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: 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-Equip Management 1,200,000 Corporate Expenses-Treasurer's 734,000 General Corporate Officers' Salaries 1,380,000 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 650 1,105 845 Number of railroad cars in inventory 6,000 8,400 9,600 Instructions 1. Prepare quarterly income statement showing income from operations for the three regions. Use three column headings: North, South, and West. Check Figure: Income from operations, West Regions $820,800 2. Identify the most successful region according to the profit margin. 3. Provide a recommendation to the CEO for a better method for evaluating the performance of the regions. In your recommendation, identify the major weakness of the present method.

Explanation / Answer

Income Statement North South West Revenue $3,780,000 5673000 5130000 Less: Operating Expenses 2678500 4494890 3770050 Cost allocated for Dispatchimg Department 45500 77350 59150 Cost allocated for Equipment managementDepartment 300000 420000 480000 Total Operating Cost 3024000 4992240 4309200 Income from operations $756,000 $680,760 $820,800 Working Cost alloacted from Dispatching department in the ratio of 650:1105:845 650+1105+845 2600 Per train dispatching cost 182000/2600 70 North South West Total Cost alloacted from Dispatching department in the ratio of 650:1105:845 45500 77350 59150 182000 70*650 Cost allocated for Equipment managenment department is he ratio of 6000:8400:9600 6000+8400+9600 24000 One railroad car 1200000/24000 50 Cost allocated for Equipment managenment department is he ratio of 6000:8400:9600 300000 420000 480000 1200000 50*6000 ans 2 According to profit margin amount it is West as it is having highest $820800 Ans 3 Better way is to calculte profit margin % which tells with accuracy which one is most profitable North South West Revenue   R $3,780,000 5673000 5130000 Income from operations 756000 680760 820800 Operating profit margin % I/R*100 20 12 16 The most profitable is North as it is having highest % The profit margin absolute figures cannot tell the true profitability as revenue and cost in each department is on different basis so straightaway comparison is one of the major weakness so different ratios should be calculated to know the true profitability

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