Profit CenterResponsibility 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$3,780,000RevenuesS Region5,673,000RevenuesW Region5,130,000Operating ExpensesN Region2,678,500Operating ExpensesS Region4,494,890Operating ExpensesW Region3,770,050Corporate ExpensesDispatching182,000Corporate ExpensesEquipment Management1,200,000Corporate ExpensesTreasurer's734,000General Corporate Officers' Salaries1,380,000The 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:

NorthSouthWestNumber of scheduled trains6501,105845Number of railroad cars in inventory6,0008,4009,600Required:

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 CompanyDivisional Income StatementsFor the Quarter Ended December 31NorthSouthWestRevenues$$$Operating expensesIncome from operations before service department charges$$$Service department charges:Dispatching$$$Equipment managementTotal service department charges$$$Income from operations$$$

2.Compute theprofit margin.

DivisionProfit MarginNorth Region%South Region%West Region%

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.