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, 2016:

RevenuesN Region	$3,780,000
RevenuesS Region	5,673,000
RevenuesW Region	5,130,000
Operating ExpensesN Region	2,678,500
Operating ExpensesS Region	4,494,890
Operating ExpensesW Region	3,770,050
Corporate ExpensesDispatching	182,000
Corporate ExpensesEquipment Management	1,200,000
Corporate ExpensesTreasurers	734,000
General Corporate Officers Salaries	1,380,000

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	650	1,105	845
Number of railroad cars in inventory	6,000	8,400	9,600

1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West.

THOMAS RAILROAD COMPANY

Divisional Income Statements

For the Quarter Ended December 31, 2016

1

North

South

West

2

Revenues

3

Operating expenses

4

Income from operations before service department charges

5

Less service department charges:

6

Dispatching

7

Equipment Management

8

Total service department charges

9 Income from operations

. Compute the profit margin for each division.

Division	Profit Margin
North Division
South Division
West Division

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? What is a major weakness of the present method?

A major weakness of the present method is that

the assets invested in each division are not considered.

there is no weakness. The present method works well.

more than a quarters income is needed to accurately assess performance.

service department charges vary from month to month.

peak periods are not taken into account.

Which of the following methods would better evaluate divisional performance? Check all that apply.

Calculating residual income (income from operations less a minimal return on divisional assets)

Considering the rate of return on investment (income from operations divided by divisional assets)

Including only controllable revenues and expenses

None of these. The present method works well

Accounting for transfer pricing between divisions

Focusing on the amount of income from operations per dollar of earned revenue

Utilizing a balanced scorecard for each service department