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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:

RevenuesN Region	$986,300
RevenuesS Region	1,226,600
RevenuesW Region	2,061,700
Operating ExpensesN Region	625,000
Operating ExpensesS Region	730,000
Operating ExpensesW Region	1,246,800
Corporate ExpensesDispatching	463,200
Corporate ExpensesEquipment Management	272,800
Corporate ExpensesTreasurers	150,000
General Corporate Officers Salaries	331,300

The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurers Department. The Treasurers Department and general corporate officers salaries are not controllable by division management. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the inventories of railroad cars. It makes sure the right freight cars are at the right place at the right time. The Treasurers 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	4,800		5,800		8,700
Number of railroad cars in inventory	1,100		1,800		1,500

Required:

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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	$fill in the blank 59c0b2faefc8fb5_1	$fill in the blank 59c0b2faefc8fb5_2	$fill in the blank 59c0b2faefc8fb5_3
Operating expenses	fill in the blank 59c0b2faefc8fb5_4	fill in the blank 59c0b2faefc8fb5_5	fill in the blank 59c0b2faefc8fb5_6
Income from operations before service department charges	$fill in the blank 59c0b2faefc8fb5_7	$fill in the blank 59c0b2faefc8fb5_8	$fill in the blank 59c0b2faefc8fb5_9
Less service department charges:
Dispatching	$fill in the blank 59c0b2faefc8fb5_10	$fill in the blank 59c0b2faefc8fb5_11	$fill in the blank 59c0b2faefc8fb5_12
Equipment Management	fill in the blank 59c0b2faefc8fb5_13	fill in the blank 59c0b2faefc8fb5_14	fill in the blank 59c0b2faefc8fb5_15
Total service department charges	$fill in the blank 59c0b2faefc8fb5_16	$fill in the blank 59c0b2faefc8fb5_17	$fill in the blank 59c0b2faefc8fb5_18
Income from operations	$fill in the blank 59c0b2faefc8fb5_19	$fill in the blank 59c0b2faefc8fb5_20	$fill in the blank 59c0b2faefc8fb5_21

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

Region	Profit Margin
North Region	fill in the blank 392878f64fbc06a_1%
South Region	fill in the blank 392878f64fbc06a_2%
West Region	fill in the blank 392878f64fbc06a_3%

Identify the most successful region according to the profit margin.

NorthSouthWest

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.

abcde