Midwest Entertainment has four operating divisions: Bus Charters, Lodging, Conce
ID: 2398679 • Letter: M
Question
Midwest Entertainment has four operating divisions: Bus Charters, Lodging, Concerts, and Ticket Services. Each division is a separate segment for financial reporting purposes. Revenues and costs related to outside transactions were as follows for the past year (dollars in thousands) Ticket Bus Charters Lodging Concerts Services $11,700 $5,350 $4,500 $1,650 1,550 Costs 7,900 3,520 3,370 Bus Charters Division participates in a frequent guest program with Lodging Division During the past year, Bus Charters reported that it traded lodging award coupons for travel that had a retail value of $1.3 million, assuming that the travel was redeemed at full fares. Concerts Division offered 20 percent discounts to Midwest's bus passengers and lodging guests. These discounts to bus passengers were estimated to have a retail value of $360,000. Midwest's lodging guests redeemed $150,000 in concert discount coupons Midwest's hotels also provided rooms for Bus Charters's employees (drivers and guides). The value of the rooms for the year was $680,000 Ticket Services Division sold chartered tours for Bus Charters valued at $190,000 for the year. This service for intracompany lodging was valued at $90,000. It also sold concert tickets for Concerts tickets for intracompany concert admission were valued at $54,000. While preparing all of these data for financial statement presentation, Lodging Division's controller stated that the value of the bus coupons should be based on their differential and opportunity costs, not on the full fare. This argument was supported because travel coupons are usually allocated to seats that would otherwise be empty or that are restricted similar to those on discount tickets. If the differential and opportunity costs were used for this transfer price, the value would be $250,000 instead of $1.3 million. Bus Charters's controller made a similar argument concerning the concert discount coupons. If the differential cost basis were used for the concert coupons, the transfer price would be $54,000 instead of the $360,000 Midwest reports assets in each division as follows (dollars in thousands) $48,000 19,550 15,350 2,750 Bus Charters Lodging Ticket ServicesExplanation / Answer
a. ($ in thousands) Bus charters Lodging Concerts Ticket services External revenue 11700 5350 4500 1650 Internal revenue: Award coupons 1300 Concert discount-Bus 360 Concert discount-lodging 150 Rooms for bus charters employees 680 Ticket service: Bus 190 Lodging 90 concerts 54 Total revenue (A) 13000 6030 5010 1984 Costs 7900 3520 3370 1550 Award coupons 1300 Concert discount-Bus 360 Concert discount-lodging 150 Rooms for bus charters employees 680 Ticket service: Bus 190 Lodging 90 concerts 54 Total cost (B) 9130 5060 3424 1550 Operating profit (A)-(B) 3870 970 1586 434 b. ($ in thousands) Bus charters Lodging Concerts Ticket services Operating profit 3870 970 1586 434 Award coupons -1050 1050 (1300-250) Concert discount-Bus 306 -306 (360-54) Revised operating profit 3126 2020 1280 434 c. ROI=Operating profit/Division assets Using operating profits in (a) Bus charters Lodging Concerts Ticket services Operating profit 3870 970 1586 434 Assets 48000 19550 15350 2750 ROI 8.06% 4.96% 10.33% 15.78% Rank 3 4 2 1 Using operating profits in (b) Bus charters Lodging Concerts Ticket services Operating profit 3126 2020 1280 434 Assets 48000 19550 15350 2750 ROI 6.51% 10.33% 8.34% 15.78% Rank 4 2 3 1