What would be the profitability of the 3 business lines using HC as the CAB????
You, as general manager, receive this information from the accountant. Which actions would you derive from the report?
What if we use the revenues (benefits received) as a way to allocate the common and general costs? Implications? Comparison with allocating the OH with Head-count? As a manager would you make the same conclusions here as in the previous post?
What are the numbers (and your opinion) of using multiple cost pools and not just one???
The Terminus Hotel, a 200-room facility located in a medieval city in Southern Spain. As consequence of poor management and old-fashioned interior design, the hotel experienced slumping demand since 2001. In 2004, the hotel was on the brink of bankruptcy. All of a sudden, these dark prospects turned into hopeful ones; the hotel was located in a historic building and the regional authorities approached Mr. Leo D. Marcial, chair of the Chamber of Commerce, to mobilize local entrepreneurs in order to take over hotel ownership. After some discussions, the entrepreneurs agreed on bidding for the hotel to make it an exclusive, high profile and properly-managed facility. The entrepreneurs regarded the acquisition of the Terminus Hotel as an opportunity to enter the hospitality industry under convenient conditions; they could get a first-rate brand at a relatively cheap price. In January 2007, the new ownership completed thorough refurbishing of the facility, which comprised new furniture and state-of-the-art interior design. The hotel resumed operations in February 2007 (see Table 1).TABLE 1 THE TERMINUS HOTEL: ASSETS (IN EUROS) (DECEMBER 31, 2007) 2007 2004 ASSETS Goodwill 35,000 40,000 Other intangible assets 55,000 25,000 Investment property 9,400 10,000 Property, plant and equipment 6,250,000 2,570,000 Financial assets available for sale 95,000 75,000 Trade and other receivables 90,000 175,000 Deferred tax assets 12,600 90,000 Non-current assets 6,547,000 2,985,000 Inventories 56,000 104,500 Financial assets available for sale 15,000 22,500 Trade and other receivables 875,000 1,150,000 Derivative financial instruments 95,000 117,000 Cash and cash equivalents 1,655,000 2,233,000 Assets held for sale 1,375,000 119,000 Current assets 4,071,000 3,746,000The new Terminus Hotel offered three main services: accommodation, a restaurant and entertainment. The restaurant served haute cuisine designed and prepared by the team of a world- class chef, whilst entertainment consisted of flamenco singing and dancing. Restaurant and entertainment services were open to non-clients. In their own firms, the entrepreneurs had spare capacity in a number of support services. In a win- win move, allied firms supplied the hotel with full service in areas such as accounting, law, financing, advertising, gardening, receivables and the reservation center. The transfer prices for these transactions were below market prices (see Table 2). TABLE 2 SERVICES PROVIDED TO THE TERMINUS HOTEL BY ALLIED FIRMS (IN EUROS) Service 2007 Law 55,000 Financing 85,000 Accounting and Taxation 55,000 Advertising 320,000 Gardening 20,000 Reservation Center 35,000 Receivables 30,000 TOTAL 600,000SERVICE PROFITABILITY ANALYSIS Although the business plan of the hotel forecasted losses for 2007, actual results were below expectations. In order to identify sources of problems, the entrepreneurs requested a profitability analysis for the three main services offered by the hotel. Cristina Aranda, the cost analyst of one of the allied firms and the person in charge of budget and control for the Terminus Hotel, teamed up with General Manager Claudia Santander to identify some cost categories (see Table 3). TABLE 3 COMMON COSTS FOR ACCOMMODATION, RESTAURANT AND ENTERTAINMENT (EUROS) Service 2007 General Management 55,000 Administrative Support 15,000 Housekeeping 95,000 Laundry 325,000 Security 100,000 Maintenance 110,000 TOTAL 700,000 Additionally, Cristina calculated the operating profit for each of the main services offered by the Terminus Hotel (see Table 4).TABLE 4 OPERATING PROFIT FOR ACCOMMODATION RESTAURANT AND ENTERTAINMENT SERVICES Accommodation Restaurant Entertainment Revenues 4,500,000 2,650,000 1 350,000 Operating Expenses 4,1 10,000 2,475,000 1,400,000 2| IE Business School THE TERMINUS HOTEL {A} i CG1130Al Operating Prot 390,000 175,000 (50,000) Furthermore, Cristina and Claudia gathered the following data about each of the services (see Table 5). This data excludes the support activities shown above: A. TABLE 5 DATA ABOUT ACCOMMODATION. RESTAURANT AND ENTERTAINMENT Accommodation Restaurant Entertainment Employees 12 16 12 Compensation of employees (350,000 (500,000 (250,000 Square meters 5,000 m2 200 m2 300 m2 Daily occupancy (average) 75 rooms 40 tables 30 tables Property, plant and equipment (Net of depreciation) 65,200,000 (475,000 E325,000 Drawing on current practices in her firm, a pottery, Cristina allocated 100% of common costs to services using a number of employees as single cost allocation base. In order to generate alternative calculations, Cristina also prepared an allocation of all common costs using total revenues as single cost allocation basis. Claudia objected to both calculations. In her opinion, single cost allocations resulted in simplistic calculations that were unrealistic for decision-making purposes. As Claudia argued that the complexity of hotel services could only be captured by using multiple cost allocations, she prepared the following proposal (Table 6):TABLE 6 ALLOCATING COMMON COSTS BY USING MULTIPLE COST ALLOCATION BASES Common cost Cost allocation basis Financing, Maintenance Value of property, plant and equipment Accounting and Taxation, Reservation Number of employees Center, Advertising, Law, General Management, Admin. Gardening, Housekeeping, Security Number of square meters Receivables, Laundry Revenues
