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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 operating income as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December $31$:

Line Item Description Amount

Revenues$$N Region $$897,600$

Revenues$$S Region $1,095,400$

Revenues$$W Region $1,840,300$

Operating Expenses$$N Region $568,800$

Operating Expenses$$S Region $651,900$

Operating Expenses$$W Region $1,112,900$

Corporate Expenses$$Dispatching $390,000$

Corporate Expenses$$Equipment Management $270,300$

Corporate Expenses$$Treasurer$$s $136,500$

General Corporate Officers$$ Salaries $301,500$

The company operates three support departments: the Dispatching Department, the Equipment Management Department, and the Treasurer$$s Department. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the railroad cars inventories. It makes sure the right freight cars are at the right place at the right time. The Treasurer$$s Department conducts a variety of services for the company as a whole. The following additional information has been gathered:

Line Item Description North South West

Number of scheduled trains $4,9005,9008,700$

Number of railroad cars in inventory $1,3002,0001,800$

Required:

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$1.$ Prepare quarterly income statements showing operating income for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.

Thomas Railroad Company

Divisional Income Statements

For the Quarter Ended December $31$

Line Item Description North South West

Revenues $Revenues

$Revenues

$Revenues

Operating expenses Operating expenses

Operating expenses

Operating expenses

Operating income before support department allocations $Operating income before support department allocations

$Operating income before support department allocations

$Operating income before support department allocations

Support department allocations:

Dispatching $Dispatching

$Dispatching

$Dispatching

Equipment Management Equipment Management

Equipment Management

Equipment Management

Total support department allocations $Total support department allocations

$Total support department allocations

$Total support department allocations

Operating income $Operating income

$Operating income

$Operating income

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

Division Profit Margin

North Region fill in the blank $1$ of $3$

$\%$

South Region fill in the blank $2$ of $3$

$\%$

West Region fill in the blank $3$ of $3$

$\%$

Identify the most successful region 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 regions?

a$.$ The method used to evaluate the performance of the regions should be reevaluated.

b$.$ A better regional performance measure would be the return on investment $($operating income divided by regional assets$).$

c$.$ A better regional performance measure would be the residual income $($operating income less a minimal return on regional assets$).$

d$.$ None of these choices would be included.

e$.$ All of these choices $($a$,$ b & c$)$ would be included.

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