ructions Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer...

Revenues—East	$878,000
Revenues—West	1,042,000
Revenues—Central	1,880,000
OperatingExpenses—East	563,600
OperatingExpenses—West	619,680
OperatingExpenses—Central	1,172,940
CorporateExpenses—Shareholder Relations	155,000
CorporateExpenses—Customer Support	333,000
CorporateExpenses—Legal	233,100
General CorporateOfficers’ Salaries	278,500

	East	West	Central
Number of customercontacts	4,500	5,500	8,500
Number of hoursbilled	1,350	2,100	2,100

	Required:
1.	Prepare quarterly incomestatements showing income from operations for the three divisions.Use three column headings: East, West, and Central.
2.	Identify the most successfuldivision according to the profit margin. Enter percentage roundedtwo decimal places (e.g. 0.22547 is 22.55%).
3.	What would you include in arecommendation to the CEO for a better method for evaluating theperformance of the divisions? What is a major weakness of thepresent method?

3.8 Ratings (334 Votes)



	Computation of ABC rate
	Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
	Customer Support	$ 3,33,000	18,500	$ 18.00	per customer contact
	Legal	$ 2,33,100	5,550	$ 42.00	per hour billed
	Total Cost	$ 5,66,100

Part 1
	Income Statement
		East	West	Central	Total
	Revenues	$ 8,78,000	$ 10,42,000	$ 18,80,000	$ 38,00,000
	Opearting expenses	$ 5,63,600	$ 6,19,680	$ 11,72,940	$ 23,56,220
	Income from operations before allocating service department costs	$ 3,14,400	$ 4,22,320	$ 7,07,060	$ 14,43,780
	Service department costs:
	Customer Support(Activity base units*$18.00)	$ 81,000	$ 99,000	$ 1,53,000	$ 3,33,000
	Legal(Activity base units*$42.00)	$ 56,700	$ 88,200	$ 88,200	$ 2,33,100
	Income from Operations	$ 24,300	$ 10,800	$ 64,800	$ 99,900
Part 2	Profit Margin(Income from Operations/Revenues)	2.77%	1.04%	3.45%
	Central Division is the most successful division


Part 3	In the present method the company is ignoring Corporate expenses-Shareholders Returns and General Corp. officer's salaries. Both these conditions should be considered foor decision making
	Both the cost should be allocated on the basis of a particular activiy base or Revenue.

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