Profit Center Responsibility Reporting for a Service Company 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 operating income 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 $1,027,800 Revenues—S Region 1,251,100 Revenues—W Region 2,070,600 Operating Expenses—N Region 651,300 Operating Expenses—S Region 744,600 Operating Expenses—W Region 1,252,200 Corporate Expenses—Dispatching 455,0
Profit Center Responsibility Reporting for a Service Company
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 operating income as a percent of revenues. The following quarterly income and expense accounts were provided from the
| Revenues—N Region | $1,027,800 |
| Revenues—S Region | 1,251,100 |
| Revenues—W Region | 2,070,600 |
| Operating Expenses—N Region | 651,300 |
| Operating Expenses—S Region | 744,600 |
| Operating Expenses—W Region | 1,252,200 |
| Corporate Expenses—Dispatching | 455,000 |
| Corporate Expenses—Equipment Management | 295,000 |
| Corporate Expenses—Treasurer’s | 156,300 |
| General Corporate Officers’ Salaries | 345,200 |
The company operates three support departments: the Dispatching Department, the Equipment Management Department, and the Treasurer’s 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 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 | 4,400 | 5,300 | 7,800 | |||
| Number of railroad cars in inventory | 1,300 | 2,000 | 1,700 |
Required:
Question Content Area
1. Prepare quarterly income statements showing operating income for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.
| North | South | West | |
| Revenues | $fill in the blank 21b55cfc2f85fd8_1 | $fill in the blank 21b55cfc2f85fd8_2 | $fill in the blank 21b55cfc2f85fd8_3 |
| Operating expenses | fill in the blank 21b55cfc2f85fd8_4 | fill in the blank 21b55cfc2f85fd8_5 | fill in the blank 21b55cfc2f85fd8_6 |
| Operating income before support department allocations | $fill in the blank 21b55cfc2f85fd8_7 | $fill in the blank 21b55cfc2f85fd8_8 | $fill in the blank 21b55cfc2f85fd8_9 |
| Support department allocations: | |||
| Dispatching | $fill in the blank 21b55cfc2f85fd8_10 | $fill in the blank 21b55cfc2f85fd8_11 | $fill in the blank 21b55cfc2f85fd8_12 |
| Equipment Management | fill in the blank 21b55cfc2f85fd8_13 | fill in the blank 21b55cfc2f85fd8_14 | fill in the blank 21b55cfc2f85fd8_15 |
| Total support department allocations | $fill in the blank 21b55cfc2f85fd8_16 | $fill in the blank 21b55cfc2f85fd8_17 | $fill in the blank 21b55cfc2f85fd8_18 |
| Operating income | $fill in the blank 21b55cfc2f85fd8_19 | $fill in the blank 21b55cfc2f85fd8_20 | $fill in the blank 21b55cfc2f85fd8_21 |
Question Content Area
2. What is the profit margin of each region? Round to one decimal place.
| Region | Profit Margin |
| North Region | fill in the blank 70c1ae0dd020068_1 % |
| South Region | fill in the blank 70c1ae0dd020068_2 % |
| West Region | fill in the blank 70c1ae0dd020068_3 % |
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 regions?
- The method used to evaluate the performance of the regions should be reevaluated.
- A better regional performance measure would be the
return on investment (operating income divided by regional assets). - A better regional performance measure would be the residual income (operating income less a minimal return on regional assets).
- None of these choices would be included.
- All of these choices (a, b & c) would be included.
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