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November 6, 2020
Case Study: TallTree2 Hotel Casino
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?
Each of the departments could potentially be run as profit centers if the department
managers had the authority to balance profits and expenses for their own departments.
However, as it currently stands, Gaming is the only segment that is operating as a profit
center. Meanwhile, the Rooms segment is operating as a revenue center since they are
basing their departmental “success” on projected versus actual revenues from room
rentals but are not able to price their own rooms. Therefore, the revenue is technically
dependent on the number of regular versus special event attendee room rentals. Lastly,
the Food and Beverage departments are operating as cost centers, particularly because
a significant portion of their sales (20% and 77%, respectively) are complementary
concessions to gamers. With the current operational setup, the Food and Beverage
department managers are expected to minimize costs but have little authority to do so.
Using Worksheet #1 and the concerns expressed by the department managers,
discuss the issues of each department manager when faced with the profit center
approach.
TallTree2 Hotel Casino is divided into four primary departments:
A. Casino (“Gaming”);
B. Hotel (“Rooms”);
C. Food; and
D. Beverage.
Each respective department manager is currently facing unique challenges as a result
of the profit center approach. Broadly, all of the departments (except for
Casino/Gaming) are not adequately assessed as profit centers.
Gaming
The Gaming department is the primary revenue-generating segment of TallTree2’s
operations, accounting for 64% of total revenue. Additionally, all other departments play
a supporting role to the Gaming department. Most, if not all, products and services from
Rooms, Food, and Beverage departments are provided at a comparatively minimal to
no cost (i.e., complimentary or “Comp(s)”) to customers in order to further incentivize
gambling and drive revenue into the Gaming department. Accordingly, one would
expect that the Gaming department would still be faring much better under the profit
center approach as it continues to generate over half of TallTree2’s total revenue.
However, even the Gaming department would benefit from an improved overall system
of assessment. Under the current profit center approach, the Gaming department is just
barely performing better than the Rooms department (53.9% vs. 53.6%, respectively, in
terms of department profits) despite generating nearly $19 million in revenue—
approximately five times more revenue than the Rooms department. The likely reason
for this disparity may be the complimentary expenses from Gaming which totaled $2.1
million (or 11.3% of total Gaming revenue and 7.2% of total revenue) and was the
second largest expense for the department.
In practice, the Gaming department should incur the cost of providing Comps from other
departments, such as when free drinks from the Beverage department are given to
players in the casino to encourage further gambling. Therefore, while the Gaming
department would enjoy greater revenues from this complimentary support from other
departments, it should share the increased cost load and reduced profits as the Comps
