Reference no: EM132959530
Profit Center Responsibility Reporting for a Service Company
Thomas Railroad Company organizes its three divisions, the North (N), South (S), and West (W) regions, 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:
Revenues-N Region $873,300
Revenues-S Region 1,022,600
Revenues-W Region 1,813,000
Operating Expenses-N Region 553,400
Operating Expenses-S Region 608,600
Operating Expenses-W Region 1,096,400
Corporate Expenses-Dispatching 439,300
Corporate Expenses-Equipment Management 197,600
Corporate Expenses-Treasurer's 132,800
General Corporate Officers' Salaries 293,300
The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer's Department. The Treasurer's Department and general corporate officers' salaries are not controllable by division management. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the inventories of railroad cars. It makes sure the right freight cars are at the right place at the right time. The Treasurer's Department conducts a variety of services for the company as a whole. The following additional information has been gathered:
North South West
Number of scheduled trains 4,800 5,700 8,600
Number of railroad cars in inventory 1,000 1,500 1,300
Required:
1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.
North South West
Revenues
Operating expenses
Income from operations before service department charges
Less service department charges:
Dispatching
Equipment Management
Total service department charges
Income from operations
2) What is the profit margin of each division? Round to one decimal place.
Region Profit Margin
North Region %
South Region %
West Region %
Identify the most successful region according to the profit margin:
3) What would you include in a recommendation to the CEO for a better method for evaluating the performance of the divisions?
a)The method used to evaluate the performance of the divisions should be reevaluated.
b)A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).
c)A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).
d)None of these choices would be included.
e)All of these choices (a, b & c) would be included.