2. PR.24.02A Profit center responsibility reporting for a service company Red Line Railroad 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: Revenues-East $1,400,000 Revenues-West 2,000,000 Revenues-Central 3,200,000 Operating Expenses-East 800,000 Operating Expenses-West 1,350,000 Operating Expenses-Central 1,900,000 Corporate Expenses-Shareholder Relations 300,000 Corporate Expenses-Customer Support 320,000 Corporate Expenses- Legal 500,000 General Corporate Officers' Salaries 1,200,000 The company operates three support 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 a cost driver for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is a cost driver for this work. The following additional information has been gathered: East Number of customer contacts 1,500 Number of hours billed 750 West 2,800 1,750 Central 5,700 1,500 1. Prepare quarterly income statements showing operating income for the three divisions. Use three column headings: East, West, and Central. Red Line Railroad Inc. Divisional Income Statements For the Quarter Ended December 31 East West Central Revenues Operating expenses Operating income before support department allocations Support department allocations: Customer Support Legal TA Total support department allocations A Operating income 2. What is the profit margin of each region? Round percentages to the nearest whole number. Division Profit Margin East Region West Region Central Region Identify the most successful region 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 regions? 1. A better divisional performance measure would be return on investment, residual income as these methods consider the assets used by the division. 2. The current performance measures are based on the operating income per dollar of earned revenue. This method meets the requirement. 3. A better divisional performance measure would be return on investment, and residual income as these methods consider the dollar revenue earned by the division. 2. PR.24.02A Profit center responsibility reporting for a service company Red Line Railroad 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: Revenues-East $1,400,000 Revenues-West 2,000,000 Revenues-Central 3,200,000 Operating Expenses-East 800,000 Operating Expenses-West 1,350,000 Operating Expenses-Central 1,900,000 Corporate Expenses-Shareholder Relations 300,000 Corporate Expenses-Customer Support 320,000 Corporate Expenses- Legal 500,000 General Corporate Officers' Salaries 1,200,000 The company operates three support 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 a cost driver for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is a cost driver for this work. The following additional information has been gathered: East Number of customer contacts 1,500 Number of hours billed 750 West 2,800 1,750 Central 5,700 1,500 1. Prepare quarterly income statements showing operating income for the three divisions. Use three column headings: East, West, and Central. Red Line Railroad Inc. Divisional Income Statements For the Quarter Ended December 31 East West Central Revenues Operating expenses Operating income before support department allocations Support department allocations: Customer Support Legal TA Total support department allocations A Operating income 2. What is the profit margin of each region? Round percentages to the nearest whole number. Division Profit Margin East Region West Region Central Region Identify the most successful region 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 regions? 1. A better divisional performance measure would be return on investment, residual income as these methods consider the assets used by the division. 2. The current performance measures are based on the operating income per dollar of earned revenue. This method meets the requirement. 3. A better divisional performance measure would be return on investment, and residual income as these methods consider the dollar revenue earned by the division