Profit center responsibility reporting for a service company

Red Line Railroad Inc. has three regional divisions organized asprofit centers. The chief executive officer (CEO) evaluatesdivisional performance, using operating income as a percent ofrevenues. The following quarterly income and expense accounts wereprovided from the trial balance as of December 31:

Revenues—East	$1,400,000
Revenues—West	2,000,000
Revenues—Central	3,200,000
Operating Expenses—East	800,000
Operating Expenses—West	1,350,000
Operating Expenses—Central	1,900,000
Corporate Expenses—Shareholder Relations	300,000
Corporate Expenses—Customer Support	320,000
Corporate Expenses—Legal	500,000
General Corporate Officers' Salaries	1,200,000

The company operates three support departments: ShareholderRelations, Customer Support, and Legal. The Shareholder RelationsDepartment conducts a variety of services for shareholders of thecompany. The Customer Support Department is the company’s point ofcontact for new service, complaints, and requests for repair. Thedepartment believes that the number of customer contacts is a costdriver for this work. The Legal Department provides legal servicesfor division management. The department believes that the number ofhours billed is a cost driver for this work. The followingadditional information has been gathered:

	East		West		Central
Number of customer contacts	1,500		2,800		5,700
Number of hours billed	750		1,750		1,500

Required:

1. Prepare quarterly income statements showingoperating income for the three divisions. Use three columnheadings: East, West, and Central.

Red Line Railroad Inc.
Divisional Income Statements
For the Quarter Ended December 31
	East	West	Central
Revenues	$	$	$
Operating expenses
Operating income before support department allocations	$	$	$
Support department allocations:
Customer Support	$	$	$
Legal
Total support department allocations	$	$	$
Operating income	$	$	$

2. What is the profit margin of each region?Round percentages to the nearest whole number.

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

Identify the most successful region according to the profitmargin.

3. What would you include in a recommendationto the CEO for a better method for evaluating the performance ofthe regions?

1. A better divisional performance measure would be return oninvestment, residual income as these methods consider the assetsused by the division.
2. The current performance measures are based on the operatingincome per dollar of earned revenue. This method meets therequirement.
3. A better divisional performance measure would be return oninvestment, and residual income as these methods consider thedollar revenue earned by the division.