Heavenly Resorts operates a five-star hotel with a world-recognized championship golf course. Heavenly has a decentralized management structure with three divisions:
◆ Lodging (rooms, conference facilities)
◆ Food (restaurants and in-room service)
◆ Recreation (golf course, tennis courts, and so on)
Starting next month, Heavenly Resorts will offer a two-day, two-person “getaway package” for $1,000. This deal includes:
◆ Two nights’ stay for two in an ocean-view room—separately priced at $800 ($400 per night for two).
◆ Two rounds of golf—separately priced at $375 ($187.50 per round). One person can do two rounds, or two people can do one round each.
◆ Candlelight dinner for two at the exclusive Heavenly Resorts Restaurant—separately priced at $200 ($100 per person).
Jenny Lee, president of the Recreation Division, recently asked the CEO of Heavenly Resorts how her division would share in the $1,000 revenue from the package. The golf course was operating at 100% capacity. Under the getaway-package rules, participants who booked one week in advance were guaranteed access to the golf course. Lee noted that every “getaway” booking would displace $375 of golf bookings. She emphasized that the high demand reflected the devotion of her team to keeping the golf course rated one of the “Best 10 Courses in the World” by Golf Monthly. As an aside, she also noted that the Lodging and Food divisions had to turn away customers only during “peak-season events such as the New Year’s period.”
REQUIRED
1. Using selling prices, allocate the $1,000 getaway-package revenue to the three divisions using:
a. The stand-alone revenue-allocation method
b. The incremental revenue-allocation method (with Recreation first, then Lodging, and then Food)
2. What are the pros and cons of the two methods in requirement 1?