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 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 $1,030,800 Revenues—S Region 1,192,300 Revenues—W Region 2,190,000 Operating Expenses—N Region 653,200 Operating Expenses—S Region 709,600 Operating Expenses—W Region 1,324,400 Corporate Expenses—Dispatching 567,500 Corporate Expenses—Equipment Management 188,600 Corporate Expenses—Treasurer’s 156,800 General Corporate Officers’ Salaries 346,200 The company operates three service 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 5,700 6,800 10,200 Number of railroad cars in inventory 1,200 1,800 1,600 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 fill in the blank South Region fill in the blank West Region fill in the blank 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? The method used to evaluate the performance of the divisions should be reevaluated. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets). A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets). None of these choices would be included. All of these choices (a, b & c) would be included.

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 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 $1,030,800 Revenues—S Region 1,192,300 Revenues—W Region 2,190,000 Operating Expenses—N Region 653,200 Operating Expenses—S Region 709,600 Operating Expenses—W Region 1,324,400 Corporate Expenses—Dispatching 567,500 Corporate Expenses—Equipment Management 188,600 Corporate Expenses—Treasurer’s 156,800 General Corporate Officers’ Salaries 346,200 The company operates three service 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 5,700 6,800 10,200 Number of railroad cars in inventory 1,200 1,800 1,600 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 fill in the blank South Region fill in the blank West Region fill in the blank 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? The method used to evaluate the performance of the divisions should be reevaluated. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets). A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets). None of these choices would be included. All of these choices (a, b & c) would be included.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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 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	$1,030,800
Revenues—S Region	1,192,300
Revenues—W Region	2,190,000
Operating Expenses—N Region	653,200
Operating Expenses—S Region	709,600
Operating Expenses—W Region	1,324,400
Corporate Expenses—Dispatching	567,500
Corporate Expenses—Equipment Management	188,600
Corporate Expenses—Treasurer’s	156,800
General Corporate Officers’ Salaries	346,200

The company operates three service 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	5,700		6,800	10,200
Number of railroad cars in inventory	1,200		1,800	1,600

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	fill in the blank
South Region	fill in the blank
West Region	fill in the blank

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?

The method used to evaluate the performance of the divisions should be reevaluated.
A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).
A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).
None of these choices would be included.
All of these choices (a, b & c) would be included.

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