Allocation of Central Costs; Profit centers Holiday Resorts, Inc. operates four resort hotels in the heavily wooded areas of eastern Texas. The resorts are named after the predominant trees at the resort: Oak Glen, Birch Glen, Mimosa, and Walnut Arbor. Holiday allocates its central office costs to each of the four hotels according to the annual revenue it generated. For the current year, these costs (000s omitted) were as follows:
Front office personnel (desk, clerks, etc.) | $ 6,000 |
Administrative and executive salaries | 4,000 |
Interest on resort purchase | 2,000 |
Advertising | 600 |
Housekeeping | 1,000 |
Depreciation on reservations computer | 80 |
Room maintenance | 800 |
Carpet-cleaning contract | 50 |
Contract to repaint rooms | 400 |
| $14,930 |
| Oak Glen | Walnut Arbor | Birch Glen | Mimosa | Total |
Revenue (000s) | $ 4,550 | $ 8,975 | $ 9,678 | $ 6,220 | $ 29,423 |
Square feet | 65,122 | 77,375 | 38,655 | 82,556 | 263,708 |
Rooms | 88 | 125 | 64 | 175 | 452 |
Assets (000s) | $88,125 | $132,775 | $68,545 | $55,883 | $345,328 |
Required
1. Based on annual revenue, what amount of the central office costs are allocated to each hotel? What are the shortcomings of this allocation method?
2. Suppose that the current method 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 hotel, 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 hotel? Is this system preferable to the single-allocation base system used in requirement 1? Why or why not?
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