The Terminus Hotel, a 200-room facility located in a medieval city in Southern Spain. As consequence...

    

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The Terminus Hotel, a 200-room facility located in a medieval city in Southern Spain. As consequence of poor management and old-fashioned interior design. the hotel experienced slumping demand since 2001. In 2004, the hotel was on the brink of bankruptcy. All of a sudden, these dark prospects turned into hopeful ones; the hotel was located in a historic building and the regional authorities approached Mr. Leo D. Marcial, chair of the Chamber of Commerce, to mobilize local entrepreneurs in order to take over hotel ownership. After some discussions, the entrepreneurs agreed on bidding for the hotel to make t an exclusive, high profile and properly-managed facility. The entrepreneurs regarded the acquisition of the Teminus Hotel as an opportunity to enter the hospitality industry under convenient conditions; they could get a first-rate brand at a relatively cheap price. In January 2007, the new ownership completed thorough refurbishing of the facility, which comprised new furniture and state-of-the-art interior design. The hotel resumed operations in February 2007 (see Table 1). TABLE 1 I TERMINUS HOTEL:ASSETS (NEUROS) (DECEMBLR 31.2007) 2007 2004 ASSETS Goodwill Other insangible assets Investmert property Prepeny, plant and equioment Financial assets avalatie fer sale Trade and other receivables Delerred tax assets Non-current assets 35.000 55.000 40.000 25000 10,000 2570,000 9,400 6.250,000 96,000 90,000 12,600 75,000 175.000 90,000 2.985,900 6,547,000 Inventories Financial assets avalabie for sale Trade and other receivables 104 500 22500 1.150.000 56,000 15,000 875.000 Derivative financial instruments 95,000 117,000 Cash and cash equivalents Assets heid for sale 2233,000 1,656,000 1375,000 119,000 Current assete 4,071,000 3.746.00 The new Terminus Hotel offered three main services: accommodation, a restaurant and entertainment. The restaurant served haute cuisine designed and prepared by the team of a world- class chef, whilst entertainment consisted of flamenco singing and dancing. Restaurant and entertainment services were open to non-clents. In their own firms, the entrepreneurs had spare capacity in a number of support services. In a win- win move, alled firms supplied the hotel with full service in areas such as accounting, law, financing, advertising. gardening, receivables and the reservation center. The transfer prices for these transactions were below market prices (see Table 2). TABLE 2 SERIGES PROODED Te THE TERMMIS HOTEL BY ALUED EHMS INLBOS) Service 2007 56.000 Law Firarcing Accounting and Taxation Advertieing Gardening 86,000 55.000 320.000 20.000 Reservation Center 36,000 30,000 600.000 Receivables TOTAL SERVICE PROFITABILITY ANALYSIS Although the business plan of the hotel forecasted losses for 2007, actual results were below expectations. In order to identify sources of problems, the entrepreneurs requested a profitability analysis for the three main services offered by the hotel. Cristina Aranda, the cost analyst of one of the alled firms and the person in charge of budget and control for the Terminus Hotel, teamed up with General Manager Claudia Santander to identify some cost categories (see Table 3). TABLE 3 COMMON COSTS FOR ACCOMMODATION. RESTALRANT AND ENTERTANMENT (EUROS) Service 2007 General Management Administraive Support Housekeeping Laundry Security 56.000 15.000 66,000 325,000 100,000 Maintenance 110.000 TOTAL 700,000 Additionaly. Cristina calculated the operating profit for each of the main services offered by the Terminus Hotel (see Table 4). TABLE 4 OPERATING PRDET FOR ACCOMMOATION, RESTALRANT AND ENTERTANNENT SERVCES Accommodation Restaurant Entertainment Revenues 4,500.000 2.650.000 1350,000 Operating Expenses 4,110.000 2475.000 1.400,000 Operating Proft 390,000 175,000 (50,000) Furthermore, Cristina and Claudia gathered the following data about each of the services (see Table 5). This data excludes the support activities shown above: TABLE 5 DATA ABOUT ACCOMMODATION. RESTALRANT AND ENTERTAINMENT Accommodation Restaurant Entertainment Employees Compensation of employees Square meters Daily occupancy (average) Property, plant and equipment (Net of depreciation) 12 16 12 €500.000 200 m2 €350,000 250,000 5,000 m2 300 m2 75 rooms 40 tables 30 tables €5,200,000 €475.000 €325,000 Drawing on current practices in her firm, a pottery, Cristina allocated 100% of common costs to services using a number of employees as single cost allocation base. In order to generate alternative calculations, Cristina also prepared an allocation of all common costs using total revenues as single cost allocation basis. Claudia objected to both calculations. In her opinion, single cost allocations resulted in simplistic calculations that were unrealistic for decision-making purposes. As Claudia argued that the complexity of hotel services could only be captured by using multiple cost allocations, she prepared the following proposal (Table 6): TABLE 6 ALLOGATING COMMON COSTS BY USING MuA TIPLE COST ALLOCATON BASES Commen cost Cost allocation basis Value of property, plant and equipment Number of employees Financing, Maintenance Accounting and Taxation, Reservation Center, Advertising, Law, General Management, Admin Gardening. Housekoeping. Security Receivables, Laundry Number of square meters Revenues REQUIRED ASSIGNMENTS: 1. Using Cristina's single cost allocations, report services profitability. Explain the rationale behind each of the proposals. 2. Using Claudia's multiple cost allocation bases, report services profitability. Comment on the rationale of the proposal. 3. In view of the available information, which decisions would you make? ... =>Basically, you are required to calculate the net profitability of the 3 business areas (ie ACCOMODATION, RESTAURANT, and ENTERTAINMENT) where net profitability of every business area = operating income of the business area (given) minus allocated portion of corporate overhead (i.e. €1,300,000), using two alternative cost allocation bases (i.e. division revenues and division employees) for the corporate overhead. Therefore, to produce two tables: one table with net profitability of the 3 business areas using division revenues as cost allocation base of the corporate overhead and a second table with net profitability of the 3 business areas using division employees as cost allocation base of the corporate overhead. The Terminus Hotel, a 200-room facility located in a medieval city in Southern Spain. As consequence of poor management and old-fashioned interior design. the hotel experienced slumping demand since 2001. In 2004, the hotel was on the brink of bankruptcy. All of a sudden, these dark prospects turned into hopeful ones; the hotel was located in a historic building and the regional authorities approached Mr. Leo D. Marcial, chair of the Chamber of Commerce, to mobilize local entrepreneurs in order to take over hotel ownership. After some discussions, the entrepreneurs agreed on bidding for the hotel to make t an exclusive, high profile and properly-managed facility. The entrepreneurs regarded the acquisition of the Teminus Hotel as an opportunity to enter the hospitality industry under convenient conditions; they could get a first-rate brand at a relatively cheap price. In January 2007, the new ownership completed thorough refurbishing of the facility, which comprised new furniture and state-of-the-art interior design. The hotel resumed operations in February 2007 (see Table 1). TABLE 1 I TERMINUS HOTEL:ASSETS (NEUROS) (DECEMBLR 31.2007) 2007 2004 ASSETS Goodwill Other insangible assets Investmert property Prepeny, plant and equioment Financial assets avalatie fer sale Trade and other receivables Delerred tax assets Non-current assets 35.000 55.000 40.000 25000 10,000 2570,000 9,400 6.250,000 96,000 90,000 12,600 75,000 175.000 90,000 2.985,900 6,547,000 Inventories Financial assets avalabie for sale Trade and other receivables 104 500 22500 1.150.000 56,000 15,000 875.000 Derivative financial instruments 95,000 117,000 Cash and cash equivalents Assets heid for sale 2233,000 1,656,000 1375,000 119,000 Current assete 4,071,000 3.746.00 The new Terminus Hotel offered three main services: accommodation, a restaurant and entertainment. The restaurant served haute cuisine designed and prepared by the team of a world- class chef, whilst entertainment consisted of flamenco singing and dancing. Restaurant and entertainment services were open to non-clents. In their own firms, the entrepreneurs had spare capacity in a number of support services. In a win- win move, alled firms supplied the hotel with full service in areas such as accounting, law, financing, advertising. gardening, receivables and the reservation center. The transfer prices for these transactions were below market prices (see Table 2). TABLE 2 SERIGES PROODED Te THE TERMMIS HOTEL BY ALUED EHMS INLBOS) Service 2007 56.000 Law Firarcing Accounting and Taxation Advertieing Gardening 86,000 55.000 320.000 20.000 Reservation Center 36,000 30,000 600.000 Receivables TOTAL SERVICE PROFITABILITY ANALYSIS Although the business plan of the hotel forecasted losses for 2007, actual results were below expectations. In order to identify sources of problems, the entrepreneurs requested a profitability analysis for the three main services offered by the hotel. Cristina Aranda, the cost analyst of one of the alled firms and the person in charge of budget and control for the Terminus Hotel, teamed up with General Manager Claudia Santander to identify some cost categories (see Table 3). TABLE 3 COMMON COSTS FOR ACCOMMODATION. RESTALRANT AND ENTERTANMENT (EUROS) Service 2007 General Management Administraive Support Housekeeping Laundry Security 56.000 15.000 66,000 325,000 100,000 Maintenance 110.000 TOTAL 700,000 Additionaly. Cristina calculated the operating profit for each of the main services offered by the Terminus Hotel (see Table 4). TABLE 4 OPERATING PRDET FOR ACCOMMOATION, RESTALRANT AND ENTERTANNENT SERVCES Accommodation Restaurant Entertainment Revenues 4,500.000 2.650.000 1350,000 Operating Expenses 4,110.000 2475.000 1.400,000 Operating Proft 390,000 175,000 (50,000) Furthermore, Cristina and Claudia gathered the following data about each of the services (see Table 5). This data excludes the support activities shown above: TABLE 5 DATA ABOUT ACCOMMODATION. RESTALRANT AND ENTERTAINMENT Accommodation Restaurant Entertainment Employees Compensation of employees Square meters Daily occupancy (average) Property, plant and equipment (Net of depreciation) 12 16 12 €500.000 200 m2 €350,000 250,000 5,000 m2 300 m2 75 rooms 40 tables 30 tables €5,200,000 €475.000 €325,000 Drawing on current practices in her firm, a pottery, Cristina allocated 100% of common costs to services using a number of employees as single cost allocation base. In order to generate alternative calculations, Cristina also prepared an allocation of all common costs using total revenues as single cost allocation basis. Claudia objected to both calculations. In her opinion, single cost allocations resulted in simplistic calculations that were unrealistic for decision-making purposes. As Claudia argued that the complexity of hotel services could only be captured by using multiple cost allocations, she prepared the following proposal (Table 6): TABLE 6 ALLOGATING COMMON COSTS BY USING MuA TIPLE COST ALLOCATON BASES Commen cost Cost allocation basis Value of property, plant and equipment Number of employees Financing, Maintenance Accounting and Taxation, Reservation Center, Advertising, Law, General Management, Admin Gardening. Housekoeping. Security Receivables, Laundry Number of square meters Revenues REQUIRED ASSIGNMENTS: 1. Using Cristina's single cost allocations, report services profitability. Explain the rationale behind each of the proposals. 2. Using Claudia's multiple cost allocation bases, report services profitability. Comment on the rationale of the proposal. 3. In view of the available information, which decisions would you make? ... =>Basically, you are required to calculate the net profitability of the 3 business areas (ie ACCOMODATION, RESTAURANT, and ENTERTAINMENT) where net profitability of every business area = operating income of the business area (given) minus allocated portion of corporate overhead (i.e. €1,300,000), using two alternative cost allocation bases (i.e. division revenues and division employees) for the corporate overhead. Therefore, to produce two tables: one table with net profitability of the 3 business areas using division revenues as cost allocation base of the corporate overhead and a second table with net profitability of the 3 business areas using division employees as cost allocation base of the corporate overhead. The Terminus Hotel, a 200-room facility located in a medieval city in Southern Spain. As consequence of poor management and old-fashioned interior design. the hotel experienced slumping demand since 2001. In 2004, the hotel was on the brink of bankruptcy. All of a sudden, these dark prospects turned into hopeful ones; the hotel was located in a historic building and the regional authorities approached Mr. Leo D. Marcial, chair of the Chamber of Commerce, to mobilize local entrepreneurs in order to take over hotel ownership. After some discussions, the entrepreneurs agreed on bidding for the hotel to make t an exclusive, high profile and properly-managed facility. The entrepreneurs regarded the acquisition of the Teminus Hotel as an opportunity to enter the hospitality industry under convenient conditions; they could get a first-rate brand at a relatively cheap price. In January 2007, the new ownership completed thorough refurbishing of the facility, which comprised new furniture and state-of-the-art interior design. The hotel resumed operations in February 2007 (see Table 1). TABLE 1 I TERMINUS HOTEL:ASSETS (NEUROS) (DECEMBLR 31.2007) 2007 2004 ASSETS Goodwill Other insangible assets Investmert property Prepeny, plant and equioment Financial assets avalatie fer sale Trade and other receivables Delerred tax assets Non-current assets 35.000 55.000 40.000 25000 10,000 2570,000 9,400 6.250,000 96,000 90,000 12,600 75,000 175.000 90,000 2.985,900 6,547,000 Inventories Financial assets avalabie for sale Trade and other receivables 104 500 22500 1.150.000 56,000 15,000 875.000 Derivative financial instruments 95,000 117,000 Cash and cash equivalents Assets heid for sale 2233,000 1,656,000 1375,000 119,000 Current assete 4,071,000 3.746.00 The new Terminus Hotel offered three main services: accommodation, a restaurant and entertainment. The restaurant served haute cuisine designed and prepared by the team of a world- class chef, whilst entertainment consisted of flamenco singing and dancing. Restaurant and entertainment services were open to non-clents. In their own firms, the entrepreneurs had spare capacity in a number of support services. In a win- win move, alled firms supplied the hotel with full service in areas such as accounting, law, financing, advertising. gardening, receivables and the reservation center. The transfer prices for these transactions were below market prices (see Table 2). TABLE 2 SERIGES PROODED Te THE TERMMIS HOTEL BY ALUED EHMS INLBOS) Service 2007 56.000 Law Firarcing Accounting and Taxation Advertieing Gardening 86,000 55.000 320.000 20.000 Reservation Center 36,000 30,000 600.000 Receivables TOTAL SERVICE PROFITABILITY ANALYSIS Although the business plan of the hotel forecasted losses for 2007, actual results were below expectations. In order to identify sources of problems, the entrepreneurs requested a profitability analysis for the three main services offered by the hotel. Cristina Aranda, the cost analyst of one of the alled firms and the person in charge of budget and control for the Terminus Hotel, teamed up with General Manager Claudia Santander to identify some cost categories (see Table 3). TABLE 3 COMMON COSTS FOR ACCOMMODATION. RESTALRANT AND ENTERTANMENT (EUROS) Service 2007 General Management Administraive Support Housekeeping Laundry Security 56.000 15.000 66,000 325,000 100,000 Maintenance 110.000 TOTAL 700,000 Additionaly. Cristina calculated the operating profit for each of the main services offered by the Terminus Hotel (see Table 4). TABLE 4 OPERATING PRDET FOR ACCOMMOATION, RESTALRANT AND ENTERTANNENT SERVCES Accommodation Restaurant Entertainment Revenues 4,500.000 2.650.000 1350,000 Operating Expenses 4,110.000 2475.000 1.400,000 Operating Proft 390,000 175,000 (50,000) Furthermore, Cristina and Claudia gathered the following data about each of the services (see Table 5). This data excludes the support activities shown above: TABLE 5 DATA ABOUT ACCOMMODATION. RESTALRANT AND ENTERTAINMENT Accommodation Restaurant Entertainment Employees Compensation of employees Square meters Daily occupancy (average) Property, plant and equipment (Net of depreciation) 12 16 12 €500.000 200 m2 €350,000 250,000 5,000 m2 300 m2 75 rooms 40 tables 30 tables €5,200,000 €475.000 €325,000 Drawing on current practices in her firm, a pottery, Cristina allocated 100% of common costs to services using a number of employees as single cost allocation base. In order to generate alternative calculations, Cristina also prepared an allocation of all common costs using total revenues as single cost allocation basis. Claudia objected to both calculations. In her opinion, single cost allocations resulted in simplistic calculations that were unrealistic for decision-making purposes. As Claudia argued that the complexity of hotel services could only be captured by using multiple cost allocations, she prepared the following proposal (Table 6): TABLE 6 ALLOGATING COMMON COSTS BY USING MuA TIPLE COST ALLOCATON BASES Commen cost Cost allocation basis Value of property, plant and equipment Number of employees Financing, Maintenance Accounting and Taxation, Reservation Center, Advertising, Law, General Management, Admin Gardening. Housekoeping. Security Receivables, Laundry Number of square meters Revenues REQUIRED ASSIGNMENTS: 1. Using Cristina's single cost allocations, report services profitability. Explain the rationale behind each of the proposals. 2. Using Claudia's multiple cost allocation bases, report services profitability. Comment on the rationale of the proposal. 3. In view of the available information, which decisions would you make? ... =>Basically, you are required to calculate the net profitability of the 3 business areas (ie ACCOMODATION, RESTAURANT, and ENTERTAINMENT) where net profitability of every business area = operating income of the business area (given) minus allocated portion of corporate overhead (i.e. €1,300,000), using two alternative cost allocation bases (i.e. division revenues and division employees) for the corporate overhead. Therefore, to produce two tables: one table with net profitability of the 3 business areas using division revenues as cost allocation base of the corporate overhead and a second table with net profitability of the 3 business areas using division employees as cost allocation base of the corporate overhead. The Terminus Hotel, a 200-room facility located in a medieval city in Southern Spain. As consequence of poor management and old-fashioned interior design. the hotel experienced slumping demand since 2001. In 2004, the hotel was on the brink of bankruptcy. All of a sudden, these dark prospects turned into hopeful ones; the hotel was located in a historic building and the regional authorities approached Mr. Leo D. Marcial, chair of the Chamber of Commerce, to mobilize local entrepreneurs in order to take over hotel ownership. After some discussions, the entrepreneurs agreed on bidding for the hotel to make t an exclusive, high profile and properly-managed facility. The entrepreneurs regarded the acquisition of the Teminus Hotel as an opportunity to enter the hospitality industry under convenient conditions; they could get a first-rate brand at a relatively cheap price. In January 2007, the new ownership completed thorough refurbishing of the facility, which comprised new furniture and state-of-the-art interior design. The hotel resumed operations in February 2007 (see Table 1). TABLE 1 I TERMINUS HOTEL:ASSETS (NEUROS) (DECEMBLR 31.2007) 2007 2004 ASSETS Goodwill Other insangible assets Investmert property Prepeny, plant and equioment Financial assets avalatie fer sale Trade and other receivables Delerred tax assets Non-current assets 35.000 55.000 40.000 25000 10,000 2570,000 9,400 6.250,000 96,000 90,000 12,600 75,000 175.000 90,000 2.985,900 6,547,000 Inventories Financial assets avalabie for sale Trade and other receivables 104 500 22500 1.150.000 56,000 15,000 875.000 Derivative financial instruments 95,000 117,000 Cash and cash equivalents Assets heid for sale 2233,000 1,656,000 1375,000 119,000 Current assete 4,071,000 3.746.00 The new Terminus Hotel offered three main services: accommodation, a restaurant and entertainment. The restaurant served haute cuisine designed and prepared by the team of a world- class chef, whilst entertainment consisted of flamenco singing and dancing. Restaurant and entertainment services were open to non-clents. In their own firms, the entrepreneurs had spare capacity in a number of support services. In a win- win move, alled firms supplied the hotel with full service in areas such as accounting, law, financing, advertising. gardening, receivables and the reservation center. The transfer prices for these transactions were below market prices (see Table 2). TABLE 2 SERIGES PROODED Te THE TERMMIS HOTEL BY ALUED EHMS INLBOS) Service 2007 56.000 Law Firarcing Accounting and Taxation Advertieing Gardening 86,000 55.000 320.000 20.000 Reservation Center 36,000 30,000 600.000 Receivables TOTAL SERVICE PROFITABILITY ANALYSIS Although the business plan of the hotel forecasted losses for 2007, actual results were below expectations. In order to identify sources of problems, the entrepreneurs requested a profitability analysis for the three main services offered by the hotel. Cristina Aranda, the cost analyst of one of the alled firms and the person in charge of budget and control for the Terminus Hotel, teamed up with General Manager Claudia Santander to identify some cost categories (see Table 3). TABLE 3 COMMON COSTS FOR ACCOMMODATION. RESTALRANT AND ENTERTANMENT (EUROS) Service 2007 General Management Administraive Support Housekeeping Laundry Security 56.000 15.000 66,000 325,000 100,000 Maintenance 110.000 TOTAL 700,000 Additionaly. Cristina calculated the operating profit for each of the main services offered by the Terminus Hotel (see Table 4). TABLE 4 OPERATING PRDET FOR ACCOMMOATION, RESTALRANT AND ENTERTANNENT SERVCES Accommodation Restaurant Entertainment Revenues 4,500.000 2.650.000 1350,000 Operating Expenses 4,110.000 2475.000 1.400,000 Operating Proft 390,000 175,000 (50,000) Furthermore, Cristina and Claudia gathered the following data about each of the services (see Table 5). This data excludes the support activities shown above: TABLE 5 DATA ABOUT ACCOMMODATION. RESTALRANT AND ENTERTAINMENT Accommodation Restaurant Entertainment Employees Compensation of employees Square meters Daily occupancy (average) Property, plant and equipment (Net of depreciation) 12 16 12 €500.000 200 m2 €350,000 250,000 5,000 m2 300 m2 75 rooms 40 tables 30 tables €5,200,000 €475.000 €325,000 Drawing on current practices in her firm, a pottery, Cristina allocated 100% of common costs to services using a number of employees as single cost allocation base. In order to generate alternative calculations, Cristina also prepared an allocation of all common costs using total revenues as single cost allocation basis. Claudia objected to both calculations. In her opinion, single cost allocations resulted in simplistic calculations that were unrealistic for decision-making purposes. As Claudia argued that the complexity of hotel services could only be captured by using multiple cost allocations, she prepared the following proposal (Table 6): TABLE 6 ALLOGATING COMMON COSTS BY USING MuA TIPLE COST ALLOCATON BASES Commen cost Cost allocation basis Value of property, plant and equipment Number of employees Financing, Maintenance Accounting and Taxation, Reservation Center, Advertising, Law, General Management, Admin Gardening. Housekoeping. Security Receivables, Laundry Number of square meters Revenues REQUIRED ASSIGNMENTS: 1. Using Cristina's single cost allocations, report services profitability. Explain the rationale behind each of the proposals. 2. Using Claudia's multiple cost allocation bases, report services profitability. Comment on the rationale of the proposal. 3. In view of the available information, which decisions would you make? ... =>Basically, you are required to calculate the net profitability of the 3 business areas (ie ACCOMODATION, RESTAURANT, and ENTERTAINMENT) where net profitability of every business area = operating income of the business area (given) minus allocated portion of corporate overhead (i.e. €1,300,000), using two alternative cost allocation bases (i.e. division revenues and division employees) for the corporate overhead. Therefore, to produce two tables: one table with net profitability of the 3 business areas using division revenues as cost allocation base of the corporate overhead and a second table with net profitability of the 3 business areas using division employees as cost allocation base of the corporate overhead. The Terminus Hotel, a 200-room facility located in a medieval city in Southern Spain. As consequence of poor management and old-fashioned interior design. the hotel experienced slumping demand since 2001. In 2004, the hotel was on the brink of bankruptcy. All of a sudden, these dark prospects turned into hopeful ones; the hotel was located in a historic building and the regional authorities approached Mr. Leo D. Marcial, chair of the Chamber of Commerce, to mobilize local entrepreneurs in order to take over hotel ownership. After some discussions, the entrepreneurs agreed on bidding for the hotel to make t an exclusive, high profile and properly-managed facility. The entrepreneurs regarded the acquisition of the Teminus Hotel as an opportunity to enter the hospitality industry under convenient conditions; they could get a first-rate brand at a relatively cheap price. In January 2007, the new ownership completed thorough refurbishing of the facility, which comprised new furniture and state-of-the-art interior design. The hotel resumed operations in February 2007 (see Table 1). TABLE 1 I TERMINUS HOTEL:ASSETS (NEUROS) (DECEMBLR 31.2007) 2007 2004 ASSETS Goodwill Other insangible assets Investmert property Prepeny, plant and equioment Financial assets avalatie fer sale Trade and other receivables Delerred tax assets Non-current assets 35.000 55.000 40.000 25000 10,000 2570,000 9,400 6.250,000 96,000 90,000 12,600 75,000 175.000 90,000 2.985,900 6,547,000 Inventories Financial assets avalabie for sale Trade and other receivables 104 500 22500 1.150.000 56,000 15,000 875.000 Derivative financial instruments 95,000 117,000 Cash and cash equivalents Assets heid for sale 2233,000 1,656,000 1375,000 119,000 Current assete 4,071,000 3.746.00 The new Terminus Hotel offered three main services: accommodation, a restaurant and entertainment. The restaurant served haute cuisine designed and prepared by the team of a world- class chef, whilst entertainment consisted of flamenco singing and dancing. Restaurant and entertainment services were open to non-clents. In their own firms, the entrepreneurs had spare capacity in a number of support services. In a win- win move, alled firms supplied the hotel with full service in areas such as accounting, law, financing, advertising. gardening, receivables and the reservation center. The transfer prices for these transactions were below market prices (see Table 2). TABLE 2 SERIGES PROODED Te THE TERMMIS HOTEL BY ALUED EHMS INLBOS) Service 2007 56.000 Law Firarcing Accounting and Taxation Advertieing Gardening 86,000 55.000 320.000 20.000 Reservation Center 36,000 30,000 600.000 Receivables TOTAL SERVICE PROFITABILITY ANALYSIS Although the business plan of the hotel forecasted losses for 2007, actual results were below expectations. In order to identify sources of problems, the entrepreneurs requested a profitability analysis for the three main services offered by the hotel. Cristina Aranda, the cost analyst of one of the alled firms and the person in charge of budget and control for the Terminus Hotel, teamed up with General Manager Claudia Santander to identify some cost categories (see Table 3). TABLE 3 COMMON COSTS FOR ACCOMMODATION. RESTALRANT AND ENTERTANMENT (EUROS) Service 2007 General Management Administraive Support Housekeeping Laundry Security 56.000 15.000 66,000 325,000 100,000 Maintenance 110.000 TOTAL 700,000 Additionaly. Cristina calculated the operating profit for each of the main services offered by the Terminus Hotel (see Table 4). TABLE 4 OPERATING PRDET FOR ACCOMMOATION, RESTALRANT AND ENTERTANNENT SERVCES Accommodation Restaurant Entertainment Revenues 4,500.000 2.650.000 1350,000 Operating Expenses 4,110.000 2475.000 1.400,000 Operating Proft 390,000 175,000 (50,000) Furthermore, Cristina and Claudia gathered the following data about each of the services (see Table 5). This data excludes the support activities shown above: TABLE 5 DATA ABOUT ACCOMMODATION. RESTALRANT AND ENTERTAINMENT Accommodation Restaurant Entertainment Employees Compensation of employees Square meters Daily occupancy (average) Property, plant and equipment (Net of depreciation) 12 16 12 €500.000 200 m2 €350,000 250,000 5,000 m2 300 m2 75 rooms 40 tables 30 tables €5,200,000 €475.000 €325,000 Drawing on current practices in her firm, a pottery, Cristina allocated 100% of common costs to services using a number of employees as single cost allocation base. In order to generate alternative calculations, Cristina also prepared an allocation of all common costs using total revenues as single cost allocation basis. Claudia objected to both calculations. In her opinion, single cost allocations resulted in simplistic calculations that were unrealistic for decision-making purposes. As Claudia argued that the complexity of hotel services could only be captured by using multiple cost allocations, she prepared the following proposal (Table 6): TABLE 6 ALLOGATING COMMON COSTS BY USING MuA TIPLE COST ALLOCATON BASES Commen cost Cost allocation basis Value of property, plant and equipment Number of employees Financing, Maintenance Accounting and Taxation, Reservation Center, Advertising, Law, General Management, Admin Gardening. Housekoeping. Security Receivables, Laundry Number of square meters Revenues REQUIRED ASSIGNMENTS: 1. Using Cristina's single cost allocations, report services profitability. Explain the rationale behind each of the proposals. 2. Using Claudia's multiple cost allocation bases, report services profitability. Comment on the rationale of the proposal. 3. In view of the available information, which decisions would you make? ... =>Basically, you are required to calculate the net profitability of the 3 business areas (ie ACCOMODATION, RESTAURANT, and ENTERTAINMENT) where net profitability of every business area = operating income of the business area (given) minus allocated portion of corporate overhead (i.e. €1,300,000), using two alternative cost allocation bases (i.e. division revenues and division employees) for the corporate overhead. Therefore, to produce two tables: one table with net profitability of the 3 business areas using division revenues as cost allocation base of the corporate overhead and a second table with net profitability of the 3 business areas using division employees as cost allocation base of the corporate overhead. The Terminus Hotel, a 200-room facility located in a medieval city in Southern Spain. As consequence of poor management and old-fashioned interior design. the hotel experienced slumping demand since 2001. In 2004, the hotel was on the brink of bankruptcy. All of a sudden, these dark prospects turned into hopeful ones; the hotel was located in a historic building and the regional authorities approached Mr. Leo D. Marcial, chair of the Chamber of Commerce, to mobilize local entrepreneurs in order to take over hotel ownership. After some discussions, the entrepreneurs agreed on bidding for the hotel to make t an exclusive, high profile and properly-managed facility. The entrepreneurs regarded the acquisition of the Teminus Hotel as an opportunity to enter the hospitality industry under convenient conditions; they could get a first-rate brand at a relatively cheap price. In January 2007, the new ownership completed thorough refurbishing of the facility, which comprised new furniture and state-of-the-art interior design. The hotel resumed operations in February 2007 (see Table 1). TABLE 1 I TERMINUS HOTEL:ASSETS (NEUROS) (DECEMBLR 31.2007) 2007 2004 ASSETS Goodwill Other insangible assets Investmert property Prepeny, plant and equioment Financial assets avalatie fer sale Trade and other receivables Delerred tax assets Non-current assets 35.000 55.000 40.000 25000 10,000 2570,000 9,400 6.250,000 96,000 90,000 12,600 75,000 175.000 90,000 2.985,900 6,547,000 Inventories Financial assets avalabie for sale Trade and other receivables 104 500 22500 1.150.000 56,000 15,000 875.000 Derivative financial instruments 95,000 117,000 Cash and cash equivalents Assets heid for sale 2233,000 1,656,000 1375,000 119,000 Current assete 4,071,000 3.746.00 The new Terminus Hotel offered three main services: accommodation, a restaurant and entertainment. The restaurant served haute cuisine designed and prepared by the team of a world- class chef, whilst entertainment consisted of flamenco singing and dancing. Restaurant and entertainment services were open to non-clents. In their own firms, the entrepreneurs had spare capacity in a number of support services. In a win- win move, alled firms supplied the hotel with full service in areas such as accounting, law, financing, advertising. gardening, receivables and the reservation center. The transfer prices for these transactions were below market prices (see Table 2). TABLE 2 SERIGES PROODED Te THE TERMMIS HOTEL BY ALUED EHMS INLBOS) Service 2007 56.000 Law Firarcing Accounting and Taxation Advertieing Gardening 86,000 55.000 320.000 20.000 Reservation Center 36,000 30,000 600.000 Receivables TOTAL SERVICE PROFITABILITY ANALYSIS Although the business plan of the hotel forecasted losses for 2007, actual results were below expectations. In order to identify sources of problems, the entrepreneurs requested a profitability analysis for the three main services offered by the hotel. Cristina Aranda, the cost analyst of one of the alled firms and the person in charge of budget and control for the Terminus Hotel, teamed up with General Manager Claudia Santander to identify some cost categories (see Table 3). TABLE 3 COMMON COSTS FOR ACCOMMODATION. RESTALRANT AND ENTERTANMENT (EUROS) Service 2007 General Management Administraive Support Housekeeping Laundry Security 56.000 15.000 66,000 325,000 100,000 Maintenance 110.000 TOTAL 700,000 Additionaly. Cristina calculated the operating profit for each of the main services offered by the Terminus Hotel (see Table 4). TABLE 4 OPERATING PRDET FOR ACCOMMOATION, RESTALRANT AND ENTERTANNENT SERVCES Accommodation Restaurant Entertainment Revenues 4,500.000 2.650.000 1350,000 Operating Expenses 4,110.000 2475.000 1.400,000 Operating Proft 390,000 175,000 (50,000) Furthermore, Cristina and Claudia gathered the following data about each of the services (see Table 5). This data excludes the support activities shown above: TABLE 5 DATA ABOUT ACCOMMODATION. RESTALRANT AND ENTERTAINMENT Accommodation Restaurant Entertainment Employees Compensation of employees Square meters Daily occupancy (average) Property, plant and equipment (Net of depreciation) 12 16 12 €500.000 200 m2 €350,000 250,000 5,000 m2 300 m2 75 rooms 40 tables 30 tables €5,200,000 €475.000 €325,000 Drawing on current practices in her firm, a pottery, Cristina allocated 100% of common costs to services using a number of employees as single cost allocation base. In order to generate alternative calculations, Cristina also prepared an allocation of all common costs using total revenues as single cost allocation basis. Claudia objected to both calculations. In her opinion, single cost allocations resulted in simplistic calculations that were unrealistic for decision-making purposes. As Claudia argued that the complexity of hotel services could only be captured by using multiple cost allocations, she prepared the following proposal (Table 6): TABLE 6 ALLOGATING COMMON COSTS BY USING MuA TIPLE COST ALLOCATON BASES Commen cost Cost allocation basis Value of property, plant and equipment Number of employees Financing, Maintenance Accounting and Taxation, Reservation Center, Advertising, Law, General Management, Admin Gardening. Housekoeping. Security Receivables, Laundry Number of square meters Revenues REQUIRED ASSIGNMENTS: 1. Using Cristina's single cost allocations, report services profitability. Explain the rationale behind each of the proposals. 2. Using Claudia's multiple cost allocation bases, report services profitability. Comment on the rationale of the proposal. 3. In view of the available information, which decisions would you make? ... =>Basically, you are required to calculate the net profitability of the 3 business areas (ie ACCOMODATION, RESTAURANT, and ENTERTAINMENT) where net profitability of every business area = operating income of the business area (given) minus allocated portion of corporate overhead (i.e. €1,300,000), using two alternative cost allocation bases (i.e. division revenues and division employees) for the corporate overhead. Therefore, to produce two tables: one table with net profitability of the 3 business areas using division revenues as cost allocation base of the corporate overhead and a second table with net profitability of the 3 business areas using division employees as cost allocation base of the corporate overhead. The Terminus Hotel, a 200-room facility located in a medieval city in Southern Spain. As consequence of poor management and old-fashioned interior design. the hotel experienced slumping demand since 2001. In 2004, the hotel was on the brink of bankruptcy. All of a sudden, these dark prospects turned into hopeful ones; the hotel was located in a historic building and the regional authorities approached Mr. Leo D. Marcial, chair of the Chamber of Commerce, to mobilize local entrepreneurs in order to take over hotel ownership. After some discussions, the entrepreneurs agreed on bidding for the hotel to make t an exclusive, high profile and properly-managed facility. The entrepreneurs regarded the acquisition of the Teminus Hotel as an opportunity to enter the hospitality industry under convenient conditions; they could get a first-rate brand at a relatively cheap price. In January 2007, the new ownership completed thorough refurbishing of the facility, which comprised new furniture and state-of-the-art interior design. The hotel resumed operations in February 2007 (see Table 1). TABLE 1 I TERMINUS HOTEL:ASSETS (NEUROS) (DECEMBLR 31.2007) 2007 2004 ASSETS Goodwill Other insangible assets Investmert property Prepeny, plant and equioment Financial assets avalatie fer sale Trade and other receivables Delerred tax assets Non-current assets 35.000 55.000 40.000 25000 10,000 2570,000 9,400 6.250,000 96,000 90,000 12,600 75,000 175.000 90,000 2.985,900 6,547,000 Inventories Financial assets avalabie for sale Trade and other receivables 104 500 22500 1.150.000 56,000 15,000 875.000 Derivative financial instruments 95,000 117,000 Cash and cash equivalents Assets heid for sale 2233,000 1,656,000 1375,000 119,000 Current assete 4,071,000 3.746.00 The new Terminus Hotel offered three main services: accommodation, a restaurant and entertainment. The restaurant served haute cuisine designed and prepared by the team of a world- class chef, whilst entertainment consisted of flamenco singing and dancing. Restaurant and entertainment services were open to non-clents. In their own firms, the entrepreneurs had spare capacity in a number of support services. In a win- win move, alled firms supplied the hotel with full service in areas such as accounting, law, financing, advertising. gardening, receivables and the reservation center. The transfer prices for these transactions were below market prices (see Table 2). TABLE 2 SERIGES PROODED Te THE TERMMIS HOTEL BY ALUED EHMS INLBOS) Service 2007 56.000 Law Firarcing Accounting and Taxation Advertieing Gardening 86,000 55.000 320.000 20.000 Reservation Center 36,000 30,000 600.000 Receivables TOTAL SERVICE PROFITABILITY ANALYSIS Although the business plan of the hotel forecasted losses for 2007, actual results were below expectations. In order to identify sources of problems, the entrepreneurs requested a profitability analysis for the three main services offered by the hotel. Cristina Aranda, the cost analyst of one of the alled firms and the person in charge of budget and control for the Terminus Hotel, teamed up with General Manager Claudia Santander to identify some cost categories (see Table 3). TABLE 3 COMMON COSTS FOR ACCOMMODATION. RESTALRANT AND ENTERTANMENT (EUROS) Service 2007 General Management Administraive Support Housekeeping Laundry Security 56.000 15.000 66,000 325,000 100,000 Maintenance 110.000 TOTAL 700,000 Additionaly. Cristina calculated the operating profit for each of the main services offered by the Terminus Hotel (see Table 4). TABLE 4 OPERATING PRDET FOR ACCOMMOATION, RESTALRANT AND ENTERTANNENT SERVCES Accommodation Restaurant Entertainment Revenues 4,500.000 2.650.000 1350,000 Operating Expenses 4,110.000 2475.000 1.400,000 Operating Proft 390,000 175,000 (50,000) Furthermore, Cristina and Claudia gathered the following data about each of the services (see Table 5). This data excludes the support activities shown above: TABLE 5 DATA ABOUT ACCOMMODATION. RESTALRANT AND ENTERTAINMENT Accommodation Restaurant Entertainment Employees Compensation of employees Square meters Daily occupancy (average) Property, plant and equipment (Net of depreciation) 12 16 12 €500.000 200 m2 €350,000 250,000 5,000 m2 300 m2 75 rooms 40 tables 30 tables €5,200,000 €475.000 €325,000 Drawing on current practices in her firm, a pottery, Cristina allocated 100% of common costs to services using a number of employees as single cost allocation base. In order to generate alternative calculations, Cristina also prepared an allocation of all common costs using total revenues as single cost allocation basis. Claudia objected to both calculations. In her opinion, single cost allocations resulted in simplistic calculations that were unrealistic for decision-making purposes. As Claudia argued that the complexity of hotel services could only be captured by using multiple cost allocations, she prepared the following proposal (Table 6): TABLE 6 ALLOGATING COMMON COSTS BY USING MuA TIPLE COST ALLOCATON BASES Commen cost Cost allocation basis Value of property, plant and equipment Number of employees Financing, Maintenance Accounting and Taxation, Reservation Center, Advertising, Law, General Management, Admin Gardening. Housekoeping. Security Receivables, Laundry Number of square meters Revenues REQUIRED ASSIGNMENTS: 1. Using Cristina's single cost allocations, report services profitability. Explain the rationale behind each of the proposals. 2. Using Claudia's multiple cost allocation bases, report services profitability. Comment on the rationale of the proposal. 3. In view of the available information, which decisions would you make? ... =>Basically, you are required to calculate the net profitability of the 3 business areas (ie ACCOMODATION, RESTAURANT, and ENTERTAINMENT) where net profitability of every business area = operating income of the business area (given) minus allocated portion of corporate overhead (i.e. €1,300,000), using two alternative cost allocation bases (i.e. division revenues and division employees) for the corporate overhead. Therefore, to produce two tables: one table with net profitability of the 3 business areas using division revenues as cost allocation base of the corporate overhead and a second table with net profitability of the 3 business areas using division employees as cost allocation base of the corporate overhead. The Terminus Hotel, a 200-room facility located in a medieval city in Southern Spain. As consequence of poor management and old-fashioned interior design. the hotel experienced slumping demand since 2001. In 2004, the hotel was on the brink of bankruptcy. All of a sudden, these dark prospects turned into hopeful ones; the hotel was located in a historic building and the regional authorities approached Mr. Leo D. Marcial, chair of the Chamber of Commerce, to mobilize local entrepreneurs in order to take over hotel ownership. After some discussions, the entrepreneurs agreed on bidding for the hotel to make t an exclusive, high profile and properly-managed facility. The entrepreneurs regarded the acquisition of the Teminus Hotel as an opportunity to enter the hospitality industry under convenient conditions; they could get a first-rate brand at a relatively cheap price. In January 2007, the new ownership completed thorough refurbishing of the facility, which comprised new furniture and state-of-the-art interior design. The hotel resumed operations in February 2007 (see Table 1). TABLE 1 I TERMINUS HOTEL:ASSETS (NEUROS) (DECEMBLR 31.2007) 2007 2004 ASSETS Goodwill Other insangible assets Investmert property Prepeny, plant and equioment Financial assets avalatie fer sale Trade and other receivables Delerred tax assets Non-current assets 35.000 55.000 40.000 25000 10,000 2570,000 9,400 6.250,000 96,000 90,000 12,600 75,000 175.000 90,000 2.985,900 6,547,000 Inventories Financial assets avalabie for sale Trade and other receivables 104 500 22500 1.150.000 56,000 15,000 875.000 Derivative financial instruments 95,000 117,000 Cash and cash equivalents Assets heid for sale 2233,000 1,656,000 1375,000 119,000 Current assete 4,071,000 3.746.00 The new Terminus Hotel offered three main services: accommodation, a restaurant and entertainment. The restaurant served haute cuisine designed and prepared by the team of a world- class chef, whilst entertainment consisted of flamenco singing and dancing. Restaurant and entertainment services were open to non-clents. In their own firms, the entrepreneurs had spare capacity in a number of support services. In a win- win move, alled firms supplied the hotel with full service in areas such as accounting, law, financing, advertising. gardening, receivables and the reservation center. The transfer prices for these transactions were below market prices (see Table 2). TABLE 2 SERIGES PROODED Te THE TERMMIS HOTEL BY ALUED EHMS INLBOS) Service 2007 56.000 Law Firarcing Accounting and Taxation Advertieing Gardening 86,000 55.000 320.000 20.000 Reservation Center 36,000 30,000 600.000 Receivables TOTAL SERVICE PROFITABILITY ANALYSIS Although the business plan of the hotel forecasted losses for 2007, actual results were below expectations. In order to identify sources of problems, the entrepreneurs requested a profitability analysis for the three main services offered by the hotel. Cristina Aranda, the cost analyst of one of the alled firms and the person in charge of budget and control for the Terminus Hotel, teamed up with General Manager Claudia Santander to identify some cost categories (see Table 3). TABLE 3 COMMON COSTS FOR ACCOMMODATION. RESTALRANT AND ENTERTANMENT (EUROS) Service 2007 General Management Administraive Support Housekeeping Laundry Security 56.000 15.000 66,000 325,000 100,000 Maintenance 110.000 TOTAL 700,000 Additionaly. Cristina calculated the operating profit for each of the main services offered by the Terminus Hotel (see Table 4). TABLE 4 OPERATING PRDET FOR ACCOMMOATION, RESTALRANT AND ENTERTANNENT SERVCES Accommodation Restaurant Entertainment Revenues 4,500.000 2.650.000 1350,000 Operating Expenses 4,110.000 2475.000 1.400,000 Operating Proft 390,000 175,000 (50,000) Furthermore, Cristina and Claudia gathered the following data about each of the services (see Table 5). This data excludes the support activities shown above: TABLE 5 DATA ABOUT ACCOMMODATION. RESTALRANT AND ENTERTAINMENT Accommodation Restaurant Entertainment Employees Compensation of employees Square meters Daily occupancy (average) Property, plant and equipment (Net of depreciation) 12 16 12 €500.000 200 m2 €350,000 250,000 5,000 m2 300 m2 75 rooms 40 tables 30 tables €5,200,000 €475.000 €325,000 Drawing on current practices in her firm, a pottery, Cristina allocated 100% of common costs to services using a number of employees as single cost allocation base. In order to generate alternative calculations, Cristina also prepared an allocation of all common costs using total revenues as single cost allocation basis. Claudia objected to both calculations. In her opinion, single cost allocations resulted in simplistic calculations that were unrealistic for decision-making purposes. As Claudia argued that the complexity of hotel services could only be captured by using multiple cost allocations, she prepared the following proposal (Table 6): TABLE 6 ALLOGATING COMMON COSTS BY USING MuA TIPLE COST ALLOCATON BASES Commen cost Cost allocation basis Value of property, plant and equipment Number of employees Financing, Maintenance Accounting and Taxation, Reservation Center, Advertising, Law, General Management, Admin Gardening. Housekoeping. Security Receivables, Laundry Number of square meters Revenues REQUIRED ASSIGNMENTS: 1. Using Cristina's single cost allocations, report services profitability. Explain the rationale behind each of the proposals. 2. Using Claudia's multiple cost allocation bases, report services profitability. Comment on the rationale of the proposal. 3. In view of the available information, which decisions would you make? ... =>Basically, you are required to calculate the net profitability of the 3 business areas (ie ACCOMODATION, RESTAURANT, and ENTERTAINMENT) where net profitability of every business area = operating income of the business area (given) minus allocated portion of corporate overhead (i.e. €1,300,000), using two alternative cost allocation bases (i.e. division revenues and division employees) for the corporate overhead. Therefore, to produce two tables: one table with net profitability of the 3 business areas using division revenues as cost allocation base of the corporate overhead and a second table with net profitability of the 3 business areas using division employees as cost allocation base of the corporate overhead.

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