Question
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 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 | $1,172,500 |
RevenuesS Region | 1,333,100 |
RevenuesW Region | 2,504,200 |
Operating ExpensesN Region | 743,000 |
Operating ExpensesS Region | 793,400 |
Operating ExpensesW Region | 1,514,400 |
Corporate ExpensesDispatching | 673,200 |
Corporate ExpensesEquipment Management | 184,000 |
Corporate ExpensesTreasurers | 178,300 |
General Corporate Officers Salaries | 393,800 |
The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurers Department. The Treasurers Department and general corporate officers salaries are not controllable by division management. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the inventories of railroad cars. 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 | 5,000 | 5,900 | 8,900 | |||
Number of railroad cars in inventory | 1,200 | 1,800 | 1,600 |
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 | |||
Less service department charges: | |||
Dispatching | |||
Equipment Management | |||
Total service department charges | |||
Income from operations |
Feedback
1. Determine the dispatching rate per train by dividing service cost by output. For each division's dispatching cost, multiply the dispatching rate by the number of scheduled trains. Repeat this process for the other service department charges. Subtract the service department charges for a division from that division's income from operations before such charges.
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. West
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.
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