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Chapter 24-Problems

1. PR.24-02.ALGO
2. PR.24-03.ALGO

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   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	$868,700
   Revenues—S Region	1,063,800
   Revenues—W Region	1,840,300
   Operating Expenses—N Region	550,500
   Operating Expenses—S Region	633,100
   Operating Expenses—W Region	1,112,900
   Corporate Expenses—Dispatching	424,800
   Corporate Expenses—Equipment Management	223,600
   Corporate Expenses—Treasurer’s	132,100
   General Corporate Officers’ Salaries	291,800

   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	4,400		5,300		8,000
   Number of railroad cars in inventory	1,300		2,100		1,800

   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.

   Thomas Railroad Company
   Divisional Income Statements
   For the Quarter Ended December 31
   	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?

   1. The method used to evaluate the performance of the divisions should be reevaluated.
   2. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).
   3. A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).
   4. None of these choices would be included.
   5. All of these choices (a, b & c) would be included.

Answer 1

Ques 1
Thomas Railroad Company
Divisional Income Statements
For the Quarter Ended December 31
	North	South	West	Total
Revenues	$            868,700	$         1,063,800	$         1,840,300	$            3,772,800
Less:Operating expenses	$            550,500	$            633,100	$         1,112,900	$            2,296,500
Income from operations before service department charges	$            318,200	$            430,700	$            727,400	$            1,476,300
Less service department charges:
Dispatching	$            105,600	$            127,200	$            192,000	$                424,800
Equipment Management	$               55,900	$               90,300	$               77,400	$                223,600
Total service department charges	$            161,500	$            217,500	$            269,400	$                648,400
Income from operations	$            156,700	$            213,200	$            458,000	$                827,900
for dipatching you would calculate (424800/(4400+5300+8000))=$24 per scheduled train
for eqipment you would calculate (223600/(1300+2100+1800))=$43 per railroad car
Ques 2
	North	South	West
Net income(A)	$            156,700	$            213,200	$            458,000
Revenues(B)	$            868,700	$         1,063,800	$         1,840,300
Profit Margin(A/B)	18.0%	20.0%	24.9%
the most profitable margin is West
Ques 3
e.All of the above choices would be included