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

     

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The Terminus Hotel, a 200-room facity 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 fumiture and state-of-the-art interior design. The hotel resumed operations in February 2007 (see Table 1). TABLE 1 THE TERMINUS HOT:ASSETS (NEUROS) (DEGEMBLR 31.2007) 2007 2004 ASSETS Goodwill 35,000 40,000 Otter intangitie assets Investmert property Property, plant and equiement Financial assets avalatie for sale Trade and other receivabies Delerred tax assets Non-current assets 55,000 25.000 10,000 9,400 6250,000 2570,000 75,000 175,000 95,000 90.000 12,600 90,000 2.985.000 6,547,000 56.000 104,500 |Inventories Financial assets availabie for sale Trade and other receivables Derivative financial instruments Cash and cash equvalents 15.000 22,500 875.000 95,000 1655,000 1,375,000 1.150.000 117,000 2233.000 Assets held for sale 119,000 Current assets 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 wore open to non-cients. In their own firms, the entrepreneurs had spare capacity in a number of support services. In a win- win move, alied 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 SERVICIS PROVIDED To THE TERMIMUS HOTE BY ALLIED ERMS (N ELBOS) Service 2007 Law 55,000 Firarcing 85,000 56.000 320,000 Accounting and Tasation Advertising Cardaning Reservation Center Receivabies TOTAL 20,000 36.000 30.000 600,000 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 Santandear to identify some cost categories (see Table 3). TABLE 3 COMMON.COSTS FORACCOMMODATION. RESTABANT AND ENTERTANMENT (EUROS) Service 2007 General Marapement Administrative Support 56.000 15.000 Housekeeping Landry Security Maintenance 96,000 325.000 100,000 110.000 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 OPERATNG PROET FOR ACCOMMODATON, RESTALRANT AND ENTERTANNENT SERVCES Accommodation 4.500.000 Restaurant Entertainment Revenues 2650.000 1,350,000 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 AROUT ACCOMMDATION. RESTAURANT AND ENTERTAIMENT Accommodation Restaurant Entertainment Employees Compensation of employees Square meters Daly ocoupancy (average) Property, plant and equipment 12 16 12 350,000 5,000 m2 75 rooms €500.000 250,000 200 m2 300 m2 40 tables 30 tables (Not of depreciation) €5.200.000 €325,000 €475.000 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 ALLOGATION BASES Common cost Cost allocation basis Financing, Maintenance Value of property, plant and equipment Accounting and Taxation, Reservation Number of employees Center, Advertising, Law, General Management, Admin Gardening. Housekeeping, 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. In view of the available information, which decisions would you make? 3. ... =>Basically, you are required to calculate the net profitability of the 3 business areas (e 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 facity 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 fumiture and state-of-the-art interior design. The hotel resumed operations in February 2007 (see Table 1). TABLE 1 THE TERMINUS HOT:ASSETS (NEUROS) (DEGEMBLR 31.2007) 2007 2004 ASSETS Goodwill 35,000 40,000 Otter intangitie assets Investmert property Property, plant and equiement Financial assets avalatie for sale Trade and other receivabies Delerred tax assets Non-current assets 55,000 25.000 10,000 9,400 6250,000 2570,000 75,000 175,000 95,000 90.000 12,600 90,000 2.985.000 6,547,000 56.000 104,500 |Inventories Financial assets availabie for sale Trade and other receivables Derivative financial instruments Cash and cash equvalents 15.000 22,500 875.000 95,000 1655,000 1,375,000 1.150.000 117,000 2233.000 Assets held for sale 119,000 Current assets 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 wore open to non-cients. In their own firms, the entrepreneurs had spare capacity in a number of support services. In a win- win move, alied 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 SERVICIS PROVIDED To THE TERMIMUS HOTE BY ALLIED ERMS (N ELBOS) Service 2007 Law 55,000 Firarcing 85,000 56.000 320,000 Accounting and Tasation Advertising Cardaning Reservation Center Receivabies TOTAL 20,000 36.000 30.000 600,000 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 Santandear to identify some cost categories (see Table 3). TABLE 3 COMMON.COSTS FORACCOMMODATION. RESTABANT AND ENTERTANMENT (EUROS) Service 2007 General Marapement Administrative Support 56.000 15.000 Housekeeping Landry Security Maintenance 96,000 325.000 100,000 110.000 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 OPERATNG PROET FOR ACCOMMODATON, RESTALRANT AND ENTERTANNENT SERVCES Accommodation 4.500.000 Restaurant Entertainment Revenues 2650.000 1,350,000 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 AROUT ACCOMMDATION. RESTAURANT AND ENTERTAIMENT Accommodation Restaurant Entertainment Employees Compensation of employees Square meters Daly ocoupancy (average) Property, plant and equipment 12 16 12 350,000 5,000 m2 75 rooms €500.000 250,000 200 m2 300 m2 40 tables 30 tables (Not of depreciation) €5.200.000 €325,000 €475.000 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 ALLOGATION BASES Common cost Cost allocation basis Financing, Maintenance Value of property, plant and equipment Accounting and Taxation, Reservation Number of employees Center, Advertising, Law, General Management, Admin Gardening. Housekeeping, 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. In view of the available information, which decisions would you make? 3. ... =>Basically, you are required to calculate the net profitability of the 3 business areas (e 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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