The TallTree2 Hotel Casino is a 640-room resort complex featuring a full range of Nevada-style gaming with slot machines and table games. Besides the hotel and casino, it also operates four restaurants, two entertainment showrooms and three gift shops. Because of the economic environment at the time, TallTree2 wanted to improve its bottom line by launching a range of Special Events like golf tournaments, boxing matches, New Year Parties and a series of pit, keno and slot tournaments. Those special events were specifically designed to compensate for the slow periods and generate additional gaming revenues.
Terrence Wei, the new property president, feels that his department managers appear to be in conflict with each other. The managers of each department have expressed concerns when it comes to running their department under the profit center approach. Overall, complementary costs and allocated overhead included in the direct costs pose more of a problem in determining the amounts to allocate. More specifically, the hotel manager complained about capacity constraints. It is difficult for this department to recapture all of the opportunity costs of not selling rooms at full price or even above that amount in times of high demand.
The manager is required to keep 20% of the rooms in case a higher roller comes in. If a player pays for the room, it will be at the $45 discount rate and not the $139 that a walk in customer would pay. The food department is currently pricing below the community restaurants. The manager argues that he should be able to set his prices and run his department on a profitable basis. It is currently running at 15% loss and the complementary food makes up for 20% of all restaurant sales. As for the beverage division, 77% of sales are complimentary.
The manager in this department is concerned about the very low prices offered. Judy Fitch, president of marketing, is concerned that the worksheet provided by Bill Martino does not reflect the revenues generated by the special events. In order to align the company’s vision and incentives with those of the managers, the structure of each department needs to be re-evaluated based on current performance. The company is decentralized and each department is a responsibility center. A responsibility center is a division of a company for which a manager has the authority to make decisions.
The main types of responsibility centers are cost centers and profit centers. A cost center is a division of a company that is responsible for the keeping the costs as low as possible. Cost centers contribute to a company’s profitability indirectly like marketing, customer service or research and development. A profit center is a division of the company that is accounted for on a standalone basis for the purpose of profit calculation. The managers of those profit centers have the decision-making authority related to product or service pricing and operating expenses.
Therefore, the profit center is responsible for making its own earnings. The goal is to reorganize the allocation of costs so that each segment is profitable. The special events target high rollers and should bring more money that they currently bring. The Casino department should still be run as a profit center. Gambling is the largest source of revenue for the hotel casino complex. The department manager controls the revenues by offering special promotions and complimentary food, beverages and rooms in times of slow periods.
The manager is not only responsible for the profit generated but also for the costs. Finally, the casino controls the bargaining power for the price-setting and complimentary services offered such as food, beverages and rooms. The hotel department should be evaluated as a profit center. The division already has substantial control over pricing since it is based on supply and demand and on seasonal trends. Also, complimentary rooms only account for 8% of the revenue created by the department. Because of the high opportunity costs, room sales account for almost 92%.
The Hotel is also one of the main income sources for the gambling industry. The Food department should be run as a cost center because 20% of the revenue is generated from complimentary sales and also because the restaurants are currently running at a 15% loss. The restaurants’ main purpose is to serve gamblers and should not be established as a standalone business. The restaurants are expected to provide low-cost meals that will attract more people or retain the current customers on the property.
The Beverage department should also be evaluated as a cost center. 77% of the beverage’s division revenues come from complimentary beverages served to the casino customers. The casino has major control over which customers receive the complimentary beverages and the manager of the department has very little control over the division’s profit. The department should however be responsible for controlling costs like the staff and the cost of the inputs supplied. The synergy between the different departments makes it harder to evaluating those individually.
The ood and beverage departments have the primary purpose to keep customers in the casino; they have a supporting role. The casino should have the ultimate decision power to decide how and when the complimentary food and beverage are distributed. Instead, the food and beverage departments should control the costs of doing business, the efficiency and quality rather than to make profit. Special events should be evaluated on profitability. It will only makes sense if each division is run as a profit center or cost center accordingly. Also, TallTree2 should take other elements into consideration.
The full price of rooms should be included as revenue. That way, it will be easier to see the amount deducted for discounts and complimentary rooms. Bill’s argument to include the displacement costs for hotel and revenues lost during special events is rational. TallTree2 needs to know how much profit is lost so that they can make it up. The number of rooms reserved for “high rollers” should be revised because the 97 free rooms during the Stars and Stripes event could have been occupied by walk-in customers at the rate of $139 nights.
If walk-in customers are turned down, those customers are not likely to stay at the hotel or even gamble at the casino in the future. Some quantitative elements should be included like customer satisfaction. The event’s success shouldn’t only be evaluated in terms of profitability. With the casino and hotel departments being evaluated as profit centers and the food and beverage departments run as cost centers, TallTree2 will be more profitable and management of each departments will not be in conflict with each other.
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Topic: Profit Center
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