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 $1,057,300 Revenues—S Region
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
| Revenues—N Region | $1,057,300 |
| Revenues—S Region | 1,215,200 |
| Revenues—W Region | 2,257,000 |
| Operating Expenses—N Region | 670,000 |
| Operating Expenses—S Region | 723,200 |
| Operating Expenses—W Region | 1,364,900 |
| Corporate Expenses—Dispatching | 623,500 |
| Corporate Expenses—Equipment Management | 152,000 |
| Corporate Expenses—Treasurer’s | 160,800 |
| General Corporate Officers’ Salaries | 355,100 |
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 | 5,400 | 6,500 | 9,600 | |||
| Number of railroad cars in inventory | 1,000 | 1,500 | 1,300 |
Required:
Question Content Area
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.
| North | South | West | |
| Revenues | $fill in the blank 1b6b6d029078060_1 | $fill in the blank 1b6b6d029078060_2 | $fill in the blank 1b6b6d029078060_3 |
| Operating expenses | fill in the blank 1b6b6d029078060_4 | fill in the blank 1b6b6d029078060_5 | fill in the blank 1b6b6d029078060_6 |
| Income from operations before service department charges | $fill in the blank 1b6b6d029078060_7 | $fill in the blank 1b6b6d029078060_8 | $fill in the blank 1b6b6d029078060_9 |
| Less service department charges: | |||
| Dispatching | $fill in the blank 1b6b6d029078060_10 | $fill in the blank 1b6b6d029078060_11 | $fill in the blank 1b6b6d029078060_12 |
| Equipment Management | fill in the blank 1b6b6d029078060_13 | fill in the blank 1b6b6d029078060_14 | fill in the blank 1b6b6d029078060_15 |
| Total service department charges | $fill in the blank 1b6b6d029078060_16 | $fill in the blank 1b6b6d029078060_17 | $fill in the blank 1b6b6d029078060_18 |
| Income from operations | $fill in the blank 1b6b6d029078060_19 | $fill in the blank 1b6b6d029078060_20 | $fill in the blank 1b6b6d029078060_21 |
Question Content Area
2. What is the profit margin of each division? Round to one decimal place.
| Region | Profit Margin |
| North Region | fill in the blank f8a59801d02af9e_1% |
| South Region | fill in the blank f8a59801d02af9e_2% |
| West Region | fill in the blank f8a59801d02af9e_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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