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	$863,200
RevenuesS Region	1,078,400
RevenuesW Region	1,768,500
Operating ExpensesN Region	547,000
Operating ExpensesS Region	641,800
Operating ExpensesW Region	1,069,500
Corporate ExpensesDispatching	359,100
Corporate ExpensesEquipment Management	280,800
Corporate ExpensesTreasurers	131,300
General Corporate Officers Salaries	289,900

The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurers 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 Treasurers 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	4,300		5,100		7,700
Number of railroad cars in inventory	1,300		2,100		1,800

Required:

1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.

Thomas Railroad Company
Divisional Income Statements
For the Quarter Ended December 31
	North	South	West
Revenues	$	$	$
Operating expenses
Income from operations before service department charges	$	$	$
Service department charges:
Dispatching	$	$	$
Equipment Management
Total service department charges	$	$	$
Income from operations	$	$	$

2. What is the profit margin of each division? Round to one decimal place.

Region	Profit Margin
North Region	%
South Region	%
West Region	%

Identify the most successful region according to the profit margin. North 0r South or West??

3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the divisions?

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

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

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

D.) None of these choices would be included.

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