Overview of Exercise The purpose of this exercise is to show methods for estimating the profitability of individual "departments" within a business. In this example, the business is "Ravenswood Leisure Centre" and it has four departments - a leisure pool, a sports hall, squash courts and a sauna/jacuzzi area. The profitability of departments in a business entity can only be calculated if all income and all costs of each department are known, or at least estimated. This poses a challenge, as it is often the case that a business has no way of measuring, with any accuracy, all the costs incurred by each department. For example, typical overheads such as electricity, administration, insurance, rates, and financing costs can only be arbitrarily divided between departments. (arbitrary = at one's own discretion). In order to estimate the profitability of individual departments, therefore, all overheads must be divided up and apportioned among departments according to some form of internal metrics. In this exercise, there are three types of internal metrics suggested: A. The floor space of each department, measured in square meters (see table 4) B. The proportion of the overall staff that work in the department (see table 5) The capital cost of the building in which the department is situated if this is known (see table 1) Each of these criteria may be suitable as a means of apportioning different overheads. For example, it might be suitable to choose floor space as the apportionment method for electricity and/or rates. However, it would make sense to choose the proportion of the overall staff in each department as a basis for apportioning the centre manager's salary and/or office administration costs. In this exercise, your task is to work out the profitability of each department using the given template below. The task has been made easier for you, as the method for apportioning each overhead has been selected for you. All you need to do is to perform the arithmetic and find out how each department in Ravenswood Leisure Centre contributes to the overall business profitability Your Scenario The Ravenswood Leisure Centre was built at a cost of $6 million (see Table 1) and has just finished its first Table 1: CAPITAL COST of Sports Centre year of operation Department Capital Cost Capital Cost $'000 The Centre has the following facilities: Leisure Pool 2,700 A leisure pool Sports Hall 2,300 A multipurpose sports hall Changing / Sauna / Jacuzzis Four (4) squash courts Squash Courts Total 6,000 100% Changing rooms that include saunas and Jacuzzis Corby City Council, owners of the complex, is keen to Table 2: INCOME per Department find out the profitability of the whole business and Department S'000s each of its departments separately. Leisure Pool The total income from the complex was $1.55 million Sports Hall and Table 2 provides a breakdown of this amount per department. Sauna / Jacuzzis Squash Courts % 45% 38% 3% 200 800 14% 650 600 50 250 1550 Total 15 10 20 40 65 10 The centre had overhead costs of $400,000 for the year. Table 3: OVERHEADS to be apportioned These costs are identified in Table 3. S'000s These costs must be apportioned across the four Advertising departments. The method of apportionment for each Auditors Costs overhead cost is given to you in the worksheet accompanying this exercise. Cleaning You will need the data in Tables 4 and 5 below and Table 1 Electricity above to carry out the apportionment. Financing Cost Getting Started Insurance Maintenance 50 You have provided with two different resources to help you complete this exercise. Use ONE of the two resources: Managers Salary 75 1. A worksheet in MS Word format Office Costs Rates 2. A worksheet in MS Excel format Security The worksheet in MS Excel format should be preferred # Staff Uniforms you have the skills to enter appropriate formula to carry out the simple arithmetic tasks. Vehicle Costs Total 400 Otherwise use the template on the next page in this document You will notice that the apportionment figures from tables 1, 4 and have been transferred to the worksheet template. 100 40 15 5 20 M2 Table 4: FLOOR SPACE for each department Cost Centre Floor Area Floor Area % Leisure Pool 1,400 47% Sports Hall 1,200 40% Changing/Sauna/Jacuzzi 100 3% Squash Courts 300 10% Total 3,000 100% 14 Table S: Proportions of STAFFING ESTABLISHMENT No of Prop- People ortion Leisure Pool Staff 43% Sports Hall 30% Sauna/Jacuzzi 4 12% Squash Courts 5 15% Total Full-Time Equivalent 33 100% 10