27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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 $3,780,000
Revenues—S Region 5,673,000
Revenues—W Region 5,130,000
Operating Expenses—N Region 2.678,S00
Operating Expenses—S Region 4,494,890
Operating Expenses—W Region 3,770,050
Corporate Expenses—Dispatching 182,000
Corporate Expenses—Equipment Management 1,200,000
Corporate Expenses—Treasurer’s 734,000
General Corporate Officers’ Salaries 1,380,000

 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 650 1,105 845
Number of railroad cars in inventory 6,000 8,400 9,600


  1. 1. Prepare quarterly income statements showing income from operations for the three regions. Use three column heading: North, South, and West.
  2. 2. Identify the most, successful region according to the profit margin.
  3. 3. Provide a recommendation to the CEO for a better method for evaluating the performance of the regions. In your recommendation, identify the major weakness of the present method.


To determine

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Service department charges: These are the indirect expenses incurred by profit center. These are charged for the services received by the department or division, based on the activity base of the service department.

Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.

Formula of profit margin:

Profit margin=Income from operationsSales

To prepare: The income statements for N, S, and W Divisions of Incorporation TR for the quarter ended December 31


Prepare divisional income statements for N, S, and W Divisions of Incorporation TR for the quarter ended December 31.

Incorporation TR
Divisional Income Statements
For the Quarter Ended December 31
  N Division S Division W Division
Sales $3,780,000 $5,673,000 $5,130,000
Operating expenses 2,678,500 4,494,890 3,770,050
Income from operations before service department charges 1,101,500 1,178,110 1,359,950
Less: Service department charges:
         Dispatching 45,500 77,350 59,150
         Equipment management 300,000 420,000 480,000
Income from operations $756,000 $680,760 $820,800

Table (1)

Working Notes:

Determine the service charges to be charged for dispatching department of N Division.

Dispatching department}{Number of scheduled trains for N Division× Rate per scheduled trains}={Number of scheduled trains for N Division× Dispatching department expensesTotal number of scheduled trains}= 650 scheduled trains × $182,000{(650+1,105+845) scheduled trains}= $45,500

Determine the service charges to be charged for dispatching department of S Division.

Dispatching department}{Number of scheduled trains for S Division× Rate per scheduled trains}={Number of scheduled trains for S Division× Dispatching department expensesTotal number of scheduled trains}= 1,105 scheduled trains × $182,000{(650+1,105+845) scheduled trains}= $77,350

Determine the service charges to be charged for dispatching department of W Division.

Dispatching department}{Number of scheduled trains for W Division× Rate per scheduled trains}={Number of scheduled trains for W Division× Dispatching department expensesTotal number of scheduled trains}= 845 scheduled trains × $182,000{(650+1,105+845) scheduled trains}= $59,150

Determine the service charges to be charged for equipment management department of N Division


To determine
Profit margin and indicate the most profitable division


To determine

To recommend: The chief executive officer to use better measure to evaluate the performance or profitability of the division

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