THE TERMINUS HOTEL (A)
The Terminus Hotel, a 500-room 500-room facility located in a medieval city in Sout Southe herrn Spai Spain. n. As cons conseq eque uenc nce e of poor poor manag anagem emen entt and and oldoldfashioned fashioned interior interior design, design, the Hotel Hotel experien experienced ced slumping slumping demand demand since 00!. 00!. "n 00#, the Hotel $as on the %rin& %rin& of %an&ruptcy %an&ruptcy.. "n a ! sudden , these dar& prospects turned into hopeful ones' the Hotel $as located on a historic %uilding and the regional authorities approached (r. )eo *. (arcial, chair of the +ham%er of +ommerce, to mo%ilie local entrepreneurs in order to ta&e over hotel o$nership. After some discu dis cussi ssions ons the entr entrepr eprene eneurs urs agreed agreed on %iddin %idding g for the Hotel Hotel to ma&e it an exclusive, high-prole and properly-managed facility. The entrepreneurs regarded the acquisition of the Terminus Hotel as an oppo opport rtun unit ity y to ente enterr the the hosp hospit ital alit ity y indu indust stry ry unde underr conv conven enie ient nt condit condition ions' s' they they could could get a rstrst-rat rate e %rand %rand at a relat relative ively ly cheap cheap pric price. e. "n anu anuar ary y 0 00/ 0/,, the the ne$ ne$ o$ne o$ners rshi hip p comp comple lete ted d thor thorou ough gh refur%ishing of the facility, $hich comprised ne$ furniture and stateof-art interior design. The Hotel resumed operations in e%ruary 00/ 1see Ta%le !2. Table 1 The Terminus Terminus Hotel3 Hotel3 Assets 1in euros2 euros2 1*ecem%er 4!, 00/2 2007
ASSETS ood$ill #0,000 6ther intangi%le assets 5,000 "nvestment property !0,000 8roperty, plant and equipment ,5/0,000 inancial assets availa%le for sale /5,000 Trade Trade and other receiva%les receiva%les !/5,000 *eferred tax assets 70,000 Non-current assets 2,985,000
2004
45,000 55,000 7,#00 9,50,000 75,000 70,000 !,900 6,547,000
"nventories !0#,500 inancial assets availa%le for sale ,500
59,000 !5,000
1
1
Trade and other receiva%les !,!50,000 *erivative nancial instruments !!/,000 +ash and cash equivalents ,44,000 Assets held for sale !!7,000 Current assets 3,746,000
:/5,000 75,000 !,955,000 !,4/5,000 4,071,000
The ne$ Terminus Hotel o;ered three main services' accommodation, restaurant and entertainment 1
estaurant and entertainment services $ere open to nonclients. "n their o$n rms, the entrepreneurs had spare capacity in a num%er of support services. "n a $in-$in move, allied rms supplied the Hotel $ith full service in areas such as accounting, la$, nancing, advertising, gardening, receiva%les and reservation center. The transfer prices for these transactions $ere %elo$ mar&et prices 1see Ta%le 2. Table 2 Services provided to the Terminus Hotel %y allied rms 1in euros2 Servce
2007
)a$ inancing Accounting and Taxation Advertising ardening >eservation +enter >eceiva%les T6TA)
55,000 :5,000 55,000
40,000 0,000 45,000 40,000 900,000
Servce !ro"tablt# Anal#ss Although the %usiness plan of the Hotel forecasted losses for 00/, actual results $ere %elo$ expectations. "n order to identify sources of pro%lems, the entrepreneurs requested a prota%ility analysis for the 2
three main services o;ered %y the hotel. +ristina Aranda, the cost analyst of one of the allied rms and the person in charge of %udget and control for the Terminus Hotel, teamed up $ith +laudia Santander, eneral (anager to identify some cost categories 1see Ta%le 42.
Table 3 +ommon costs for accommodation, restaurant and entertainment 1euros2 Servce
2007
eneral (anagement Administrativ e Support House&eepin g )aundry Security (aintenance T6TA)
55,000 !5,000 75,000 45,000 !00,000 !!0,000 /00,000
Additionally, +ristina calculated the operating prot for each of the main services o;ered %y the Terminus Hotel 1see Ta%le #2. Table 4 6perating prot for accommodation, restaurant and entertainment services
>evenues 6perating ?xpenses 6perating 8rot
Acco$$o%at on #,500,000 #,!!0,000
&estaurant ,950,000 ,#/5,000
Entertan$en t !,450,000 !,#00,000
470,000
!/5,000
150,0002
urthermore, +ristina and +laudia gathered the follo$ing data a%out each of the services 1see Ta%le 52. This data excludes the support activities sho$n a%ove3 3
Table 5 *ata a%out accommodation, restaurant and entertainment
?mployees +ompensation of employees Square meters *aily occupancy 1average2 8roperty, plant and equipment 1et of depreciation2
Acco$$o%at on ! @ 450,000
&estaurant !9 @ 500,000
Entertan$en t ! @ 50,000
5,000 m /5 rooms
00 m #0 ta%les
400 m 40 ta%les
@ 5,00,000
@#/5,000
@45,000
*ra$ing on current practices in her rm, a pottery ma&er, +ristina allocated !00B of common costs to services using num%er of employees as single cost allocation %ase. "n order to generate alternative calculations, +ristina also prepared an allocation of all common costs using total revenues as single cost allocation %asis. Coth calculations $ere o%Dected %y +laudia. "n her opinion, single cost allocations resulted in simplistic calculations that $ere unrealistic for decision-ma&ing purposes. As +laudia argued that the complexity of hotel services could only %e captured %y using multiple cost allocations, she prepared the follo$ing proposal 1Ta%le 923 Table 6 Allocating common costs %y using multiple cost allocation %ases Co$$on cost inancing, (aintenance Accounting and Taxation, >eservation center, Advertising, )a$, eneral (anagement, Admin ardening, House&eeping, Security >eceiva%les, )aundry
Cost allocaton bass Ealue of property, plant and equipment um%er of employees
um%er of square meters >evenues
&e'ure% ass(n$ents) !. Fsing +ristinaGs single cost allocations, report services prota%ility. ?xplain the rationale %ehind each of the proposals. 4
. Fsing +laudiaGs multiple cost allocation %ases, report services prota%ility. +omment on the rationale of the proposal. 4. "n vie$ of the availa%le information, $hich decisions $ould you ma&e
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