Red Line 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: Revenues—East $866,000 Revenues—West 1,030,000 Revenues—Central 1,890,000 Operating Expenses—East 565,700 Operating Expenses—West 627,360 Operating Expenses—Central 1,170,060 Corporate Expenses—Shareholder Relations 156,000 Corporate Expenses—Customer Support 320,000 Corporate Expenses—Legal 255,200 General Corporate Officers’ Salaries 273,500   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 Shareholder Relations Department and general corporate officers’ salaries are not controllable by division management. 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:   East West Central Number of customer contacts 5,000 6,000 9,000 Number of hours billed 1,100 2,060 2,640     Required: 1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central. 2. Identify the most successful division 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? What is a major weakness of the present method? 1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central.   Red Line Railroad Inc. Divisional Income Statements For the Quarter Ended December 31 1   East West Central 2 Revenues       3 Operating expenses       4 Income from operations before service department charges       5 Less service department charges:       6 Customer Support       7 Legal       8 Total service department charges       9 Income from operations       2. Compute the profit margin for each division. Note: Enter percentage rounded to two decimal places (e.g. .22547 is 22.56%). Division Profit Margin East Division   % West Division   % Central Division   %

Question
Red Line 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:
Revenues—East $866,000
Revenues—West 1,030,000
Revenues—Central 1,890,000
Operating Expenses—East 565,700
Operating Expenses—West 627,360
Operating Expenses—Central 1,170,060
Corporate Expenses—Shareholder Relations 156,000
Corporate Expenses—Customer Support 320,000
Corporate Expenses—Legal 255,200
General Corporate Officers’ Salaries 273,500
 
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 Shareholder Relations Department and general corporate officers’ salaries are not controllable by division management. 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:
 
East
West
Central
Number of customer contacts 5,000 6,000 9,000
Number of hours billed 1,100 2,060 2,640
 
  Required:
1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central.
2. Identify the most successful division 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? What is a major weakness of the present method?
1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central.
 
Red Line Railroad Inc.
Divisional Income Statements
For the Quarter Ended December 31
1
 
East
West
Central
2
Revenues
 
 
 
3
Operating expenses
 
 
 
4
Income from operations before service department charges
 
 
 
5
Less service department charges:
 
 
 
6
Customer Support
 
 
 
7
Legal
 
 
 
8
Total service department charges
 
 
 
9
Income from operations
 
 
 
2. Compute the profit margin for each division.
Note: Enter percentage rounded to two decimal places (e.g. .22547 is 22.56%).
Division
Profit Margin
East Division
 
%
West Division
 
%
Central Division
 
%
 

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