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 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:

RevenuesN Region	$3,780,000
RevenuesS Region	5,673,000
RevenuesW Region	5,130,000
Operating ExpensesN Region	2,678,500
Operating ExpensesS Region	4,494,890
Operating ExpensesW Region	3,770,050
Corporate ExpensesDispatching	182,000
Corporate ExpensesEquipment Management	1,200,000
Corporate ExpensesTreasurer's	734,000
General Corporate Officers' Salaries	1,380,000

The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer's 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 Treasurer's 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	650		1,105		845
Number of railroad cars in inventory	6,000		8,400		9,600

Required:

Question Content Area

1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. Round your interim calculations to three decimal places, if required.

Thomas Railroad Company Divisional Income Statements For the Quarter Ended December 31

	North	South	West
Revenues	$fill in the blank 341147fff015ff2_1	$fill in the blank 341147fff015ff2_2	$fill in the blank 341147fff015ff2_3
Operating expenses	fill in the blank 341147fff015ff2_4	fill in the blank 341147fff015ff2_5	fill in the blank 341147fff015ff2_6
Income from operations before service department charges	$fill in the blank 341147fff015ff2_7	$fill in the blank 341147fff015ff2_8	$fill in the blank 341147fff015ff2_9
Service department charges:
Dispatching	$fill in the blank 341147fff015ff2_10	$fill in the blank 341147fff015ff2_11	$fill in the blank 341147fff015ff2_12
Equipment management	fill in the blank 341147fff015ff2_13	fill in the blank 341147fff015ff2_14	fill in the blank 341147fff015ff2_15
Total service department charges	$fill in the blank 341147fff015ff2_16	$fill in the blank 341147fff015ff2_17	$fill in the blank 341147fff015ff2_18
Income from operations	$fill in the blank 341147fff015ff2_19	$fill in the blank 341147fff015ff2_20	$fill in the blank 341147fff015ff2_21

Question Content Area

2. Compute the profit margin.

Division	Profit Margin
North Region	fill in the blank c2a24ef6bf8afef_1 %
South Region	fill in the blank c2a24ef6bf8afef_2 %
West Region	fill in the blank c2a24ef6bf8afef_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 divisions?

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

A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).

A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).

None of these choices would be included.

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

abcde