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14-17 (Cont’d.)

It is quite likely that the line managers would seek legal counsel, whenever there were any pertinent legal issues, if the service were free. Making the service of the Legal Department free, however, might induce some managers to make excessive use of the service. To avoid any potential abuse, Environ may want to adjust the rate downward considerably, perhaps at a level lower than what it would cost if outside legal services were sought, but not eliminate it altogether. As long as the managers know that their respective departments would be charged for using the service, they would be disinclined to make use of it unnecessarily. However, they would be motivated to use it when necessary because it would be considered a “good value” if the standard hourly rate was low enough.

14-18(30 min.)Cost allocation to divisions.

1.

Hotel

Restaurant

  Casino

Rembrandt

Revenue

$16,425,000

$5,256,000

$12,340,000

$34,021,000

Direct costs

   9,819,260

 3,749,172

   4,248,768

 17,817,200

Segment margin

$  6,605,740

$1,506,828

$  8,091,232

 16,203,800

Indirect costs

 14,550,000

Income before taxes

$  1,653,800

Segment margin %

       40.22%

    28.67%

       65.57%

2.

Hotel

Restaurant

  Casino

Rembrandt

Direct costs

$9819260

$3749172

$4248768

$17817200

Direct cost %

     55.11%

     21.04%

     23.85%

     100.00%

Square footage

      80,000

      16,000

      64,000

      160,000

Square footage %

     50.00%

     10.00%

     40.00%

     100.00%

# of Employees

           200

             50

           250

             500

# of Employees %

     40.00%

     10.00%

     50.00%

     100.00%

A: Cost allocation based on direct costs:

Hotel

Restaurant

Casino

Rembrandt

Revenue

$16,425,000

$  5,256,000

$12,340,000

$34,021,000

Direct costs

   9,819,260

   3,749,172

   4,248,768

 17,817,200

Segment margin

   6,605,740

   1,506,828

   8,091,232

 16,203,800

Allocated indirect costs

   8,018,505

   3,061,320

   3,470,175

 14,550,000

Segment pre-tax income

$( 1,412,765)

$ (1,554,492)

$  4,621,057

$  1,653,800

Segment pre-tax income %

     -8.60%

    -29.58%

     37.45%

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