Thomas Railroad Company organizes its three divisions, the North (N), South (S),

Question

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, 2016:

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:

1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West.

THOMAS RAILROAD COMPANY

Divisional Income Statements

For the Quarter Ended December 31, 2016

1

North

South

West

2

Revenues

3

Operating expenses

4

Income from operations before service department charges

5

Less service department charges:

6

Dispatching

7

Equipment Management

8

Total service department charges

9 Income from operations

. Compute the profit margin for each division.

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? What is a major weakness of the present method?

A major weakness of the present method is that

the assets invested in each division are not considered.

there is no weakness. The present method works well.

more than a quarter’s income is needed to accurately assess performance.

service department charges vary from month to month.

peak periods are not taken into account.

Which of the following methods would better evaluate divisional performance? Check all that apply.

Calculating residual income (income from operations less a minimal return on divisional assets)

Considering the rate of return on investment (income from operations divided by divisional assets)

Including only controllable revenues and expenses

None of these. The present method works well

Accounting for transfer pricing between divisions

Focusing on the amount of income from operations per dollar of earned revenue

Utilizing a balanced scorecard for each service department

Revenues—N Region $3,780,000 Revenues—S Region 5,673,000 Revenues—W Region 5,130,000 Operating Expenses—N Region 2,678,500 Operating Expenses—S Region 4,494,890 Operating Expenses—W Region 3,770,050 Corporate Expenses—Dispatching 182,000 Corporate Expenses—Equipment Management 1,200,000 Corporate Expenses—Treasurer’s 734,000 General Corporate Officers’ Salaries 1,380,000

Explanation / Answer

Part 1)

The quarterly income statements are given below:

___________

Part 2)

The profit margin for each division is calculated with the use of following table:

Based on above calculations for profit margin, the most successful region is North.

___________

Part 3)

The assets invested in each division are not considered. (which is Option A)

________

Explanation:

For evaluating divisional performance, it is important to measure the usage of assets in generating a rate of return. The present method doesn't take into account the level of asset utilization by each division in the generation of revenue. The present method works by identifying the amount of income from operations per dollar of earned revenue. This is the weakness of present method.

___________

Part 4)

The following 2 methods can be used to evaluate divisional performance:

1) Calculating residual income (income from operations less a minimal return on divisional assets). (which is Option A)

2) Considering the rate of return on investment (income from operations divided by divisional assets). (which is Option B)

Both the measures can be used for evaluation performance at the divisional level.

___________

Part 5)

The present method works well:

Focusing on the amount of income from operations per dollar of earned revenue (which is Option B)

THOMAS RAILROAD COMPANY Divisional Income Statements For the Quarter Ended December 31, 2016 1 North South West 2 Revenues 3,780,000 5,673,000 5,130,000 3 Operating expenses 2,678,500 4,494,890 3,770,050 4 Income from operations before service department charges 1,101,500 1,178,110 1,359,950 5 Less service department charges: 6 Dispatching [(182,000/(650 + 1,105 + 845) = $70] 45,500 (650*70) 77,350 (1,105*70) 59,150 (845*70) 7 Equipment Management [(1,200,000/(6,000 + 8,400 + 9,600) = $50] 300,000 (6,000*50) 420,000 (8,400*50) 480,000 (9,600*50) 8 Total service department charges 345,500 497,350 539,150 9 Income from operations $756,000 $680,760 $820,800

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.