Chapter 24, Problem 8E

Rocky Mountain Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared:

The support department allocation rates for the support department costs were based on revenues. Because the revenues of the two divisions were the same, the support department allocations to each division were also the same.

The following additional information is available:

a.    Does the operating income (loss) for the two divisions accurately measure performance? Explain.

b.    Correct the divisional income statements, using appropriate support department cost drivers.