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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:

RevenuesN Region	$979,800
RevenuesS Region	1,185,100
RevenuesW Region	2,094,300
Operating ExpensesN Region	620,900
Operating ExpensesS Region	705,300
Operating ExpensesW Region	1,266,500
Corporate ExpensesDispatching	499,100
Corporate ExpensesEquipment Management	232,000
Corporate ExpensesTreasurers	149,000
General Corporate Officers Salaries	329,100

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:

	North		South		West
Number of scheduled trains	5,400		6,500		9,800
Number of railroad cars in inventory	1,000		1,600		1,400

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

	North	South	West
Revenues	$fill in the blank d2dcdefab013ffd_1	$fill in the blank d2dcdefab013ffd_2	$fill in the blank d2dcdefab013ffd_3
Operating expenses	fill in the blank d2dcdefab013ffd_4	fill in the blank d2dcdefab013ffd_5	fill in the blank d2dcdefab013ffd_6
Operating income before support department allocations	$fill in the blank d2dcdefab013ffd_7	$fill in the blank d2dcdefab013ffd_8	$fill in the blank d2dcdefab013ffd_9
Support department allocations:
Dispatching	$fill in the blank d2dcdefab013ffd_10	$fill in the blank d2dcdefab013ffd_11	$fill in the blank d2dcdefab013ffd_12
Equipment Management	fill in the blank d2dcdefab013ffd_13	fill in the blank d2dcdefab013ffd_14	fill in the blank d2dcdefab013ffd_15
Total support department allocations	$fill in the blank d2dcdefab013ffd_16	$fill in the blank d2dcdefab013ffd_17	$fill in the blank d2dcdefab013ffd_18
Operating income	$fill in the blank d2dcdefab013ffd_19	$fill in the blank d2dcdefab013ffd_20	$fill in the blank d2dcdefab013ffd_21

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

Region	Profit Margin
North Region	fill in the blank d14098f7000100f_1 %
South Region	fill in the blank d14098f7000100f_2 %
West Region	fill in the blank d14098f7000100f_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 regions?

The method used to evaluate the performance of the regions should be reevaluated.

A better regional performance measure would be the return on investment (operating income divided by regional assets).

A better regional performance measure would be the residual income (operating income less a minimal return on regional assets).

None of these choices would be included.

All of these choices (a, b & c) would be included.

abcde