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 $912,100

RevenuesS Region 1,105,800

RevenuesW Region 1,975,400

Operating ExpensesN Region 578,000

Operating ExpensesS Region 658,100

Operating ExpensesW Region 1,194,600

Corporate ExpensesDispatching 470,400

Corporate ExpensesEquipment Management 214,500

Corporate ExpensesTreasurers 138,700

General Corporate Officers Salaries 306,300

The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurers 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 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 4,900 5,900 8,800

Number of railroad cars in inventory 800 1,300 1,200

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 $ $ $

Service department charges:

Dispatching $ $ $

Equipment Management

Total service department charges $ $ $

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.