Profit Center Responsibility Reporting for a Service Company

Conico 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:

RevenuesEast	$1,960,000
RevenuesWest	2,800,000
RevenuesCentral	4,480,000
Operating ExpensesEast	1,120,000
Operating Expenses West	1,890,000
Operating ExpensesCentral	2,660,000
Corporate ExpensesShareholder Relations	420,000
Corporate ExpensesCustomer Support	560,000
Corporate ExpensesLegal	627,200
General Corporate Officers' Salaries	1,680,000

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 companys point of contact for new service, complaints, and requests for repair. The department believes that the number of customer contacts is a cost driver for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is a cost driver for this work. The following additional information has been gathered:

	East		West		Central
Number of customer contacts	2,100		3,920		7,980
Number of hours billed	1,040		2,450		2,110

Required:

1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central.

Conico Railroad Inc.
Divisional Income Statements
For the Quarter Ended December 31
	East	West	Central
Revenues	$fill in the blank 2f7b17019011013_1	$fill in the blank 2f7b17019011013_2	$fill in the blank 2f7b17019011013_3
Operating expenses	fill in the blank 2f7b17019011013_4	fill in the blank 2f7b17019011013_5	fill in the blank 2f7b17019011013_6
Income from operations before service department allocations	$fill in the blank 2f7b17019011013_7	$fill in the blank 2f7b17019011013_8	$fill in the blank 2f7b17019011013_9
Less service department allocations:
Customer Support	$fill in the blank 2f7b17019011013_10	$fill in the blank 2f7b17019011013_11	$fill in the blank 2f7b17019011013_12
Legal	fill in the blank 2f7b17019011013_13	fill in the blank 2f7b17019011013_14	fill in the blank 2f7b17019011013_15
Total service department allocations	$fill in the blank 2f7b17019011013_16	$fill in the blank 2f7b17019011013_17	$fill in the blank 2f7b17019011013_18
Income from operations	$fill in the blank 2f7b17019011013_19	$fill in the blank 2f7b17019011013_20	$fill in the blank 2f7b17019011013_21

2. Compute the profit margin. Rounded to nearest whole percent.

Division	Profit Margin
East Region	fill in the blank 051df9fd802c018_1%
West Region	fill in the blank 051df9fd802c018_2%
Central Region	fill in the blank 051df9fd802c018_3%

Identify the most successful region 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?

1. The method used to evaluate the performance of the divisions should be reevaluated.
2. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).
3. A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).
4. None of these choices would be included.
5. All of these choices (a, b & c) would be included.