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 $ 1,104,600 Revenues—Rail Division 1,295,000 Revenues—Truck Division 2,401,200 Operating Expenses—Air Division 700,000 Operating Expenses—Rail Division 770,700 Operating Expenses—Truck Division 1,452,100 Corporate Expenses—Shareholder Relations 168,000 Corporate Expenses—Customer Support 613,800 Corporate Expenses—Legal 207,900 General Corporate Officers’ Salaries 371,000 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	5,000		5,900		8,900
Number of hours billed	800		1,300		1,200

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	$	$	$

Feedback

1. Determine the customer contact rate by dividing service cost by output. For each division's customer support, multiply the customer contact rate by the number of customer contacts. Repeat this process for the other service department charges. Subtract the service department charges for a division from that division's operating income before such charges.

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:

1. 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.
2. 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.
3. 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.
4. All of these choices are correct.

Select the correct answer from the choices above.:
d

Answer 1

		Air	rail	Truck
a)	Revenue(1)	1104600	1295000	2401200
	Operating expenses(2)	700000	770700	1452100
	Operating income before service departent charges(1)-(2)=(3)	404600	524300	949100
	Less: Service department charges
	Customer support(4)	155000	182900	275900
	legal(5)	50400	81900	75600
	Total service department charges(4)+(5)=6	205400	264800	351500
	Operating income (3)-(6)=7	199200	259500	597600
	Working note:
	Allocation of overhead expenses	Air	rail	Truck	total
	Number of customer contract (1)	5000	5900	8900	19800
	Number of hours billed(2)	800	1300	1200	3300
	Corporate exp-customer support(1*31)	155000	182900	275900	613800
	Corporate exp-legal support(2*63)	50400	81900	75600	207900
	Corporate exp-customer support(1)	613800
	total Number of customer contract(2)	19800
	overhead rate/customer contract(1/2)=3	31
	Corporate exp-legal support(1)	207900
	Total Number of hours billed(2)	3300
	overhead rate/customer contract(1/2)=3	63
		Air	rail	Truck
b)	Revenue(1)	1104600	1295000	2401200
	operating income(2)	199200	259500	597600
	profit margin(1)/(2)=3	18.03	20.04	24.89
	Truck has the highest profit margin, so it is the most profitable segment of the company
3)	All options are correct. So correct answer is d.
	return on asset and residual income will provide full entity level profitability view