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	$996,500
Revenues—S Region	1,239,200
Revenues—W Region	2,080,200
Operating Expenses—N Region	631,500
Operating Expenses—S Region	737,500
Operating Expenses—W Region	1,258,000
Corporate Expenses—Dispatching	466,000
Corporate Expenses—Equipment Management	277,200
Corporate Expenses—Treasurer’s	151,600
General Corporate Officers’ Salaries	334,700

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	5,800		7,000		10,500
Number of railroad cars in inventory	1,100		1,800		1,500

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	$	$	$

Feedback

1. Determine the dispatching rate per train by dividing service cost by output. For each division's dispatching cost, multiply the dispatching rate by the number of scheduled trains. Repeat this process for the other service department charges. Subtract the service department charges for a division from that division's income from operations before such charges.

Learning Objective 3.

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

Region	Profit Margin
North Region	%
South Region	%
West Region	%

Answer 1

1.

Thomas Railroad Company
Divisional Income Statements
For the Quarter Ended December 31
	North	South	West
Revenues	996,500.00	1,239,200.00	2,080,200.00
Operating expenses	631,500.00	737,500.00	1,258,000.00
Income from operations before service department charges	365,000.00	501,700.00	822,200.00
Service department charges:
Dispatching	116,000.00	140,000.00	210,000.00
Equipment Management	69,300.00	113,400.00	94,500.00
Total service department charges	185,300.00	253,400.00	304,500.00
Income from operations	179,700.00	248,300.00	517,700.00

2.

Region	Profit Margin
North Region	18.0%
South Region	20.0%
West Region	24.9%