90.2K

Verified Solution

Link Copied!

Johnson Products 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, 2016:

Revenues-East	$1,214,900
Revenues-West	1,468,200
Revenues-Central	2,601,300
Operating Expenses-East	769,900
Operating Expenses-West	873,800
Operating Expenses-Central	1,573,100
Corporate Expenses-Shareholder Relations	184,800
Corporate Expenses-Customer Support	623,700
Corporate Expenses-Legal	283,200
General Corporate Officer's Salaries	408,000

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 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	4,700		5,700		8,500
Number of hours billed	1,200		1,900		1,700

Required:

1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central. Do not round your interim calculations.

Johnson Products Inc.
Divisional Income Statements
For the Quarter Ended December 31, 2016
	East	West	Central
Revenues	$	$	$
Operating expenses
Income from operations before service department charges	$	$	$
Less service department charges:
Customer support	$	$	$
Legal
Subtotal	$	$	$
Income from operations	$	$	$

2. What is the profit margin of each division? Round to one decimal place.

Division	Profit Margin
East Division	%
West Division	%
Central Division	%

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?

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.

Answer & Explanation Solved by verified expert

See Answer