Wild Sun Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared: WILD SUN AIRLINES INC.Divisional Income StatementsFor the Year Ended December 31, 20Y91 Passenger DivisionCargo Division2Revenues$3,025,000.00$3,025,000.003Operating expenses2,450,000.002,736,000.004Income from operations before service department charges$575,000.00$289,000.005Less service department charges:  6Training$125,000.00$125,000.007Flight scheduling108,000.00108,000.008Reservations151,200.00151,200.009Total service department charges$384,200.00$384,200.0010Income from operations$190,800.00$(95,200.00)   The service department charge rate for the service department costs was based on revenues. Because the revenues of the two divisions were the same, the service department charges to each division were also the same.The following additional information is available: Passenger DivisionCargo DivisionTotalNumber of personnel trained350150500Number of flights8001,2002,000Number of reservations requested20,000020,000  Required:A.Does the income from operations for the two divisions accurately measure performance? Explain.B.Correct the divisional income statements, using the activity bases provided in revising the service department charges. If there is no amount or an amount is zero, enter "0". Round your interim calculations to two decimal places, if required.

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Asked Sep 2, 2019
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Wild Sun Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared:
 
WILD SUN AIRLINES INC.
Divisional Income Statements
For the Year Ended December 31, 20Y9
1
 
Passenger Division
Cargo Division
2
Revenues
$3,025,000.00
$3,025,000.00
3
Operating expenses
2,450,000.00
2,736,000.00
4
Income from operations before service department charges
$575,000.00
$289,000.00
5
Less service department charges:
 
 
6
Training
$125,000.00
$125,000.00
7
Flight scheduling
108,000.00
108,000.00
8
Reservations
151,200.00
151,200.00
9
Total service department charges
$384,200.00
$384,200.00
10
Income from operations
$190,800.00
$(95,200.00)
 
 
 
The service department charge rate for the service department costs was based on revenues. Because the revenues of the two divisions were the same, the service department charges to each division were also the same.
The following additional information is available:
 
Passenger Division
Cargo Division
Total
Number of personnel trained 350 150 500
Number of flights 800 1,200 2,000
Number of reservations requested 20,000 0 20,000
 
  Required:
A. Does the income from operations for the two divisions accurately measure performance? Explain.
B. Correct the divisional income statements, using the activity bases provided in revising the service department charges. If there is no amount or an amount is zero, enter "0". Round your interim calculations to two decimal places, if required.
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Expert Answer

Step 1

a.

Describe whether the incomes from operations for the two divisions accurately measure performance, if so explain the reason behind it:

The income from operations as provided by the divisional income statements is not correct because the number of reservations requested by cargo Division is zero, but yet the service department charges are charged to Cargo Division. This brings down the income from operations of Cargo Division.

Step 2

b.  Prepare a correct divisional income statement, using the activity bases provided in revising the service department charges:

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Wild sun airlines incorporation Divisional income statements For the year ended December 31, 2Y9 Passenger Division Amounts in (S) $3,025,000 Cargo Division Amounts in ($) Particulars Sales $3.025,000 Operating expenses Income from operations before service department charges Service department charges: Training (1) Flight scheduling (2) Reservations (3) Income from operations 2,450,000 575,000 2,736,000 289,000 175,000 86,400 302.400 75,000 129,600 563.800 11,200 0 204.600 84,400

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Step 3

Working note (1):

Compute the service charges for training departm...

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'Number of personnel Training department = | trained for passenger Rate per trainning personnel divi sion $125,000 $125,000 = 350personnel trainedx 500 personnel trained - $175,000

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