Question

Woodland Hotels Inc. operates four resorts in the heavily wooded areas of northern California. The resorts are named after the predominant trees at the resort: Pine Valley, Oak Glen, Mimosa, and Birch Glen. Woodland allocates its central office costs to each of the four resorts according to the annual revenue the resort generates. For the current year, the central office costs (000s omitted) were as follows:

Front office personnel (desk, clerks, etc.)	$	13,000
Administrative and executive salaries		6,000
Interest on resort purchase		5,000
Advertising		600
Housekeeping		4,000
Depreciation on reservations computer		80
Room maintenance		1,300
Carpet-cleaning contract		50
Contract to repaint rooms		600
	$	30,630

	Pine Valley		Oak Glen		Mimosa		Birch Glen		Total
Revenue (000s)	$	9,750	$	14,570	$	16,140	$	11,935	$	52,395
Square feet		65,845		90,920		49,595		99,310		305,670
Rooms		86		122		66		174		448
Assets (000s)	$	109,605	$	162,315	$	85,900	$	68,255	$	426,075

Required:

1. Based on annual revenue, what amount of the central office costs are allocated to each resort?

2. Suppose that the current methods were replaced with a system of four separate cost pools with costs collected in the four pools allocated on the basis of revenues, assets invested in each resort, square footage, and number of rooms, respectively. Which costs should be collected in each of the four pools?

3. Using the cost pool system in requirement 2, how much of the central office costs would be allocated to each resort?

Answer 1

All figures are in ('000s)

1.

Pine Valley	$             5,700	=30630/52395*9750
Oak Glen	$             8,518	=30630/52395*14570
Mimosa	$             9,435	=30630/52395*16140
Birch Glen	$             6,977	=30630/52395*11935
Total	$          30,630

2.

Front office personnel (desk, clerks, etc.)	$          13,000	Revenue
Administrative and executive salaries	$             6,000	Revenue
Interest on resort purchase	$             5,000	Assets
Advertising	$                600	Revenue
Housekeeping	$             4,000	Rooms
Depreciation on reservations computer	$                  80	Assets
Room maintenance	$             1,300	Rooms
Carpet-cleaning contract	$                  50	Square Feet
Contract to repaint rooms	$                600	Rooms
Total	$          30,630

3.

	Total	Pine Valley	Oak Glen	Mimosa	Birch Glen
Revenue	$          19,600	$             3,647	$              5,450	$           6,038	$           4,465
Square Feet	$                  50	$                   11	$                    15	$                   8	$                16
Rooms	$             5,900	$             1,132	$              1,607	$              869	$           2,292
Assets	$             5,080	$             1,307	$              1,935	$           1,024	$              814
Total	$          30,630	$             6,097	$              9,007	$           7,939	$           7,587

Working

	Total	Pine Valley	Oak Glen	Mimosa	Birch Glen
Revenue	$          19,600	=19600/52395*9750	=19600/52395*14570	=19600/52395*16140	=19600/52395*11935
Square Feet	$                  50	=50/305670*65845	=50/305670*90920	=50/305670*49595	=50/305670*99310
Rooms	$             5,900	=5900/448*86-1	=5900/448*122	=5900/448*66	=5900/448*174
Assets	$             5,080	=5080/426075*109605	=5080/426075*162315	=5080/426075*85900	=5080/426075*68255

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