Question

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	$938,000
Revenues—S Region	1,117,900
Revenues—W Region	1,945,600
Operating Expenses—N Region	594,400
Operating Expenses—S Region	665,300
Operating Expenses—W Region	1,176,600
Corporate Expenses—Dispatching	459,800
Corporate Expenses—Equipment Management	228,000
Corporate Expenses—Treasurer’s	142,700
General Corporate Officers’ Salaries	315,000

The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer’s Department. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the railroad cars inventories. 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	5,200		6,300		9,400
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.

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	$	$	$
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?

The method used to evaluate the performance of the divisions should be reevaluated.

A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).

A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).

None of these choices would be included.

All of these choices (a, b & c) would be included.

Answer 1

Requirement 1		Thomas Railroad Company
		Divisional Income statement
		For the quarter ended December 31
			North	West	South
		Revenues	938000	1117900	1945600
		Operating expenses	594400	665300	1176600
		Income from operations before service department charges	343600	452600	769000
		Service Department charges
		Dispatching	114400	138600	206800
		Equipment Management	60000	90000	78000
		Total service department charges	174400	228600	284800
		Income from operations	169200	224000	484200
Requirement 2
		Profit Margin of each division is
			Profit Margin
		North Region	18.04	%
		West Region	20.04	%
		South Region	24.89	%
Requirement 3
		The correct alternative is the last one i.e
		All of these choices (a, b & c) would be included
		The above statement is true because the only present method of profit margin should be reevaluted
		It should also include return on investment and residual income method.