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Corrections to service department charges for a service company Wild Sun Airliners 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 Passenger Division Cargo Division Revenues $3,025,000 $3,025,000 Operating expenses 2,450,000 2,736,000 Income from operations before service department charges $575,000 $289,000 Less service department charges: Training $125,000 $125,000 Flight scheduling 108,000 108,000 Reservations 151,200 384,200 151,200 384,200 Income from operations $190,800 $(95,200) 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 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.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 24, Problem 24.8EX
Textbook Problem

Corrections to service department charges for a service company

 Wild Sun Airliners 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

  Passenger Division Cargo Division
Revenues   $3,025,000   $3,025,000
Operating expenses   2,450,000   2,736,000
Income from operations before service department charges   $575,000   $289,000
Less service department charges:        
Training $125,000   $125,000  
Flight scheduling 108,000   108,000  
Reservations 151,200 384,200 151,200 384,200
Income from operations   $190,800   $(95,200)

 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

 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.

Expert Solution

(a)

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.

To compare: The performance of P Division and C Division of Incorporation WSA, and explain if the income from operations as performance measure is accurate

Explanation of Solution

The income from operations as provided by the divisional income statements is not correct because the number of reservations r...

Expert Solution

(b)

To determine

To prepare: The income statements for C Division and P Division

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Chapter 24 Solutions

Accounting
Show all chapter solutions
Ch. 24 - Budgetary performance for cost center Caroline...Ch. 24 - Budgetary performance for cost center Conley...Ch. 24 - Service department charges The centralized...Ch. 24 - Service department charges The centralized...Ch. 24 - Income from operations for profit center Using the...Ch. 24 - Income from operations for profit center Using the...Ch. 24 - Profit margin, investment turnover, and ROI Cash...Ch. 24 - Profit margin, investment turnover and ROI Briggs...Ch. 24 - Residual income The Consumer Division of Galena...Ch. 24 - Residual income The Commercial Division of Herring...Ch. 24 - Transfer pricing The materials used by the North...Ch. 24 - Transfer pricing The materials used by the...Ch. 24 - Budget performance reports for cost centers...Ch. 24 - Divisional income statements The following data...Ch. 24 - Service department charges and activity bases For...Ch. 24 - Activity bases for service department charges For...Ch. 24 - Service department charges In divisional income...Ch. 24 - Service department charges and activity bases...Ch. 24 - Divisional income statements with service...Ch. 24 - Corrections to service department charges for a...Ch. 24 - Profit center responsibility reporting Glades...Ch. 24 - Return on investment The income from operations...Ch. 24 - Residual income Based on the data in Exercise...Ch. 24 - Determining missing items in return computation...Ch. 24 - Profit margin, investment turnover, and return on...Ch. 24 - Return on investment The Walt Disney Company has...Ch. 24 - Determining missing items in return and residual...Ch. 24 - Determining missing items from computations Data...Ch. 24 - Return on investment, residual income for a...Ch. 24 - Balanced scorecard for a service company American...Ch. 24 - Building a balanced scorecard Hit-n-Kun Inc. owns...Ch. 24 - Decision on transfer pricing Materials used by the...Ch. 24 - Decision on transfer pricing Based on T_Kong...Ch. 24 - Budget performance report for a cost center...Ch. 24 - Profit center responsibility reporting for a...Ch. 24 - Divisional income statements and return on...Ch. 24 - Effect of proposals on divisional performance A...Ch. 24 - Divisional performance analysis and evaluation The...Ch. 24 - Transfer pricing Garcon Inc. manufactures...Ch. 24 - Budget performance report for a cost center The...Ch. 24 - Profit center responsibility reporting for a...Ch. 24 - Divisional income statements and return on...Ch. 24 - Effect of proposals on divisional performance A...Ch. 24 - Divisional performance analysis and evaluation The...Ch. 24 - Transfer pricing Exoplex Industries Inc. is a...Ch. 24 - Ethics in Action Sembotix Company has several...Ch. 24 - Communication The Norsk Division of Gridiron...Ch. 24 - Service department charges The Customer Service...Ch. 24 - Evaluating divisional performance The three...Ch. 24 - Evaluating division performance Last Resort...

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