1. Profit CenterResponsibility Reporting for a Service Company
2. 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 operating income as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31:
3. RevenuesN Region$927,100RevenuesS Region1,086,300RevenuesW Region1,995,900Operating ExpensesN Region587,500Operating ExpensesS Region646,500Operating ExpensesW Region1,207,000Corporate ExpensesDispatching495,900Corporate ExpensesEquipment Management190,800Corporate ExpensesTreasurer's141,000General Corporate Officers' Salaries311,400
4. The company operates three support 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:
5. NorthSouthWestNumber of scheduled trains4,3005,1007,700Number of railroad cars in inventory9001,4001,300
6. Required:
7. 1.Prepare quarterly income statements showing operating income for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.
8. Thomas Railroad CompanyDivisional Income StatementsFor the Quarter Ended December 31NorthSouthWestRevenues$$$Operating expensesOperating income before support department allocations$$$Support department allocations:Dispatching$$$Equipment ManagementTotal support department allocations$$$Operating income$$$
9. 2.What is theprofit marginof each region? Round to one decimal place.
10. RegionProfit MarginNorth Region%South Region%West Region%
11. Identify the most successful region according to the profit margin.
13. 3.What would you include in a recommendation to the CEO for a better method for evaluating the performance of the regions?
14. The method used to evaluate the performance of the regions should be reevaluated.
15. A better regional performance measure would be the return on investment (operating income divided by regional assets).
16. A better regional performance measure would be the residual income (operating income less a minimal return on regional assets).
17. None of these choices would be included.
18. All of these choices (a, b & c) would be included.