Tall Tree 2 Hotel Casino (Case 1).docx

TallTree2 Hotel CasinoCase Study PMBA-8220-RE1Team # 8 : Zhou, Jinxi (Jess) Xu, Xiaoyuan (Emma) Schiano-Lomoriello, AntonioTallTree2 Hotel Casino, located in Reno, Nevada, is a 640 room resort complex featuring four restaurants, two entertainment showrooms, and three gift shops, in addition to the casino and the hotel. It operates in a highly competitive market; in fact, in a radius of 10 miles there are 25 other hotel casino properties. To attract customers to play at the casino a variety of techniques and marketing campaign are developed. For example, the complex is designed so that in order to reach a restaurant or the hotel registration desk, customer must pass through the casinos gamming area. Furthermore, marketing campaign include special events that it usually a two day stay at the hotel with free meals and bargain hotel rooms prices. The key people of TallTree2 are Terence Wei (President), Judy Fitch (Marketing Vice-president), and Bill Martino (Controller). 1. Can any of the TallTree2 departments be run as profit centers with the department managers being able to determine price and cost for the department?After analyzing the TallTree2 situation we concluded that the restaurants and the hotel could run as profit centers. The managers from the food department of the resort argue that their departments are running at a loss because of their inability to set prices. In our opinion, they are right to be upset. If a restaurant is set to be a profit center, it focuses its attention on revenues and on costs like marketing costs. This means that they would be able to create promotions that will attract customers, not necessarily gambler customers. Having the freedom to set prices and being able to manage their advertisement costs the four restaurants located on the property can compete against one another in the attempt to increase the volume of customers visits. This can benefit the casino revenues too. Attracting gamblers and non gambler customers on the property, the chance of having more people to play at the casino is high. Even though the non gamblers will not be gambling a large quantity of money however they can still bring a good chunk of revenues to the casino department. In addition, we also concluded that the hotel departments should be a profit center and that its room pricing should be solely based on supply and demand approach. This way the hotel will avoid to run into capacity constraints and will certainly reduce if not avoid any possible opportunity costs. a. Using Worksheet #1 and the concerns expresses by the department managers, discuss the issues of each department manager when faced with the profit center approach. Worksheet #1 shows the income statement of TallTree2 combining all the departments and the income statement for each department separately. The first item that it comes to light is the loss that the restaurant department has for the year ending in 2008. As the manager mentioned in his concern the inability for the restaurant to set its own set of prices is causing a loss of a half of million dollars for the year ended in 2008. 20% of the restaurant revenues come from complementary food sales. Furthermore, in order to attract more customers maybe they could create special price menus for slow nights, while keeping regular prices menus on busy nights. Moreover, the beverage department is able to earn an income of $ 606,000 thanks to its low department expenses. 77% of its revenues, however, are made up by complementary beverage. Just like the restaurant manager, the beverage department manager claim that TallTree2 keeps its beverage prices too low in order to make more customer to drink. Other concerns were about the hotel. Dana Sawyer, the hotel manager, claims that to capture more opportunity costs the hotel should charge their rooms on a supply and demand basis. Lastly, the casino is the most profitable department having a high volume of revenues. b. Comment on the difficulty in transfer pricing posed by synergies between business segments. Setting a transfer pricing is quite a challenge for every business. Especially for TallTree2 that wants to provide a service at the lowest cost possible in order to overcome the competition. In determining the adequate transfer price between business segments you need to determine whether the transfer price already exists in the market, or if the transfer price should be set in comparison to the cost of goods, or if the transfer price can be negotiated by determining a ceiling price and a floor price. In our analysis we determined that since restaurants and hotels have a highly competitive market in the Nevada area they should set their transfer prices fallowing the market trend. Whereas the beverage and other departments, for example gift shops, should follow a cost based transfer price approach for the fallowing reasons. Analyzing the beverage department income statement, it is clear to realize that they are able to be profitable even though the majority of their revenues is made up of complementary drinks. We feel that if they are able to reduce some of their cost they could be even more profitable. On the other hand, the other departments, like gift shops, are profitable and most of their revenues come from the sales of their product. They have very few complimentary item sold. Therefore, in our opinion, like the beverage department, if they would be able to control their cost a little more they will be able to be more profitable. c. Based upon your analysis is TallTree2 using the most appropriate responsibility centers for evaluating each segment? If not, what changes would you suggest? In our analysis we believe that TallTree2 is not using the most appropriate responsibility center for evaluating all resorts segments. We concluded that restaurants and the hotel should be ran as profit centers because they operate in a highly competitive market. The managers should have the freedom to set the best prices and control costs. On the other hand, we believe that the other department and the beverage department should be ran as cost center. The reason why other department should run as cost center is because as of the end of 2008 their departments revenues are 98.5% made up by the product/service they sell. Therefore, they should be focusing on controlling costs so that their income will be greater. The reason why the beverage department should be a cost center is because even though they are profitable they do provide a great amount of complementary drinks. But as shown by history, the more customers drink the more they play. This means more revenues for the casino. Therefore, the beverage department should keep providing complementary beverage, but at the same time it must wisely control costs in order to generate a higher profits.In order to improve the profitability of slow periods, usually held during mid week or in slow months, TallTree2 offers a range of special events such as: golf tournaments, boxing matches, and a series of pit, keno, and slot tournaments. Usually these events are offered to all customers or to selected group of customers. For example, the New Year party is held each year to customers rated as “high rollers”, players you gamble a large amount of money each year. 2. Worksheet # 2 is the performance report for the special events developed by the controller, Bill Martino. a. Should special events be evaluated based on profitability, or some other basis?Special events should be evaluated on a profitability base; however, we feel that measuring events with some other basis might help to come up with a better conclusion. Special events may be seen as short term investments because they happen for a short period of time during slow periods for the casino. We concluded that special events should be evaluated using a Economic Value Added approach, along with the simple profitability approach used in Worksheet # 2. Using the EVA approach the casino will be able to calculate the residual income using key features like after tax operating income and actual cost of capital, which would help them to determine whether or not the special event is acceptable. b. Evaluate the items in Bill Martinos report and determine whether they are appropriate. Worksheet # 2 prepared by Bill Martino, the controller of TallTree2, compare the budgeted items and the actual items reported from the Star and Stripes Slot Tournament Special Events from the hotel, beverage, and restaurant department. In the work sheet Bill Martino reports the opportunity cost of complementary suites and rooms. Even though these items are relevant they should have not appeared in the income statement of the special event because they are treated as cost that happens in the future. However, opportunity costs are a fundamental part in the decision making process for Terence Wei, TallTree2 president, since they represent the foregone opportunity of accepting to have a special event during slow periods or not. For the other items such as hotel overheads are also future costs. They are incurred in the event that the hotel is not running at full capacity and a special event is held. At this point the hotel must hire and extra hotel personnel and an extra accountant in order to handle respectively the extra rooms occupied by the special event customers and the accounting functions associated with it. Here again these costs need to be consider in a decision making process, however they should not appear on a financial statement.Items associated with the restaurant and beverage costs seem to be appropriate. c. Comment on whether Judy Fitch has valid points about the costs and revenues associated with the Star and Strips event.In the report provided by Bill Martino, Judy Fitch has a general idea of what the real costs and revenues of the event were. However, she must take in consideration also the foregone costs of having this type of event. For example, she should be able to analyze the opportunity costs that are involved in having the special event. For example, the opportunity cost of the hotel in providing their rooms at a lower price, whereas these rooms can be reserved at a regular price for other customers. In addition to costs and revenues Judy Fitch should also focus on the customers that have attended the event in order to calculate the occupancy rate of the hotel in order to determine if hotel overheads are to be incurred in the cost of the special event. Also, she must have a mean of tracking customers and analyze the casino revenues during a special event. This means, in order to accept a special event she must have a sense on what would bethe amount of money the customers would be willing to gamble, in order to forecast the casinos revenues.d. How could Worksheet # 2 and # 3 be combined to reflect the profitability of special events? In worksheet # 3, the player tracking system is employed in order to determine what would be the casino revenues during the event. This is very important because worksheet # 2 considered the profit for the beverage, food, and room departments of the resort. Now with worksheet # 3 Judy Fitch, the marketing VP, combines the total profits of all departments including the casino to calculate what was the actual profit generated by the special event. The Star Stripes Slot Tournament actual profit exceeds the expected profit by 245%. Therefore, overall TallTree2 can consider the event a success. Profitability of special events is crucial for TallTree2. In fact, Mr. Weis policy clearly states that if a special event cannot generate a positive net income, it will be discontinued.3. Evaluate Bill Martinos argument for including displacement cost for hotel and casino slot revenues lost during the special events. How should this be measured and how it will be used?As stated earlier, displacement costs for the hotel and casino slots are to be considered opportunity costs. These costs are real; however they should not appear on the companys financial statement because they pertain to the future and differ across alternatives. However the dollar measures of these costs are very important to the budget and the decision making process for TallTree2 manager when deciding whether or not to accept the special event. Also they should be important for each departments managers to realize if the event is bringing profits to the department or not. Therefore these measures should not be considered as for the entire company but also for each separate segment. In conclusion, TallTree2 resort should operate as a decentralized division, allowing all departments managers to be able to operate their department base on departmental needs. Something to keep in mind however, is the fact that the entire resort should be operate in favor of the casino department because it is the most profitable division. Furthermore, as explained in the case, the main objective for each casino is to keep their customer inside the complex. This means that once customers enter in a resort like TallTree2, they should not leave the complex since everything they need is there such as: hotel, restaurants, bars, coffee shops, gift shops, showrooms, etc.In the case of TallTree2 each departments should be able