Reference no: EM131801447

Problem

A-One Freight Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31, 20Y3

Revenues--Air Division                                       $5,000,000

Revenues--Rail Division                                      6,000,000

Revenues--Truck Division                                   9,000,000

Operating Expenses--Air Division                        4,100,000

Operating Expenses--Rail Division                       4,900,000

Operating Expenses--Truck Division                    7,555,000

Corporate Expenses--Shareholder Relations        220,000

Corporate Expenses--Customer Support            990,000

Corporate Expenses--Legal                               880,000

General Corporate Officers' salaries                    500,000

The company operates three service departments: Shareholder Relations, Customer Support, and Legal. The Shareholder Relations Department conducts a variety of services for shareholders of the company. The Customer Support Department is the company's point of contact for new service, complaints, and requests for repair. The department believes that the number of customer contacts is an activity base for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is an activity base for this work. The following additional information has been gathered:

                                                      Air               Rail                Truck     

Number of customer contacts            1,500           4,500            16,000              

Number of hours billed                      900              2,400            6,700        

Instructions:

1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: Air, Rail, and Truck.

2. Identify the most successful division according to the profit margin. Round to one decimal place.

3. Provide a recommendation to the CEO for a better method for evaluating the performance of the divisions. In your recommendation, identify the major weakness of the present method.