Pegasus Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared:

The service department charge rate for the service department costs was based on revenues. Since the revenues of the two divisions were the same, the service department charges to each division were also the same.
The following additional information is available:

a. Does the income from operations for the two divisions accurately measure performance?
b. Correct the divisional income statements, using the activity bases provided above in revising the service departmentcharges.

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Pegasus Airlines Inc. Divisional Income Statements For the Year Ended October 31, 2006 Passenger Division Cargo Division $3,000,000 1,500,000 $3,000,000 1,250,000 Revenues Operating expenses. Income from operations before $1,500,000 $1,750,000 Less service department charges: Training .. $250,000 Flight scheduling Reservations .. 300,000 400,000 $250,000 300,000 950,000 400,000 950,000 S 800,000 Income from operations . . . S550,000 Passenger Cargo Division otal Number of flight personnel trained Number of flights Number of reservations requested Division 200 150 20,000 250 400 20,000 50 250