Profit center responsibility reporting for a service company Final Questions Quarterly Income Statements Instructions Instructions Traxonia Railroad Inc. has three regional divisions organized as profit centers. The chiet 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 $866,000 Revenues-East 1,030,000 Revenues-West 1,890,000 Revenues-Central 565,700 Operating Expenses-East 627360 Operating Expenses-West 1,170,060 Operating Expenses-Central 156,000 Corporate Expenses-Shareholder Relations 320,000 Corporate Expenses-Customer Support 255 200 Corporate Expenses-Legal 273.500 General Corporate Officers' Salaries The company operates three service departments: Shareholder Relations, Customer Support, and Legal. The Shareholder Relations Department oonducts a variety of services for shareholders of the company. The Customer Support Department is the company's point of contact for new service, complaints, and requests for repair. The department beleves 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 biled is an activity base for this work. The folowing additional information has been gathered General Corporate Officers' Salaries 273,500 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 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 oontacts is an activity base for this work. The Lepal Department provides lecal 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 6,000 5,000 9,000 Number of hours biled 2.060 1.100 2.640 Required: 1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East Wast, and Central 2 Identiy the most successfuw division according to the proft margin 3 What would you include in a recommendation to the CEO for a befter method for evaluating the performance of the divisions? Quarterly Income Statements TRAXONIA RAILROAD INC. Divisional Income Statements For the Quarter Ended December 31, 2016 East West Central Th 2 Revenues sh Operating expenses nu 4 Income from operations before service department charges bill sLess service department charges Customer Support 6 Legal 7 Total service department charges 8 Income from operations 9 Profit center responsibility reporting for a service company Instructions Final Questions Quarterly Income Statements X Instructions Quarterly Income Statements Final Questions 2 Compute the profit margin for each division 22547 is 22.58 % ) Note: Enter percentage rounded two decimal places (e.g. Profit Margin Division East Division % % West Division Central Division % Now identity the most successful division according to the proft margin 3 What would you include in a recommendation to the CEO for a better method for evaluating th parformance of the divisions? What is a major weainess of the present method A major weakress of the present method is that there is no weakness. The present method works well the assets invested in each diviaion are not considered the service department charges are incorrectly allocated nonfinancial drivers are not identifed a fll year's income is needed for assessment Next Previous Profit center responsibility reporting for a service company Instructions Final Questions Quarterly Income Statements Instructions Quarterly Income Statements Final Questions there is no weakness. The present method works well. the assets invested in each division are not considered. the service department charges are incorrectly allocated. nonfinancial drivers are not identified. a full year's income is needed for assessment Which of the following methods would better evaluate divisional performance? Check all that apply URlizing transfer pricing between divisiones Focusing on controllable revenues and expenses None of these. The present method works well Considering residual income (income from operations less a minimal return on divisional assets) Computing the rate of return on investment (income from operations divided by divisional assets) Completing a balanced scorecard for each service department Including direct and indirect operating expenses for each division