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Traxonia Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO)...

Traxonia Railroad Inc. has three regional divisions organized 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, 2016:

Revenues—East $ 878,000
Revenues—West 1,042,000
Revenues—Central 1,880,000
Operating Expenses—East 563,600
Operating Expenses—West 619,680
Operating Expenses—Central 1,172,940
Corporate Expenses—Shareholder Relations 155,000
Corporate Expenses—Customer Support 333,000
Corporate Expenses—Legal 233,100
General Corporate Officers’ Salaries 278,500

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:

East

West

Central
Number of customer contacts 4,500 5,500 8,500
Number of hours billed 1,350 2,100 2,100
Required:
1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central.
2. Identify the most successful division 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 divisions?

Solutions

Expert Solution

1. See Pics

2. As per working, Most profitable Division is CENTRAL Division.

3. As a recommendation, it is advisable to also provie for a proper basis to allocate costs of shareholders' relations department and corporate salaries to provide for a more accurate NET PROFIT RATIO.

ekkarill92 answered 1 year ago
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