Red Line Rallroad Inc. has three regional divisions organized as profit centers.

Question

Red Line Rallroad 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 $ 862,000 1,036,000 1,890,000 563,600 621,840 1,167,00 150,000 380,000 252,000 274,500 Revenues East Revenues-West Operating Expenses-East Operating Expenses-Central Corporate Expenses Shareholder Relations Corporate Expenses-Customer Support General Corporate Oficers Salaries The company operates three service departments: Sharehoider Relations, Customer Support, and Legal. The Shareholder Relations Department conducts a variety of services tor shareholders of the company. 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 ,400 2,000 2.200 Number of hours billed

Explanation / Answer

1) Divisional Income Statements For the quarter ended Dec 31 East West Central Revenues 862000 1036000 1890000 Operating expenses 563600 621840 1167900 Income from operations before service department charges 298400 414160 722100 Service department charges: Customer support 90000 108000 162000 Legal 63000 90000 99000 Total service department charges 153000 198000 261000 Income from operations   145400 216160 461100 2) The profit margin for each division: Income from operations / Revenue 145400/862000 216160/1036000 461100/1890000 PROFIT MARGIN    17% 21% 24% Most profitable division MOST PROFITABLE 3) Answer : there is no weakness. The present method works well. This is because the divisional expenses are properly apportioned. None of these. The present method works well.

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