Smith Hotel & Casino is situated on Lake Tahoe. The complex includes a 300-room hotel, a casino, and a restaurant. As Smith's new controller, you are asked to recommend the basis to be used for allocating fixed overhead costs to the three divisions in 2012. You are presented with the following income statement information for 2011:

	Hotel	Restaurant	Casino
Revenues	$19,654,000	$6,375,000	$12,350,000
Direct Costs	$9,700,000	$3,750,000	$4,561,700
Segment Margin	$9,954,000	$2,625,000	$7,788,300

You are given the following data on the three divisions.

	Hotel	Restaurant	Casino
Floor Space (Square Feet)	115,000	23,000	92,000
Number of Employees	280	70	350

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 2011 was $14,610,000.

Requirement 1:

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

	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.

	Hotel	Restaurant	Casino	Smith (Total)
Allocated Fixed Overhead Costs	?	?	?	?
Operating Margin	?	?	?	?
Operating Margin %	?%	?%	?%

Next Allocate costs based on floor space same Table above

And finally costs based on number of employers based on the Table above

Requirement 3:

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

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 recieved/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 devisions.