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 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	$778,900
Revenues—S Region	947,700
Revenues—W Region	1,643,500
Operating Expenses—N Region	493,600
Operating Expenses—S Region	564,000
Operating Expenses—W Region	993,900
Corporate Expenses—Dispatching	403,200
Corporate Expenses—Equipment Management	176,000
Corporate Expenses—Treasurer’s	118,500
General Corporate Officers’ Salaries	261,600

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	4,800		5,800		8,600
Number of railroad cars in inventory	1,100		1,800		1,500

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	%

Answer 1

Thomas Railroad Company
Divisional Income Statements
For the Quarter Ended December 31
	North	South	West
Revenues	778,900	947,700	1,643,500
Operating expenses	493,600	564,000	993,900
Operating income before support department allocations	285,300	383,700	649,600
Support department allocations:
Dispatching	100,800	121,800	180,600
Equipment Management	44,000	72,000	60,000
Total support department allocations	144,800	193,800	240,600
Operating income	140,500	189,900	409,000
Profit Margin = Operating Income/Revenues	18.0%	20.0%	24.9%