Profit Center Responsibility Reporting for a Service Company Thomas Railroad Com

Question

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 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: Revenues-N Region Revenues-S Region Revenues-W Region Operating Expenses-N Region Operating Expenses-S Region Operating Expenses-W Region Corporate Expenses-Dispatching Corporate Expenses-Equipment Management Corporate Expenses-Treasurer's General Corporate Officers Salaries The company operates three service 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 $1,263,400 1,531,600 2,674,500 800,600 911,500 1,617,400 655,400 284,200 192,100 424,300 North 5,700 1,200 South 6,800 2,000 West 10,100 1,700 Number of scheduled trains Number of railroad cars in inventory

Explanation / Answer

1) Corporate expenses- Dispatching department will be allocated to each region on the basis of number of scheduled trains and corporate expenses- Equipment management will be allocated on the basis of number of railroad cars in inventory.

Total no. of scheduled trains = 5,700+6,800+10,100 = 22,600

Corporate expenses-Dispatching dept per scheduled train = $655,400/22,600 = $29 per train

Total no. of railroad cars in inventory = 1,200+2,000+1,700 = 4,900

Corporate expenses- Equipment management per car = $284,200/4,900 = $58 per car

Thomas Railroad Company

Divisional Income Statements

For the Quarter Ended December 31 (Amounts in $)

2) Profit margin = Income from operations/Revenues   

Calculation of profit margin of each division (Amounts in $)  

The most successful region is west region because its profit margin (i.e. 24.9%) is more than profit margin of other two regions.

3) The correct option is e) All of these choices (a, b & c) would be included.

North South West Revenues 1,263,400 1,531,600 2,674,500 Operating expenses (800,600) (911,500) (1,617,400) Income from operations before service department charges (A) 462,800 620,100 1,057,100 Service department charges: Dispatching ($29 per train*trains) (5,700:6,800:10,100) trains 165,300 197,200 292,900 Equipment Management ($58 per car*railroad car) (1,200:2,000:1,700) cars in inventory 69,600 116,000 98,600 Total service department charges (B) 234,900 313,200 391,500 Income from operations (A-B) 227,900 306,900 665,600

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