Question

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 operating income 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	$1,013,100
Revenues—S Region	1,210,800
Revenues—W Region	2,084,700
Operating Expenses—N Region	642,000
Operating Expenses—S Region	720,600
Operating Expenses—W Region	1,260,700
Corporate Expenses—Dispatching	456,000
Corporate Expenses—Equipment Management	285,200
Corporate Expenses—Treasurer’s	154,100
General Corporate Officers’ Salaries	340,300

The company operates three support 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	5,700		6,800		10,300
Number of railroad cars in inventory	1,200		1,800		1,600

Required:

1. Prepare quarterly income statements showing operating income 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
Operating income before support department allocations	$	$	$
Support department allocations:
Dispatching	$	$	$
Equipment Management
Total support department allocations	$	$	$
Operating income	$	$	$

2. What is the profit margin of each region? 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 regions?

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

Answer 1

1.

Thomas Railroad Company Divisional Income Statement For The Quarter Ended December 31
	North	South	West
Revenues	$1,013,100	$1,210,800	$2,084,700
Operating expenses	642,000	720,600	1,260,700
Operating income before support departments allocations	371,100	490,200	824,000
Support department allocations:
Dispatching	114,000 (456,000*57/228)	136,000 (456,000*68/228)	206,000 (456,000*103/228)
Equipment Management	74,400 (285,200*12/46)	111,600 (285,200*18/46)	99,200 (285,200*16/46)
Total support department allocations	188,400	247,600	305,200
Operating income	$182,700	$242,600	$518,800

2.

Region	Profit Margin
North region	18% ($182,700/1,013,000*100)
South region	20% ($242,600/1,210,800*100)
West region	25% ($518,800/2,084,700*100)

West region is the most successful region according to profit margin

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