Question

E14-23

Weyden Hotel​ & Casino is situated on beautiful Lake Tahoe in Nevada. The complex includes a​ 300-room hotel, a​ casino, and a restaurant. As Weyden​'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	$17,592,000	$6,293,000	$12,400,000
Direct costs	9,775,000	3,725,000	4,392,300
Segment margin	$7,817,000	$2,568,000	$8,007,700

You are also given the following data on the three divisions.

	Hotel	Restaurant	Casino
Floor space (square feet)	115,000	23,000	92,000
Number of employees	200	50	250

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 $14,630,000.

1.	Calculate division margins in percentage terms prior to allocating fixed overhead costs.
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.
3.	Discuss the results. How would you decide how to allocate indirect costs to the​ divisions? Why?
4.	Would you recommend closing any of the three divisions​ (and possibly reallocating resources to other​ divisions) as a result of your​ analysis? If​ so, which division would you close and​ why?

Answer 1