Question

Profit Center Responsibility Reporting

A-One Freight Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance using operating income 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	$ 1,290,700
Revenues—Rail Division	1,562,500
Revenues—Truck Division	2,729,100
Operating Expenses—Air Division	817,900
Operating Expenses—Rail Division	929,900
Operating Expenses—Truck Division	1,650,400
Corporate Expenses—Shareholder Relations	196,300
Corporate Expenses—Customer Support	665,000
Corporate Expenses—Legal	294,000
General Corporate Officers’ Salaries	433,500

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	4,800		5,700		8,500
Number of hours billed	1,200		2,000		1,700

Division management does not control activities related to the shareholder relations department and general corporate officers’ salaries.

Required:

a. Prepare quarterly income statements showing operating income for the three divisions. Use three column headings: Air, Rail, and Truck.

A-One Freight Inc.
Divisional Income Statements
For the Quarter Ended December 31, 20Y3
	Air	Rail	Truck
Revenues	$	$	$
Operating expenses
Operating income before service department charges	$	$	$
Less service department charges:
Customer support	$	$	$
Legal
Total service department charges	$	$	$
Operating income	$	$	$

b. What is the profit margin percentage of each division? Round to one decimal place.

Division	Profit Margin
Air Division	%
Rail Division	%
Truck Division	%

Identify the most successful division according to the profit margin percentage.
Truck

3. All of the following statements are true regarding the evaluation of divisional performance for A-1 except:

A better measure for A-1 Freight than the amount of operating income per dollar of earned revenue would be either rate of return on investment or residual income, because both measures incorporate asset utilization into the measures.

A better measure for A-1 Freight than the amount of operating income per dollar of earned revenue would be either rate of return on investment or residual income, because the amount of assets used by a division in earning a return is a very important consideration in evaluating divisional performance.

A better measure for A-1 Freight than the amount of operating income per dollar of earned revenue would be either rate of return on investment or residual income, because this company requires a significant investment in fixed assets and distribution facilities.

All of these choices are correct.

Select the correct answer from the choices above.:
d

Answer 1

Answer a)
			Air	Rail	Truck
i	Revenues		1,290,700	1,562,500	2,729,100
ii	Operating expenses		817,900	929,900	1,650,400
iii=i-ii	Operating income before service department charges		472,800	632,600	1,078,700
	Less service department charges:
iv	Customer support		168000	199500	297500
v	Legal		72000	120000	102000
vi=iv+v	Total service department charges		240000	319500	399500
vii=iii-vi	Operating income		232,800	313,100	679,200
	* refer below allocation over head table
	Allocation of overhead expenses		Air	Rail	Truck	Total
i	Number of customer contacts		4,800	5,700	8,500	19,000
ii	Number of hours billed		1,200	2,000	1,700	4,900
iii	Corporate Expenses—Customer Support = i* 35		168000	199500	297500	665000
iv	Corporate Expenses—Legal=ii*60		72000	120000	102000	294000
	Note - 1
	Corporate Expenses—Customer Support	665,000
	Total number of customer contacts	19,000
	Overhead rate / Customer contracts	35.00
	Note - 2
	Corporate Expenses—Legal	294,000
	Total number of hours billed	4,900
	Overhead rate / per hours billed	60.00
	Corporate Expenses—Shareholder Relations
	Corporate Expenses—Customer Support
	Corporate Expenses—Legal
	General Corporate Officers’ Salaries
Answer b)			Air	Rail	Truck
	Revenues		1,290,700	1,562,500	2,729,100
	Operating income		232800	313100	679200
	Profit margin		18.04%	20.04%	24.89%
	Truck is most profitable segment of the company as it has highest profit margin
Answer 3)
	All the options are correct. Hence correct answer is d. Return on asset and residual income will provide full entity level profitability view.