Profit center responsibility reporting for a service company Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using operating income as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31: Revenues—East $1,400,000 Revenues—West 2,000,000 Revenues—Central 3,200,000 Operating Expenses—East 800,000 Operating Expenses—West 1,350,000 Operating Expenses—Central 1,900,000 Corporate Expenses—Shareholder Relations 300,000 Corporate Expenses—Customer Support 320,000 Corporate Expenses—Legal 500,000 General Corporate Officers' Salaries 1,200,000 The company operates three support 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 a cost driver for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is a cost driver for this work. The following additional information has been gathered: East West Central Number of customer contacts 1,500 2,800 5,700 Number of hours billed 750 1,750 1,500 Required: Question Content Area 1. Prepare quarterly income statements showing operating income for the three divisions. Use three column headings: East, West, and Central. Red Line Railroad Inc.Divisional Income StatementsFor the Quarter Ended December 31 East West Central Revenues $fill in the blank b694b4f70fe3fe3_1 $fill in the blank b694b4f70fe3fe3_2 $fill in the blank b694b4f70fe3fe3_3 Operating expenses fill in the blank b694b4f70fe3fe3_4 fill in the blank b694b4f70fe3fe3_5 fill in the blank b694b4f70fe3fe3_6 Operating income before support department allocations $fill in the blank b694b4f70fe3fe3_7 $fill in the blank b694b4f70fe3fe3_8 $fill in the blank b694b4f70fe3fe3_9 Support department allocations: Customer Support $fill in the blank b694b4f70fe3fe3_10 $fill in the blank b694b4f70fe3fe3_11 $fill in the blank b694b4f70fe3fe3_12 Legal fill in the blank b694b4f70fe3fe3_13 fill in the blank b694b4f70fe3fe3_14 fill in the blank b694b4f70fe3fe3_15 Total support department allocations $fill in the blank b694b4f70fe3fe3_16 $fill in the blank b694b4f70fe3fe3_17 $fill in the blank b694b4f70fe3fe3_18 Operating income $fill in the blank b694b4f70fe3fe3_19 $fill in the blank b694b4f70fe3fe3_20 $fill in the blank b694b4f70fe3fe3_21 Question Content Area 2. What is the profit margin of each region? Round percentages to the nearest whole number. Division Profit Margin East Region fill in the blank 180be6f36076016_1 % West Region fill in the blank 180be6f36076016_2 % Central Region fill in the blank 180be6f36076016_3 % 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 regions? A better divisional performance measure would be return on investment, residual income as these methods consider the assets used by the division. The current performance measures are based on the operating income per dollar of earned revenue. This method meets the requirement. A better divisional performance measure would be return on investment, and residual income as these methods consider the dollar revenue earned by the division.

Profit center responsibility reporting for a service company Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using operating income as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31: Revenues—East $1,400,000 Revenues—West 2,000,000 Revenues—Central 3,200,000 Operating Expenses—East 800,000 Operating Expenses—West 1,350,000 Operating Expenses—Central 1,900,000 Corporate Expenses—Shareholder Relations 300,000 Corporate Expenses—Customer Support 320,000 Corporate Expenses—Legal 500,000 General Corporate Officers' Salaries 1,200,000 The company operates three support 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 a cost driver for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is a cost driver for this work. The following additional information has been gathered: East West Central Number of customer contacts 1,500 2,800 5,700 Number of hours billed 750 1,750 1,500 Required: Question Content Area 1. Prepare quarterly income statements showing operating income for the three divisions. Use three column headings: East, West, and Central. Red Line Railroad Inc.Divisional Income StatementsFor the Quarter Ended December 31 East West Central Revenues $fill in the blank b694b4f70fe3fe3_1 $fill in the blank b694b4f70fe3fe3_2 $fill in the blank b694b4f70fe3fe3_3 Operating expenses fill in the blank b694b4f70fe3fe3_4 fill in the blank b694b4f70fe3fe3_5 fill in the blank b694b4f70fe3fe3_6 Operating income before support department allocations $fill in the blank b694b4f70fe3fe3_7 $fill in the blank b694b4f70fe3fe3_8 $fill in the blank b694b4f70fe3fe3_9 Support department allocations: Customer Support $fill in the blank b694b4f70fe3fe3_10 $fill in the blank b694b4f70fe3fe3_11 $fill in the blank b694b4f70fe3fe3_12 Legal fill in the blank b694b4f70fe3fe3_13 fill in the blank b694b4f70fe3fe3_14 fill in the blank b694b4f70fe3fe3_15 Total support department allocations $fill in the blank b694b4f70fe3fe3_16 $fill in the blank b694b4f70fe3fe3_17 $fill in the blank b694b4f70fe3fe3_18 Operating income $fill in the blank b694b4f70fe3fe3_19 $fill in the blank b694b4f70fe3fe3_20 $fill in the blank b694b4f70fe3fe3_21 Question Content Area 2. What is the profit margin of each region? Round percentages to the nearest whole number. Division Profit Margin East Region fill in the blank 180be6f36076016_1 % West Region fill in the blank 180be6f36076016_2 % Central Region fill in the blank 180be6f36076016_3 % 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 regions? A better divisional performance measure would be return on investment, residual income as these methods consider the assets used by the division. The current performance measures are based on the operating income per dollar of earned revenue. This method meets the requirement. A better divisional performance measure would be return on investment, and residual income as these methods consider the dollar revenue earned by the division.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 2PA: Profit center responsibility reporting for a service company Red Line Railroad Inc. has three...

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Question Content Area

1. Prepare quarterly income statements showing operating income for the three divisions. Use three column headings: East, West, and Central.

Red Line Railroad Inc.Divisional Income StatementsFor the Quarter Ended December 31

	East	West	Central
Revenues	$fill in the blank b694b4f70fe3fe3_1	$fill in the blank b694b4f70fe3fe3_2	$fill in the blank b694b4f70fe3fe3_3
Operating expenses	fill in the blank b694b4f70fe3fe3_4	fill in the blank b694b4f70fe3fe3_5	fill in the blank b694b4f70fe3fe3_6
Operating income before support department allocations	$fill in the blank b694b4f70fe3fe3_7	$fill in the blank b694b4f70fe3fe3_8	$fill in the blank b694b4f70fe3fe3_9
Support department allocations:
Customer Support	$fill in the blank b694b4f70fe3fe3_10	$fill in the blank b694b4f70fe3fe3_11	$fill in the blank b694b4f70fe3fe3_12
Legal	fill in the blank b694b4f70fe3fe3_13	fill in the blank b694b4f70fe3fe3_14	fill in the blank b694b4f70fe3fe3_15
Total support department allocations	$fill in the blank b694b4f70fe3fe3_16	$fill in the blank b694b4f70fe3fe3_17	$fill in the blank b694b4f70fe3fe3_18
Operating income	$fill in the blank b694b4f70fe3fe3_19	$fill in the blank b694b4f70fe3fe3_20	$fill in the blank b694b4f70fe3fe3_21

Question Content Area

2. What is the profit margin of each region? Round percentages to the nearest whole number.

Division	Profit Margin
East Region	fill in the blank 180be6f36076016_1 %
West Region	fill in the blank 180be6f36076016_2 %
Central Region	fill in the blank 180be6f36076016_3 %

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 regions?

A better divisional performance measure would be return on investment, residual income as these methods consider the assets used by the division.
The current performance measures are based on the operating income per dollar of earned revenue. This method meets the requirement.
A better divisional performance measure would be return on investment, and residual income as these methods consider the dollar revenue earned by the division.

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Revenues—East	$1,400,000
Revenues—West	2,000,000
Revenues—Central	3,200,000
Operating Expenses—East	800,000
Operating Expenses—West	1,350,000
Operating Expenses—Central	1,900,000
Corporate Expenses—Shareholder Relations	300,000
Corporate Expenses—Customer Support	320,000
Corporate Expenses—Legal	500,000
General Corporate Officers' Salaries	1,200,000

	East	West	Central
Number of customer contacts	1,500	2,800	5,700
Number of hours billed	750	1,750	1,500