Question

ct costs based on one of the following: direct costs, floor space, or the number of employ Data Table pal Revenues Hotel Restaurant 17,592,000 $ 7,936,000 $ 9,875,000 4,310,600 7,717,000 $ 3,625,400 $ Casino 12,420,000 4,420,800 7,999 200 calcu Direct costs is $ Segment margin oundc ht Print Done 000 4,310,600 3,625,400 4,420,800 7.999,200 18,606,400 19341600 ,000 45 689 64.41 %

the first two pictures are the data pertaining to the question the third picture is the question and the fourth picture contains additional info

Answer 1

Required 1:

Hotel = 43.87%

Restaurant = 45.68%

Casino = 64.41%

Calculation:

	Hotel	Restaurant	Casino
Revenues (a)	$17,592,000	$7,936,000	$12,420,000
Less: Direct Costs (b)	9,875,000	4,310,600	4,420,800
Divisional Margin ( c)=(a)-(b)	$7,717,000	$3,625,400	$7,999,200
% of Divisional Margin ( c)/(a)	43.87%	45.68%	64.41%

Required 2:

Allocation Bases:
	Hotel	Restaurant	Casino	Total
Direct Cost (DC)	$9,875,000	$4,310,600	$4,420,800	$18,606,400
% of DC (DC/total DC)	53.07%	23.17%	23.76%	100.00%
Floor Space in sq. feet (FS)	110,000	22,000	88,000	$220,000
% of floor space (FS/total FS)	50.00%	10.00%	40.00%	100.00%
Number of Employees (E)	120	30	150	$300
% of Employees (E/total E)	40%	10%	50%	100%

Division Operating Margin with allocation of fixed overhead using direct cost

	Hotel	Restaurant	Casino	Total
Revenues	$17,592,000	$7,936,000	$12,420,000	$37,948,000
Less: Direct Costs	9,875,000	4,310,600	4,420,800	18,606,400
Operating Margin	$7,717,000	$3,625,400	$7,999,200	$19,341,600
Less: Allocated Indirect Cost (53.07%, 23.17%, 23.76%) x $14,560,000	7,727,449	3,373,158	3,459,393	14,560,000
Operating Margin (OM)	($10,449)	$252,242	$4,539,807	$4,781,600
% of OM (OM/Revenues)	-0.06%	3.18%	36.55%	12.60%

Division Operating Margin with allocation of fixed overhead based on floor space

	Hotel	Restaurant	Casino	Total
Revenues	$17,592,000	$7,936,000	$12,420,000	$37,948,000
Less: Direct Costs	9,875,000	4,310,600	4,420,800	18,606,400
Operating Margin	$7,717,000	$3,625,400	$7,999,200	$19,341,600
Less: Allocated Indirect Cost (50%, 10%, 40%) x $14,560,000	7,280,000	1,456,000	5,824,000	14,560,000
Operating Margin (OM)	$437,000	$2,169,400	$2,175,200	$4,781,600
% of OM (OM/Revenues)	2.48%	27.34%	17.51%	12.60%

Division Operating Margin with allocation of fixed overhead based on number of employees

	Hotel	Restaurant	Casino	Total
Revenues	$17,592,000	$7,936,000	$12,420,000	$37,948,000
Less: Direct Costs	9,875,000	4,310,600	4,420,800	$18,606,400
Operating Margin	$7,717,000	$3,625,400	$7,999,200	$19,341,600
Less: Allocated Indirect Cost (40%, 10%, 50%) x $14,560,000	5,824,000	1,456,000	7,280,000	14,560,000
Operating Margin (OM)	$1,893,000	$2,169,400	$719,200	$4,781,600
% of OM (OM/Revenues)	10.76%	27.34%	5.79%	12.60%

Required 3:

	Pre-tax Income Percentage
Allocation Base	Hotel	Restaurant	Casino
Direct costs	-0.06%	3.18%	36.55%
Floor space	2.48%	27.34%	17.51%
Number of employees	10.76%	27.34%	5.79%

Donatello may prefer to eliminate allocated costs from the financial measures to lower areas of dispute. As $14,560,000 is a fixed overhead cost, cause-and-effect criteria is not appropriate for short term basis. Donatello could attempt to identify the cost drivers for these costs in the long run when these costs are likely to be more variable. Donatello should see how $14,560,000 cost benefits the hotel, Casino and restaurant segments. This will inturn benefit in long term.

Required 4:

We cannot completely rely on the analysis done in requirement 2 to decide on shutting down any of the segments. The overhead costs are fixed costs in the short term and effects in long term is unclear whether the Donatello shuts down one of thier segments. Also, one segment is dependent on other and itaffects each other if one is shut down.

Donatello's analysis 2 is done based on pasts costs, which says that each of the divisions are generating positively to the profit of the company. Hence they should examine the future revenue and cost implications and plan to reduce costs in the three divisions.