Red Line Railroad Inc. has three regional divisions organized 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:

RevenuesEast $ 870,000 RevenuesWest 1,034,000 RevenuesCentral 1,880,000 Operating ExpensesEast 565,700 Operating ExpensesWest 621,360 Operating ExpensesCentral 1,174,660 Corporate ExpensesShareholder Relations 150,000 Corporate ExpensesCustomer Support 350,000 Corporate ExpensesLegal 264,000 General Corporate Officers Salaries 281,000

The company operates three service departments: Shareholder Relations, Customer Support, and Legal. The Shareholder Relations Department conducts a variety of services for shareholders of the company. The Customer Support Department is the companys point of contact for new service, complaints, and requests for repair. The department believes that the number of customer contacts is an activity base for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is an activity base for this work. The following additional information has been gathered:

East West Central Number of customer contacts 3,000 4,000 7,000 Number of hours billed 1,300 2,160 2,040

Required: 1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central. 2. Identify the most successful division according to the profit margin. Enter percentage rounded two decimal places (e.g. 0.22547 is 22.55%). 3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the divisions? What is a major weakness of the present method?