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: Revenues-N Region $1,088,500 Revenues-S Region 1,295,500 Revenues-W Region 2,359,500 Operating Expenses-N Region 689,800 Operating Expenses S Region 771,000 Operating Expenses-W Region 1,426,900 Corporate Expenses-Dispatching 585,900 Corporate Expenses-Equipment Management 226,800 Corporate Expenses-Treasurer's 165,600 General Corporate Officers' Salaries 365,600 The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer's Department. The Treasurer's 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 Treasurer's 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 4,700 5,700 8,500 Number of railroad cars in inventory 900 1,400 1,300 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 TA $ 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. 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
