Profit Center Responsibility Reporting for a Service Company Thomas Railroad Com

Question

Profit Center Responsibility Reporting for a Service Company

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:

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:

Revenues—N Region $1,039,000 Revenues—S Region 1,281,400 Revenues—W Region 2,205,700 Operating Expenses—N Region 658,400 Operating Expenses—S Region 762,600 Operating Expenses—W Region 1,333,900 Corporate Expenses—Dispatching 518,400 Corporate Expenses—Equipment Management 259,700 Corporate Expenses—Treasurer’s 158,000 General Corporate Officers’ Salaries 349,000 1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations Thomas Railroad Company Divisional Income Statements For the Quarter Ended December 3:1 North South West Revenues Operating expenses Income from operations before service department charges Service department charges: Dispatching Equipment Management Total service department charges Income from operations 2. What is the profit margin of each division? Round to one decimal place Region North Region South Region West Reglon Identify the most successful region according to the profit margin Profit Margin 0%6 3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the divisions? a. The method used to evaluate the performance of the divlslons should be reevaluated b. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional asets). c. A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets). d. None of these choices would be Included e.All of these choices (a, b & c) would be included

Explanation / Answer

Solution 1: ThomasRailraod Company Divisional Income Statements For the quarter ending December 31 North South West Revenues $ 1039000 1281400 2205700 Less : Operating expenses (659400) (762600) (1333900) income from operations before service department charges 379600 518800 871800 Service department charges Total North South West Total No      Dispatching (129600) (156000 (232800) 518400 5400 6500 9700 21600 Scheduled Trains      Equipment management (63600) (106000) (90100) 259700 1200 2000 1700 4900 Railroad Cars Total service department charges (193200) (262000) (322900) Income from operations 186400 256800 548900 Solution 2: Region Profit Margin North Region 17.9% South Region 20.0% West Region * 24.9% Most Successful Region according to the profit margin Solution 3: The answer would be (e) : all the choices of (a,b,c) would be included.

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