites were also paid for (that is, 168 rooms at $45 per room plus 4 suites at $125 per suite). Ninety-seven rooms were comped. (Worksheet #2 (C+D) Some costs can be traced directly to a special event and do not pose the problems inherent in arbitrary allocations. Such cost items include usage tax, operating supplies, printing and stationery, postage and freight, gifts, and prize money (F) (at approximately 83% of entry fees). Complimentary costs and allocated overhead costs included in the direct costs pose more of a problem in determining the amount to allocate. STarS and STrIpES SLoT TournaMEnT SpEcIaL EvEnT The Stars and Stripes Slot Tournament was held on the Sunday and Monday following the Fourth of July, 2009, at the end of a long holiday weekend when the hotel was running at 100% occupancy. Some of the special event players arrived early and rented rooms that could have been sold to regular customers. IM a Ed u c aTIo na L c a S E JournaL The rack rate is the price a hotel charges for a room as opposed to a discounted raate that would be charged in conjunction with a special event. 1 2 V OL. 2, N O. 1, ART. 2 MARCH 2009 In order for the hotel segment to receive credit for complimentary rooms or special discounts on rooms, a charge for room, food, and beverage (RFB) costs is included on the performance report. This charge is the rack rate for comped rooms and the difference between the rack rate and the special casino rate for discounted rooms. The Stars and Stripes event resulted in 97 room nights being comped at the room rack rate of $55 per night, special discounts of $12 for 4 suites, and special discounts of $10 (rack of $55, special rate of $45) for 168 room nights (C+D). The restaurant and beverage segment charges the casino for free food and beverages given to special events players at their retail value. This figure would include the package breakfast, free buffets, and the banquet provided to all the Stars and Stripes participants as well as any additional comps for special players. Charges for overhead costs for the accounting department and hotel segment also are included under direct costs. Justification for these charges is that they are incremental. If the hotel was not at full occupancy, TallTree2 would have to bring in extra accounting and hotel personnel to handle the additional rooms and accounting functions associated with the special event. Therefore, any special event is charged hotel overhead at the rate of $22 per actual room night plus a fixed cost of $100 per event. The $22 (E) was derived by dividing the annual housekeeping (maid and room service) cost by the total number of room nights in a year. The front desk charge is a flat rate of $100 per event. accumulated for slot, pit, and keno when an event displaces normal casino play. For example, the casino used 171 slot machines for this slot tournament; therefore these machines were out of commission for regular players, and potential revenues were lost.2 Gaming abstracts provide evidence that the average player has a gaming budget of $200 a day per hotel room. Therefore, the Stars and Stripes slot event used 269 total room nights and should be charged a total of $53,800 as gaming displacement costs. As the hotel casino complexes and the departments within them move toward generating more revenues, playing a supporting role to the casino segment has caused some serious conflicts within the hotel casino departments. The hotel, food, and beverage department managers are constantly suggesting that they are not being properly evaluated because they do not have the ability to set prices for their departments. Some of the common complaints are as follows. Hotel manager Dana Sawyer has been considering the ramifications of her segment recently becoming a profit center. One issue she is concerned with is that the hotel segment is more likely to run into capacity constraints than the food and beverage and gaming segments are. When the hotel is at or near full capacity, Dana feels that it is difficult to recapture all of the opportunity costs of not selling rooms at full price, or even above that amount in times of extremely high demand. The hotel manager is capable of pricing all rooms based on supply and demand. As an example, room rates for July can run from $49 up to $139, with the high-end prices typically charged for Friday, Saturday, and Sunday. Yet the hotel manager is required to hold 20% of its rooms until the last minute in case a high roller comes into town and wants a room. If the player pays for the room, it is at the discounted casino rate of $45 even though the hotel manager could get as much as $139 for the room from a walk-in customer. For years, the food department (restaurants) has been told that it needs to provide a range of restaurants that are substantially priced below the more common restaurants available in the community. By offering good food at bargain prices, customers will come onto the property to eat. Once on the property, they will be tempted to try their hand at gambling. But if this department is being evaluated as a profit center, the food manager argues that he should be oThEr concErnS Fitch is very concerned that the worksheet provided by Martino does not provide a true picture of the total revenues generated by the special event. All the players in the special event had player tracking cards. Fitch has generated a worksheet with their tracked play (see Worksheet #3). She argues that while these players were generating entry fees and hotel revenues, their biggest contribution was their casino play when they were not in the special event. In contrast to the event worksheet prepared by Martino, Worksheet #3 indicates that the Stars and Stripes special event was profitable on both a budgeted and actual basis. dISpLacEMEnT coSTS Controller Bill Martino suggested that displacement costs be included in the performance report under the assumption that special events prevent regular players from gaming and staying in the hotel. Displacement cost figures are IM a Ed u c aTIo na L c a S E JournaL 2 3 TallTree2 has more than 2,000 slot machines and is generating average revenues of $60 dollars per day per machine. Industry magazines have reported that new California casinos are generating as much as $500 per day or more, because of the heavy traffic from patrons. V OL. 2, N O. 1, ART. 2 MARCH 2009 able to set his prices and run his department on a profitable basis. He notes that the department is currently running at a 15% loss and complimentary food sales make up 20% of all restaurant sales. A review of the beverage department shows that 77% of its sales are represented by complimentary sales. The department manager also argues that the beverage prices are very low in order to bring in more customers. History has shown that the more customers drink, the more likely they will spend more money gambling. player tracking system, it was just a matter of time before the various gaming properties developed a player reward program. The initial player reward programs were solely developed as slot player clubs. These clubs/programs became a way to offer slot players comps equivalent to those given the table games players. Information from the player tracking system also became the basis for constructing promotional activities based on a targeted demographic group (Mills, 2007). While improving the market share for high rollers may have been the initial reason for player tracking systems, casino management realized that a range of incentive programs could increase play for a number of different types of casino players. Special events are now developed for all types of players including slot, keno, sports bettors, and table game players. The customer invitation list is generated from the property player tracking system. Much of the information is initially generated from player's club cards. The casino encourages all players to obtain a player's club card. The casino then has the ability to track players by using magnetic cards that are inserted into slot machines. The card accumulates information on the total dollars bet and actual jackpots won by that player. Table games information is provided by the pit supervisors. They track all players betting over a specified sum of money. For example, the pit boss has a player, Ted Palmer, who is betting $100 per hand and has played for 4 hours. Typically the player will play 50 hands an hour on a full table with a total of 7 players. The pit boss notes that Ted Palmer put at risk $20,000 (100*50*4). Such player tracking information is then manually entered in the computerized system. Other gaming departments also input their information into the computer. Note that the information is entered as total dollars bet. These figures are then netted to arrive at the total win from each player. For example, the house normally keeps 2.1% of every dollar that a player puts into the slot machine. For pit table games the normal return (net income) is 12% of drop and Keno net income is 12% of write. Handle, drop, and write represent the total dollar volume that is actually played and recorded by the player tracking system. (See Worksheet #3.) Given this information, the casino issues invitations to special events based on player preferences. For example, for players who normally play the slot machines, a group would be invited to the next slot tournament special event. The group could be those players who normally play the $1 or $5 slot machines. As an example, the average play in northern Nevada is $200 per player. For the Stars and Stripes special pLayEr TrackIng SySTEMS Casino executives have always worked from the philosophy that good treatment of the customer leads to longer stays or increased return visits and more dollar play. The cost of a free room and dinner were minimal compared to the money the player would drop. In the early years of legalized gaming, player tracking referred to the evaluation of individual play on table games. Essentially the casino pit supervisor would watch customers play to determine the average wager and the length of time that they played. If these customers lost large amounts of money on a regular basis, they became known as \"high rollers.\" When the casino had a lot of action, the rating of the player might be substantially off if that player kept changing his betting habits. Given the limited past history or even the current credit check information, casino executives had flexibility to offer a range of discretionary comps. Many times these comps were based on how well the player knew the casino executive or casino floor manager. Slot play was usually not considered when issuing comps because few casino executives felt slot players were playing enough to warrant comps. It was commonly thought that slot play was simply a diversion from table game play. In addition, it was difficult to watch slot players because they tended to move around, playing different slot machines spread all around the casino floor. Of course, good casino hosts soon recognized that there were some slot players dropping substantial funds in the slot machines. Slot managers therefore made sure they were treated well. The computerization of slot machines led to the development of player tracking systems. Bally Gaming and Systems developed the industry's first online slot data collection system in the mid 70s as a means to track current players and allow the casino to develop information about its customers' play (Wang, 2002). In 1985, the Harrah's Atlantic City property became one of the first to adopt this new technology. Given the information gathered from the I M a Ed u c aTIo na L c a S E JournaL 4 V OL. 2, N O. 1, ART. 2 MARCH 2009 event, Finch invited selected players who on average would bet $500 per day. This group should clearly outperform the average customer! Worksheet #1 continued casino department Income Statement For year Ended december 31, 2008 (000s) Worksheet #1 Tall Tree2 Income Statement For year Ended december 31, 2008 (000s) revenue Pit Revenue Coin operated devices Poker and Pan Total Revenue revenue Gaming 18,895 4,147 14.0% Food 3,512 11.9% Bad Debt expense 1,783 6.0% 76.1% 78 0.4% 18,895 100.0% departmental Expenses Beverage 23.5% 64.0% Rooms 4,445 14,371 Other 57 0.3% 338 1.8% Complimentary expenses 2,137 11.3% Gaming Taxes and Licenses 1,604 8.5% Commissions 1,179 4.0% Total Revenue 29,515 100.0% Cost of Sales 2,764 9.4% Gross Margin 26,751 90.6% 387 2.0% Departmental Expenses 14,211 48.1% Total Departmental Expenses 8,706 46.1% Departmental Income 12,540 42.5% departmental Income 10,189 53.9% 1,251 4.2% 3,783 91.2% Payroll Taxes Payroll Other Departmental Expenses 367 1.9% 3,816 20.2% general and administrative Expenses Advertising and promotion Bad Debt Expense 10 Music and Entertainment Payroll tax 2.0% 5.1% 172 Interest expense 5.4% 1,518 Energy expense 2.3% 582 Depreciation and Amortization 0.0% 671 1,581 Complimentary expense (non-Depart) Worksheet #1 continued rooms department Income Statement For year Ended december 31, 2008 (000s) 0.6% revenue Room Sales 191 0.6% Payroll expenses 2,560 8.7% Operating leases 564 1.9% Taxes- Real estate 311 1.1% departmental Expenses Taxes and licenses -other Complimentary Rooms Total Revenue 364 8.8% 4,147 100.0% 101 0.3% Bad Debt expense 10 0.2% 1,454 4.9% Complimentary expenses 20 0.5% Total General and Administrative Expenses 10,964 37.1% Other General & Administrative expenses net Income before Federal Income Taxes 1,577 Payroll Taxes Payroll 5.3% Other Departmental Expenses 119 2.9% 1,280 30.9% 5 11.9% 1,924 46.4% departmental Income IM a Ed u c aTIo na L c a S E JournaL 495 Total Departmental Expenses 2,223 53.6% V OL. 2, N O. 1, ART. 2 MARCH 2009 Worksheet #1 continued Food department Income Statement For year Ended december 31, 2008 (000s) Worksheet #1 continued other Income Statement For year Ended december 31, 2008 (000s) revenue revenue 2,809 80.0% Other Income 703 20.0% Other Complimentary Items Total Revenue 3,512 100.0% Total Revenue Cost of Sales 1,737 49.5% Gross Margin 1,775 50.5% Food Sales Complimentary Food Sales Payroll Other Departmental Expenses Total Departmental Expenses departmental Income 1.5% 1,179 100.0% 491 41.6% Gross Margin 688 58.4% departmental Expenses 1 0.0% Bad Debt expense 0 0.0% 106 3.0% Complimentary expenses 0 0.0% 179 5.1% Payroll Taxes 1,687 48.0% Bad Debt expense Payroll Taxes 98.5% 18 Cost of Sales departmental Expenses Complimentary expenses 1,161 24 2.0% Payroll 235 20.0% Other Departmental Expenses 386 32.7% 645 54.7% 43 3.7% 323 9.2% 2,296 65.4% Total Departmental Expenses (521) -14.8% departmental Income Worksheet #1 continued Beverage department Income Statement For year Ended december 31, 2008 (000s) revenue Beverage Sales Complimentary Beverage Sales 410 23.0% 1,372 77.0% 1,783 100.0% Cost of Sales 537 30.1% Gross Margin 1,246 69.9% - 0.0% Complimentary expenses 29 1.6% Payroll Taxes 50 2.8% 463 26.0% 99 5.5% Total Departmental Expenses 640 35.9% departmental Income 606 34.0% Total Revenue departmental Expenses Bad Debt expense Payroll Other Departmental Expenses I M a Ed u c aTIo na L c a S E JournaL 6 V OL. 2, N O. 1, ART. 2 MARCH 2009 Worksheet #2 Special Events, Stars and Stripes prepared by Bill Martino days/date 7/5-7/6/2009 coordinator guests other costs Budget actual Fitch Projected: 100 Usage Tax 0 69 Actual: 171 Operating Supplies 0 65 revenues Budget actual Departmental Signs 0 0 Entry Fees 12,900 22,059 a Copy Machine 0 0 Plus Points 0 0 Auto 0 0 Ticket Sales-Cash 0 0 Advertising 0 0 Ticket Sales-Comp 0 0 Printing & Stationary 2,500 1,778 0 Postage & Freight 1,500 861 8,060 B Equipment Rental 0 0 Uniforms 0 0 Travel & Entertain. 0 0 Sun-Mon Banquet Revenue Room Revenue Total rFB costs Suite Comp. 0 8,730 21,630 Budget 822 30,119 Gifts actual 800 1,060 g Professional fees 48 c 0 0 Room Comp. 4140 7015 d Departmental Signs 0 0 Buffet 1,400 1,287 Entertainment 0 0 Coffee Shop 250 1,040 Trophies 120 69 Casino Bars 100 0 Green Fees 0 0 Fireside 0 0 Prizes (early bird) Le Moulin Lounge 0 0 Prize Money Le Moulin 200 500 Robo Bar 0 0 Air Fares 112 0 18,309 Grounds Maintenance 0 Room Service 0 10,707 0 0 0 0 0 0 0 0 Valet 0 0 Bell Captain 0 0 Beverage Depart. 0 0 Food Depart. 0 0 Slot Depart. 10,446 0 330 add. Labor(non-rev) 9,312 0 Tickets 916 Total Event Trans. (buses) 28 1,900 120 Misc.(sign-ups) 0 Banquet Comp. 0 0 Incentives Pit Depart. Acct. Depart. Keno Depart. 0 0 100 100 0 5,280 5,918 Total 21,127 28,559 Total revenues 21,630 30,119 Total costs 30,439 39,005 Event cost 7 0 Hotel I M a Ed u c aTIo na L c a S E JournaL F -8,809 -8,886 V OL. 2, N O. 1, ART. 2 MARCH 2009 E Worksheet #3 Stars and Stripes Event Income using the player Tracking System prepared by Judy Fitch Worksheet #2 continued Special Events, Stars and Stripes Supporting calculations a Entry fees Fee guests Total $ Projected $129 100 12,900 revenue 22,059 Slot Handle Actual $129 171 Budget actual 1,000,000 1,857,624 Pit Drop hotel revenues Keno Write casino rate room night Total $ B Projected rooms $45 194 8,730 $125 0 0 Slots (2.1% of Handle) $45 168 7,560 82,045 35,697 21,000 39,010 Depart. Net Income Projected suites 0 5,000 B Actual rooms Actual suites $125 4 Pit (12% of Drop) Keno (12% of Write) 500 Net Income 8,060 C Projected suites $137 6 822 C Actual suites $12 4 Minus Event Cost 48 Event Profit 0 9,845 600 4,284 21,600 53,139 8,809 8,886 12,791 44,253 Actual suites $137 0 0 D Projected rooms $55 40 2,200 Event Assumptions D Projected rooms $10 194 1,940 Slot's Depart.net income is 2.1% of handle 4,140 Pit's Depart. Net income is 12% of drop. Keno's Depart. Net income is 12% of write. D Actual rooms $10 168 1,680 D Actual rooms $55 97 5,335 7,015 G T-shirts 214 at $4.95 Displacement is calculated by $200 budget per room. 1,060 The $200 is considered win and is netted out to the appropriate department. Prize money F Projected Revenue 12,900 0.83 10,707 Projected Displacement: F Actual Revenue 22,059 0.83 18,309 Slots: 200 room nights x $200 = $40,000 Suite: 6 nights x $137 = $822 Rooms: 40 nights x $55 = $2,200 Event Assumptions: Entry Fee of $129 includes the following: Two complimentary meal tickets of the buffet Actual Displacement: A VIP welcome gift package Slots: $200 x 269 total room nights = $53,800 One continental breakfast at the tournament site (banquet comp.) Rooms: $58 room rate x 97 comped room nights = $5,626 Limousine pick up for airport arrivals hotel overhead rooms rate Total $ E projected rooms 240 22 5,280 E Actual rooms 269 22 5,918 I M a Ed u c aTIo na L c a S E JournaL 8 V OL. 2, N O. 1, ART. 2 MARCH 2009 InSTrucTIonS For conSuLTanTS aBouT IMa Terrence Wei currently feels that his department managers appear to be in conflict with each other. He provides you with the three aforementioned worksheets and asks you to provide alternative solutions for issues that his department managers have brought into discussion. Use the following points to guide discussion. 1. With a worldwide network of nearly 60,000 professionals, IMA is the world's leading organization dedicated to empowering accounting and finance professionals to drive business performance. IMA provides a dynamic forum for professionals to advance their careers through Certified Management Accountant (CMA) certification, research, professional education, networking and advocacy of the highest ethical and professional standards. For more information about IMA, please visit www.imanet.org. Can any of the TallTree2 departments be run as profit centers with the department managers being able to determine price and cost for the department? a) Using Worksheet #1 and the concerns expressed by the department managers, discuss the issues of each department manager when faced with the profit center approach. b) Comment on the difficulty in transfer pricing posed by synergies between business segments. c) Based upon your analysis, is TallTree2 using the most appropriate responsibility centers for evaluating each segment? If not, what changes would you suggest? 2. Worksheet #2 is the performance report for special events developed by the controller, Bill Martino. a) Should special events be evaluated based on profitability, or some other basis? b) Evaluate the items in Bill Martino's report and determine whether they are appropriate. Be sure to specifically address suite and room comps and hotel overhead among other line items you might question. Consider your answer to 1c) in your evaluation. c) Comment on whether Judy Fitch has valid points about the costs and revenues associated with the Stars and Stripes event. d) How could Worksheets #2 and #3 be combined to reflect the profitability of special events? 3. Evaluate Bill Martino's argument for including displacement cost for hotel and casino slot revenues lost during special events. How should this be measured and when should it be used? I M a Ed u c aTIo na L c a S E JournaL 9 V OL. 2, N O. 1, ART. 2 MARCH 2009