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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 operating income as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31:

Line Item Description	Amount
RevenuesN Region	$1,076,200
RevenuesS Region	1,300,000
RevenuesW Region	2,340,300
Operating ExpensesN Region	682,000
Operating ExpensesS Region	773,700
Operating ExpensesW Region	1,415,300
Corporate ExpensesDispatching	579,000
Corporate ExpensesEquipment Management	229,500
Corporate ExpensesTreasurers	163,700
General Corporate Officers Salaries	361,500

The company operates three support departments: the Dispatching Department, the Equipment Management Department, and the Treasurers 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 Treasurers Department conducts a variety of services for the company as a whole. The following additional information has been gathered:

Line Item Description	North	South	West
Number of scheduled trains	4,800	5,800	8,700
Number of railroad cars in inventory	1,100	1,800	1,600

Required:

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1. Prepare quarterly income statements showing operating income 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

Line Item Description	North	South	West
Revenues	$Revenues	$Revenues	$Revenues
Operating expenses	Operating expenses	Operating expenses	Operating expenses
Operating income before support department allocations	$Operating income before support department allocations	$Operating income before support department allocations	$Operating income before support department allocations
Support department allocations:
Dispatching	$Dispatching	$Dispatching	$Dispatching
Equipment Management	Equipment Management	Equipment Management	Equipment Management
Total support department allocations	$Total support department allocations	$Total support department allocations	$Total support department allocations
Operating income	$Operating income	$Operating income	$Operating income

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

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

Identify the most successful region according to the profit margin.

North, South, or West can only pick 1.

3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the regions? a. The method used to evaluate the performance of the regions should be reevaluated. b. A better regional performance measure would be the return on investment (operating income divided by regional assets). c. A better regional performance measure would be the residual income (operating income less a minimal return on regional assets). d. None of these choices would be included. e. All of these choices (a, b & c) would be included.

a, b, c, d, or e. can only pick 1