Question
Raphael Hotel & Casino is situated on beautiful Lake Tahoe in Nevada. The complex includes a 300-room hotel, a casino, and a restaurant. As Raphael's
Raphael Hotel & Casino is situated on beautiful Lake Tahoe in Nevada. The complex includes a 300-room hotel, a casino, and a restaurant. As Raphael'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 2017. You are presented with the following income statement information for 2016:
Hotel | Restaurant | Casino | |
Revenues | $16,850,000 | $7,150,000 | $12,430,000 |
Direct Costs | $9,675,000 | $4,392,000 | $4,624,900 |
Segment Margin | $7,175,000 | $2,757,900 | $7,805,100 |
You are given the following data on the three divisions.
Hotel | Restaurant | Casino | |
Floor Space (Square Feet) | 75,000 | 15,000 | 60,000 |
Number of Employees | 360 | 90 | 450 |
Requirement 1. Calculate division margins in percentage terms prior to allocating fixed overhead costs. (Round your answers to two decimal places, X.XX.)
| Hotel | Restaurant | Casino | |||
Division margin |
| % |
| % |
| % |
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
Hotel | Restaurant | Casino | Raphael (Total) | |
Allocated Fixed Overhead Costs | ? | ? | ? | ? |
Operating Margin | ? | ? | ? | ? |
Operating Margin % | ?% | ?% | ?% |
Next, allocate costs based on floor space
And finally costs based on number of employers based on the Table above
Hotel | Restaurant | Casino | Raphael (Total) | |
Allocated Fixed Overhead Costs | ? | ? | ? | ? |
Operating Margin | ? | ? | ? | ? |
Operating Margin % | ?% | ?% | ?% |
Now allocate costs based on number of employees
Hotel | Restaurant | Casino | Raphael (Total) | |
Allocated Fixed Overhead Costs | ? | ? | ? | ? |
Operating Margin | ? | ? | ? | ? |
Operating Margin % | ?% | ?% | ?% |
There is (a dramatic difference/no difference) in the operating margin percentages depending upon which allocation base is chosen. Where cost allocation is required, the (cause-and-effect/direct cost/non-financial) and (benefits received/division-costs/floor-space) criteria are recommended. The $14,600,000 is (fixed/variable) overhead cost. This means that on a short-run basis the (cause-and-effect/direct cost/non-financial) criterion is not appropriate but Smith could attempt to identify the cost drivers for these costs in the long run. Smith should look at how the $14,610,000 cost (benefits/is a detriment to) the three divisions.
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