You are also given the following data on the three dvisions Raphael Hotel & Casi

Question

You are also given the following data on the three dvisions Raphael Hotel & Casino is situated on beautiful Lake Tahoe in Nevada. The complex includes a 300-room hotel, a casino, and a restaurant As Raphaers new controler, 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 (Click the icon to vew the data ) 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 2016 were $14,590,000 (click the icon to voew the data ) Read the Casino Raphael Hotel Restaurant Allocated foxed overhead costs Operating margin Operating margin % Enter any number in the edit fields and then click Check Answer

Explanation / Answer

1) Hotel Restaurant Casino Total Revenues 18273000 8210000 12360000 38843000 Direct costs 9825000 4268400 4226000 18319400 Segment margin 8448000 3941600 8134000 20523600 Division margin % 46.23% 48.01% 65.81% 52.84% 2) ALLOCATION BASED ON DIRECT COSTS: Allocated fixed overhead costs 7824861 3399454 3365686 14590000 Operating margin 623139 542146 4768314 5933600 Operating margin % 3.41% 6.60% 38.58% 15.28% ALLOCATION BASED ON FLOOR SPACE: Floor space (Square feet) 110000 22000 88000 220000 Allocated fixed overhead costs 7295000 1459000 5836000 14590000 Operating margin 1153000 2482600 2298000 5933600 Operating margin % 6.31% 30.24% 18.59% 15.28% ALLOCATION BASED ON NUMBER OF EMPLOYEES: Number of employees 160 40 200 400 Allocated fixed overhead costs 5836000 1459000 7295000 14590000 Operating margin 2612000 2482600 839000 5933600 Operating margin % 14.29% 30.24% 6.79% 15.28% 3) The three allocation bases give varying results as to % of operating margins. Allocation base for indirect costs Hotel Restaurant Casino Direct costs 3.41% 6.60% 38.58% Floor space (Square feet) 6.31% 30.24% 18.59% Number of employees 14.29% 30.24% 6.79% When direct costs are used, Casino has highest % and Hotel lowest % of operating margin. With floor space, Restaurant has highest % and Hotel the lowest %. Using number of employees, Restaurant has highest % and Casino the lowest. The allocation should be based on direct costs as they represent the extent to which indirect costs would be incurred. This is in the absence of information as to the break up of the indirect costs and their cost drivers. 4) Based on direct costs, the Hotel could be closed as its operating margin % is lowest.

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