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	$1,364,500
Revenues—S Region	1,641,800
Revenues—W Region	2,928,500
Operating Expenses—N Region	864,700
Operating Expenses—S Region	977,100
Operating Expenses—W Region	1,771,000
Corporate Expenses—Dispatching	742,500
Corporate Expenses—Equipment Management	275,600
Corporate Expenses—Treasurer’s	207,500
General Corporate Officers’ Salaries	458,300

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	5,600		6,800		10,100
Number of railroad cars in inventory	1,300		2,100		1,800

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	$	$	$

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

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

Identify the most successful region according to the profit margin.
West

3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the divisions?

The method used to evaluate the performance of the divisions should be reevaluated.

A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).

A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).

None of these choices would be included.

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

e

Answer 1

Thomas Railroad Company
Divisional Income Statement
for the quarter ended December 31
	North	South	West	Total
Revenues	1364500	1641800	2928500	5934800
Operating Expenses	864700	977100	1771000	3612800
Income from operations before service department charges	499800	664700	1157500	2322000
Service department charges:
Dispatching	184800	224400	333300	742500
Equipment management	68900	111300	95400	275600
Total service department charges	253700	335700	428700	1018100
Income from operations	246100	329000	728800	1303900

Working:

	Total	North	South	West
Dispatching
Basis of alloaction:	22500	5600	6800	10100
Cost allocation	742500	184800	224400	333300
Equipment management
Basis of alloaction:	5200	1300	2100	1800
Cost allocation	275600	68900	111300	95400

2.

North	18.0%
South	20.0%
West	24.9%

Working:

	North	South	West
Revenues	1364500	1641800	2928500
Income from operations	246100	329000	728800
Profit Margin	18.0%	20.0%	24.9%

3.

All of these chaices ould be included.