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: Revenues—N Region $1,153,200 Revenues—S Region 1,361,500 Revenues—W Region 2,404,500 Operating Expenses—N Region 730,800 Operating Expenses—S Region 810,300 Operating Expenses—W Region 1,454,100 Corporate Expenses—Dispatching 569,600 Corporate Expenses—Equipment Management 275,200 Corporate Expenses—Treasurer’s 175,400 General Corporate Officers’ Salaries 387,300 The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer’s Department. The Treasurer’s Department and general corporate officers’ salaries are not controllable by division management. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the inventories of railroad cars. 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 4,500 5,300 8,000 Number of railroad cars in inventory 1,100 1,700 1,500 Required: 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 31 North South West Revenues $fill in the blank 451d51f9701305e_1 $fill in the blank 451d51f9701305e_2 $fill in the blank 451d51f9701305e_3 Operating expenses fill in the blank 451d51f9701305e_4 fill in the blank 451d51f9701305e_5 fill in the blank 451d51f9701305e_6 Income from operations before service department charges $fill in the blank 451d51f9701305e_7 $fill in the blank 451d51f9701305e_8 $fill in the blank 451d51f9701305e_9 Less service department charges: Dispatching $fill in the blank 451d51f9701305e_10 $fill in the blank 451d51f9701305e_11 $fill in the blank 451d51f9701305e_12 Equipment Management fill in the blank 451d51f9701305e_13 fill in the blank 451d51f9701305e_14 fill in the blank 451d51f9701305e_15 Total service department charges $fill in the blank 451d51f9701305e_16 $fill in the blank 451d51f9701305e_17 $fill in the blank 451d51f9701305e_18 Income from operations $fill in the blank 451d51f9701305e_19 $fill in the blank 451d51f9701305e_20 $fill in the blank 451d51f9701305e_21 2. What is the profit margin of each division? Round to one decimal place. Region Profit Margin North Region fill in the blank 2d4bda01efb5013_1% South Region fill in the blank 2d4bda01efb5013_2% West Region fill in the blank 2d4bda01efb5013_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 divisions? The method used to evaluate the performance of the divisions should be reevaluated. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets). A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets). None of these choices would be included. All of these choices (a, b & c) would be included.

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: Revenues—N Region $1,153,200 Revenues—S Region 1,361,500 Revenues—W Region 2,404,500 Operating Expenses—N Region 730,800 Operating Expenses—S Region 810,300 Operating Expenses—W Region 1,454,100 Corporate Expenses—Dispatching 569,600 Corporate Expenses—Equipment Management 275,200 Corporate Expenses—Treasurer’s 175,400 General Corporate Officers’ Salaries 387,300 The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer’s Department. The Treasurer’s Department and general corporate officers’ salaries are not controllable by division management. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the inventories of railroad cars. 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 4,500 5,300 8,000 Number of railroad cars in inventory 1,100 1,700 1,500 Required: 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 31 North South West Revenues $fill in the blank 451d51f9701305e_1 $fill in the blank 451d51f9701305e_2 $fill in the blank 451d51f9701305e_3 Operating expenses fill in the blank 451d51f9701305e_4 fill in the blank 451d51f9701305e_5 fill in the blank 451d51f9701305e_6 Income from operations before service department charges $fill in the blank 451d51f9701305e_7 $fill in the blank 451d51f9701305e_8 $fill in the blank 451d51f9701305e_9 Less service department charges: Dispatching $fill in the blank 451d51f9701305e_10 $fill in the blank 451d51f9701305e_11 $fill in the blank 451d51f9701305e_12 Equipment Management fill in the blank 451d51f9701305e_13 fill in the blank 451d51f9701305e_14 fill in the blank 451d51f9701305e_15 Total service department charges $fill in the blank 451d51f9701305e_16 $fill in the blank 451d51f9701305e_17 $fill in the blank 451d51f9701305e_18 Income from operations $fill in the blank 451d51f9701305e_19 $fill in the blank 451d51f9701305e_20 $fill in the blank 451d51f9701305e_21 2. What is the profit margin of each division? Round to one decimal place. Region Profit Margin North Region fill in the blank 2d4bda01efb5013_1% South Region fill in the blank 2d4bda01efb5013_2% West Region fill in the blank 2d4bda01efb5013_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 divisions? The method used to evaluate the performance of the divisions should be reevaluated. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets). A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets). None of these choices would be included. All of these choices (a, b & c) would be included.

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 2PB

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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:

Revenues—N Region	$1,153,200
Revenues—S Region	1,361,500
Revenues—W Region	2,404,500
Operating Expenses—N Region	730,800
Operating Expenses—S Region	810,300
Operating Expenses—W Region	1,454,100
Corporate Expenses—Dispatching	569,600
Corporate Expenses—Equipment Management	275,200
Corporate Expenses—Treasurer’s	175,400
General Corporate Officers’ Salaries	387,300

The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer’s Department. The Treasurer’s Department and general corporate officers’ salaries are not controllable by division management. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the inventories of railroad cars. 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	4,500		5,300	8,000
Number of railroad cars in inventory	1,100		1,700	1,500

Required:

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 31
	North	South	West
Revenues	$fill in the blank 451d51f9701305e_1	$fill in the blank 451d51f9701305e_2	$fill in the blank 451d51f9701305e_3
Operating expenses	fill in the blank 451d51f9701305e_4	fill in the blank 451d51f9701305e_5	fill in the blank 451d51f9701305e_6
Income from operations before service department charges	$fill in the blank 451d51f9701305e_7	$fill in the blank 451d51f9701305e_8	$fill in the blank 451d51f9701305e_9
Less service department charges:
Dispatching	$fill in the blank 451d51f9701305e_10	$fill in the blank 451d51f9701305e_11	$fill in the blank 451d51f9701305e_12
Equipment Management	fill in the blank 451d51f9701305e_13	fill in the blank 451d51f9701305e_14	fill in the blank 451d51f9701305e_15
Total service department charges	$fill in the blank 451d51f9701305e_16	$fill in the blank 451d51f9701305e_17	$fill in the blank 451d51f9701305e_18
Income from operations	$fill in the blank 451d51f9701305e_19	$fill in the blank 451d51f9701305e_20	$fill in the blank 451d51f9701305e_21

2. What is the profit margin of each division? Round to one decimal place.

Region	Profit Margin
North Region	fill in the blank 2d4bda01efb5013_1%
South Region	fill in the blank 2d4bda01efb5013_2%
West Region	fill in the blank 2d4bda01efb5013_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 divisions?

The method used to evaluate the performance of the divisions should be reevaluated.
A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).
A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).
None of these choices would be included.
All of these choices (a, b & c) would be included.

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