Instructions 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: Revenues-East Revenues-West $866,000 1,030,000 1,890,000 565,700 627,360 Revenues-Central Operating Expenses --East Operating Expenses-West Operating Expenses - Central Corporate Expenses --Shareholder Relations Corporate Expenses-Customer Support Corporate Expenses --Legal General Corporate Officers' Salaries 1,170,060 156,000 320,000 255,200 273,500 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 Shareholder Relations Department and general corporate officers' salaries are not controllable by division management. The Customer Support Department is the company's 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 5,000 6,000 9,000 Number of hours billed 1,100 2,060 2,640 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 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? Quarterly Income Statements 1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central Red Line Railroad Inc. Divisional Income Statements For the Quarter Ended December 31 1 East West Central 2 Revenues 3 Operating expenses Income from operations before service department charges s Less service department charges Customer Support 6 7 3 Legal Total service department charges Income from operations 9 Final Questions 2. Compute the profit margin for each division Note: Enter percentage rounded to two decimal places (e.g. 22547 is 22.56%). Division Profit Margin East Division % West Division % Central Division % Now Identify the most successful division 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 a full year's income is needed for assessment. the assets invested in each division are not considered. there is no weakness. The present method works well. the service department charges are incorrectly allocated nonfinancial drivers are not identified a full year's income is needed for assessment. the assets invested in each division are not considered. Othere is no weakness. The present method works well. the service department charges are incorrectly allocated. nonfinancial drivers are not identified Which of the following methods would better evaluate divisional performance? Check all that apply. Completing a balanced Scorecard for each service department None of these. The present method works well Computing the rate of return on investment (income from operations divided by divisional assets) Considering residual income (income from operations less a minimal return on divisional assets) Utilizing transfer pricing between divisions Focusing on controllable revenues and expenses Including direct and indirect operating expenses for each division