23-2A Profit center responsibility reporting for a service company Obj. 3 Red Li

Question

23-2A Profit center responsibility reporting for a service company Obj. 3 Red Line Railroad Inc. has three regional divisions organized as rofit 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 HOW ME HO from the trial balance as of December 31 EXCEL TEMPLATE Revenues-Central Operating Expenses-East Operating Expenses-West Operating Expenses-Central Corporate Expenses-Shareholder Relations Corporate Expenses-Customer Support Corporate Expenses-Legal General Corporate Officers' Salaries $1,400,000 2,000,000 3,200,000 800,000 1,350,000 1,900,000 300,000 320,000 500,000 1,200,000 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 ompany'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 vork. The Legal Department provides legal services for division management. Thoe department believes that the number of hours billed is an activity base for this work. The following additional information has been gathered: Number of customer contacts Number of hours billed East 1,500 750 2,800 1,750 Central 5,700 1,500 Instructions Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central. k Figure: Income from operations, West Division, $341,650 Identify the most successful division according to the profit margin. (Round to the nearest whole percent.) Provide a recommendation to the CEO for a better method for evaluating the performance of the divisions. In your recommendation, identify the major weakness of the present method.

Explanation / Answer

Red Line Railroad Inc. Divisional Income Statements For the Quarter Ended December 31 East West Central Revenues $1,400,000 $2,000,000 $3,200,000 Operating expenses $800,000 $1,350,000 $1,900,000 Income from operations before service department charges $600,000 $650,000 $1,300,000 Less service department charges: Customer support $48,000 $89,600 $182,400 Legal $93,750 $218,750 $187,500 Subtotal $141,750 $308,350 $369,900 Income from operations $458,250 $341,650 $930,100 Supporting Schedule East West Central Total Number of Customer Contact 1500 2800 5700 10000 Number of Hours Billed 750 1750 1500 4000 Service Cost /Output =Rate Customer Contact rate 320000 10000 32 Legal Billing Rate 500000 4000 125 2)Statement Showing Profit Margin Division Income From Operation / Revenue =Profit Margin East $458,250.00 $1,400,000.00 33% West $341,650.00 $2,000,000.00 17% Central $930,100.00 $3,200,000.00 29% Most Succesful Division is East Division beacause Profit margin is very high as compare to other division The better method for evaluating the performance of the division is using Gross profit margin rate. Working Allocation of service department charges : Customer support : East Division =320000/10000*1500=48000 West Division = 320000/10000*2800=89600 Central Division = 320000/100000*5700 =182400 Legal East Division =500000/(750+1750+1500)*750 = 93750 West Division =500000/(750+1750+1500)*1750 = 218750 Central Division =500000/(750+1750+1500)*1500= 187500

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