Corrections to Support Department Allocations for a Service Company

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

Rocky Mountain Airlines Inc. Divisional Income Statements For the Year Ended December 31, 20Y9
		Passenger Division				Cargo Division
Revenues				$4,200,000				$4,200,000
Operating expenses				(2,700,000)				(3,500,000)
Operating income before support department allocations				$1,500,000				$700,000
Support department allocations:
	Training			$(180,000)				$(180,000)
	Flight scheduling			(275,000)				(275,000)
	Reservations			(375,000)				(375,000)
	Total support department allocations			$(830,000)				$(830,000)
Operating income (loss)				$670,000				$(130,000)

The support department allocation rates for the support department costs were based on revenues. Because the revenues of the two divisions were the same, the support department allocations to each division were also the same.

The following additional information is available:

	Passenger Division		Cargo Division		Total
Number of personnel trained	600		200		800
Number of flights	1,000		1,500		2,500
Number of reservations requested	30,000		0		30,000

Question Content Area

a. Does the operating income (loss) for the two divisions accurately measure performance? Explain.

The reported operating income

doesdoes not

accurately measure performance because the support department charges are based on

expensesrevenues

. Revenues

areare not

associated with the profit center managers use of the support department services.

Question Content Area

b. Correct the divisional income statements, using the activity bases provided in revising the service department charges. If an amount box does not require an entry, leave it blank, or enter "0". Round your interim calculations to two decimal places, if required.

Rocky Mountain Airlines Inc. Divisional Income Statements For the Year Ended December 31, 20Y9

		Passenger Division		Cargo Division
CashGross profitOperating expensesRevenuesTraining		$- Select -		$- Select -
CashFlight schedulingOperating incomeOperating expensesReservations		- Select -		- Select -
Operating income before support department allocations		$fill in the blank f81b08085f84059_7		$fill in the blank f81b08085f84059_8
Support department allocations:
CashOperating incomeOperating expensesRevenuesTraining	blank	$- Select -	blank	$- Select -
cashCost of goods soldFlight schedulingOperating incomeOperating expenses	blank	- Select -	blank	- Select -
CashLoss from operationsOperating expensesReservationsRevenues	blank	- Select -	blank	- Select -
Total support department allocations	blank	$fill in the blank f81b08085f84059_18	blank	$fill in the blank f81b08085f84059_19
CashGross profitOperating incomeOperating income before service department chargesLoss from operations		$- Select -		$- Select -