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Renoir Hotel & Casino is situated on beautiful Lake Tahoe in Nevada. The complex includes a 300-room hotel, a casino, and a restaurant. As Renoir'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:

(Click the icon to view the information.)

You are also given the following data on the three divisions. (Click the icon to view 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 2011 was $14,630,000.

Read the requirements.

Requirement 1. Calculate division margins in percentage terms prior to allocating fixed overhead costs. answers to two decimal places, X.XX.)

Hotel Restaurant Casino

Division margin

%

%

Requirement 2. Allocate indirect costs to the three divisions using each of the three allocation bases su each allocation base, calculate division operating margins after allocations in dollars and as a percentage

Allocate the indirect costs, then calculate the division operating margin in dollars and as a percentage of each segment.

Begin with cost allocation based on direct costs. (Round percentages, including intermediate calculation:: places, X.XX%. Round dollar amounts to the nearest dollar. Use parentheses or a minus sign for negativ

Allocated fixed overhead costs Operating margin

Hotel Restaurant Casino

Operating margin %

. ,

% % %

Next, allocate costs based on floor space. (Round percentages, including intermediate calculations, to Tu\ places, X.XX%. Round dollar amounts to the nearest dollar. Use parentheses or a minus sign for negativ

Hotel Restaurant Casino

Allocated fixed overhead costs Operating margin Operating margin % ... , %

%

Now allocate costs based on number of employees. (Round percentages, including intermediate calculat decimal places, X.XX%. Round dollar amounts to the nearest dollar. Use parentheses or a minus sign fo1 amounts.)

Allocated fixed overhead costs

Hotel Restaurant Casino

1. (cont.)

Operating margin Operating margin %

% % %

Requirement 3. Discuss the results. How would you decide to allocate indirect costs to the divisions? W

benefits-received division-costs floor-space

a dramatic difference no difference

There is

in the operating margin percentages depending upon which allocation b

cause-and-effect direct-cost nonfinancial

Where cost allocation is required, the

and

criteria are recommenc

$14,630,000 is a

fixed variable

cause-and-effect direct-cost nonfinancial

overhead cost. This means that on a short-run basis, the

appropriate but Renoir could attempt to identify the cost drivers for these costs in the lng run. Renoir sh

the $14,630,000 cost

benefits is a detriment to

the three divisions. This will help guide the choice of an allocatio

short run.

Requirement 4. Would you recommend closing any of the three divisions (and possibly reallocating resc divisions) as a result of your analysis? If so, which division would you close and why?

The analysis in requirement 2

should should not

guide the decision on whether to shut down any of the divisior

is clear is not clear

overhead costs are fixed costs in the short run. It

variable

how these costs would be affected it

Renoir shut down one of the divisions.Also, each divisi -dependent of the other two. A decisic

is not

would have no affect on would likely have a negative effect on

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the restaurant, for example,

the attendance at the casino and the

Data Table

(cont.) Hotel Restaurant Casino

Revenues $ 17,130,000 $ 6,427,000 $ 12,380,000

Direct costs 9,825,000 4,392, 100 4,475,500 Segment margin $ 7,305,000 $ 2,034,900 $ 7,904,500

Data Table

Hotel Restaurant Casino

Floor space (square feet) 70,000 14,000 56,000

Number of employees 280 70 350

Requirements

Requirements

Calculate division margins in percentage terms prior to allocating fixed overhead costs.

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 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?

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