Instructions Red Line Railroad Inc. has three regional divisions organized 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: $888,000 Revenues- East Revenues-West 1,032,000 Revenues-Central 1,870,000 Operating Expenses-East 567,500 Operating Expenses-West 625,200 Operating Expenses-Central 1,173,140 Corporate Expenses-Shareholder Relations 152,000 Corporate Expenses-Customer Support 340,000 Corporate Expenses-Legal 272,600 General Corporate Officers' Salaries 282,500 The company operates three service departments: Shareholder Relations, Customer Support, and Legal. The Shareholder Relations Department conducts a variety of services for shareholders of the company. The Shareholder Relations Department and general corporate officers' salaries are not controllable by division management. 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 an activity base for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is an activity base for this work. The following X Instructions General Corporate Officers' Salaries 282,500 The company operates three service departments: Shareholder Relations, Customer Support, and Legal. The Shareholder Relations Department conducts a variety of services for shareholders of the company. The Shareholder Relations Department and general corporate officers' salaries are not controllable by division management. 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 an activity base for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is an activity base for this work. The following additional information has been gathered: Central East West Number of customer contacts 5,000 6,000 9,000 Number of hours billed 1,350 2,000 2,450 Required: 1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central. 2. Identify the most successful division 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 divisions? What is a major weakness of the present method? Quarterly Income Statements 1. Prepare quarterly income statements showing income from operations 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 2 Revenues 3 Operating expenses Income from operations before service department charges 4 Less service department charges: 5 Customer Support 6 Legal 7 Total service department charges 8 Income from operations 9 Final Questions 2. Compute the profit margin for each division. Note: Enter percentage rounded to two decimal places (e.g. .22547 is 22.56%) Profit Margin Division East Division % West Division Central Division Now identify the most successful division 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 divisions? What is a major weakness of the present method? A major weakness of the present method is that nonfinancial drivers are not identified. the assets invested in each division are not considered. Final Questions TITO USJUIS iiVUSICU ITCUUIT UIVIOIUIT UNUTIUT UUITSIUCTUU. there is no weakness. The present method works well the service department charges are incorrectly allocated a full year's income is needed for assessment Which of the following methods would better evaluate divisional performance? Check all that apply. Considering residual income (income from operations less a minimal return on divisional assets) None of these. The present method works well Utilizing transfer pricing between divisions Focusing on controllable revenues and expenses Including direct and indirect operating expenses for each division Computing the rate of return on investment (income from operations divided by divisional assets) Completina a balanced scorecard for each service department