PR24-2a

Traxonia 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, 2016:

Revenues 870000

East Revenues 1032000

West Revenues 1872000

Central Operating Expenses 563300

East Operating Expenses 618240

West Operating Expenses 1166940

Central Corporate Expenses 154000

Shareholder Relations Corporate Expenses 400000

Customer Support Corporate Expenses 270000

Legal General Corporate Officers Salaries-- 275000

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 Customer Support Department is the companys 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:

East West Central

Number of customer contacts 5000 6000 9000

Number of hours billed 1350 2160 1890

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. Provide a recommendation to the CEO for a better method for evaluating the performance of the divisions. In your recommendation, identify the major weakness of the present method.