Sand and Sea Resorts Owns and Operates Two Resorts in a Coastal

question 128

Multiple Choice

Sand and Sea Resorts owns and operates two resorts in a coastal town. Both resorts are located on a barrier island that is connected to the mainland by a high bridge. One resort is located on the beach and is called the Crystal Coast Resort. The other resort is located on the inland waterway which passes between the town and the mainland; it is called the Harborview Resort. Some key information about the two resorts for the current year is shown below. $\begin{array}{ll}&\text { Harborview } & \text { Crystal Coast } & \text { Total }\\\text { Revenue }(000 \mathrm{~s}) & \$ 3,500 & \$ 6,500 & \$ 10,000\\\text { Square feet } & 75,000 & 225,000 & 300,000 \\\text { Rooms } & 60 & 140 & 200\\\text { Assets }(000 \mathrm{~s}) &\$ 100,000 & \$ 400,000 &\$ 500,000\end{array}$

The nontraceable operating costs of the resort amount to $\$ 4,000,000$ . By careful study, the management accountant at Sand and Sea has determined that, while the costs are not directly traceable, the total of $\$ 4$ million could be fairly allocated to the four cost drivers as follows.
$\begin{array}{lr}\text { Cost Driver } & \text { Amount Allocated } \\\text { Revenue } & \$ 200,000\\\text { Square feet } & 100,000 \\\text { Rooms } & 600,000 \\\text { Assets }(000 \mathrm{~s}) & 3,100,000\end{array}$ The Crystal Coast resort is likely to be favored in terms of a lower cost allocation under:

• A) Revenue-based allocation.
• B) Cost-driver based allocation.
• C) Cannot be determined from the information.
• D) Would be the same for both allocation methods.

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Definitions:

Maintenance Expenses

Costs incurred to keep property, equipment, or assets in efficient operating condition, not improving but merely maintaining them.

Square Footage

A unit of area measurement equal to a square that is one foot on each side, commonly used to measure the size of an area such as real estate or interior spaces.

Administration Expenses

Expenses that relate to the overall management and operations of a business, such as salaries of executive personnel, legal and professional fees.

Square Footage

The area measurement of a space, typically used in real estate to describe the size of a building or room, measured in square feet.