Traxonia Railroad Inc. has three regional divisions organized as profit centers.

Question

Traxonia Railroad 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, 2016:

The company operates three service departments: Shareholder Relations, Customer Support, and Legal. The Shareholder Relations Department conducts a variety of services for 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:

Revenues—East $ 888,000 Revenues—West 1,032,000 Revenues—Central 1,870,000 Operating Expenses—East 567,500 Operating Expenses—West 625,200 Operating Expenses—Central 1,173,140 Corporate Expenses—Shareholder Relations 152,000 Corporate Expenses—Customer Support 340,000 Corporate Expenses—Legal 272,600 General Corporate Officers’ Salaries 282,500

Explanation / Answer

1 Traxonia Railroad Inc. Quarterly income statements showing income from operations (Amt in $) Particulars East West Central Cumulative Revenue 888000 1032000 1870000 3790000 Operating Expenses 567500 625200 1173140 2365840 Gross Profit 320500 406800 696860 1424160 Gross Margin rate 36.09% 39.42% 37.27% 37.58% Allocated Expenses Customer Support 85000 102000 153000 340000 Legal 63450 94000 115150 272600 Unallocated Expenses Shareholder Expenses 152000 Total Indirect Expenses 148450 196000 268150 764600 Net Profit 172050 210800 428710 659560 Net Profit Margin 19.38% 20.43% 22.93% 17.40% Working for allocation of expenses Customer Support Total expense 340000 Base for allocaton Number of Customer Contacts Contacts Allocation East 5000 85000 West 6000 102000 Central 9000 153000 Total 20000 340000 Legal Total expense 272600 Base for allocaton Number of hours billed Hours Allocation East 1350 63450 West 2000 94000 Central 2450 115150 Total 5800 272600 Shareholders relations Total expense 152000 Base for allocaton Since this service is not operative, will not be allocated to any department 2 The most successful division according to the net profit margin is Central Division 3 The better method for evaluating the performance of the division is using Gross profit margin rate. According to the gross profit margin, the most successful division of West Division.

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