Profit Center Responsibility Reporting Johnson Products Inc. has three regional
ID: 2572150 • Letter: P
Question
Profit Center Responsibility Reporting
Johnson Products Inc. has three regional divisions organized 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, 2016:
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 company'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 work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is an activity base for this work. The following additional information has been gathered:
Required:
1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central. Do not round your interim calculations.
2. What is the profit margin of each division? Round to one decimal place.
Identify the most successful division 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 divisions?
The method used to evaluate the performance of the divisions should be reevaluated.
A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).
A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).
None of these choices would be included.
All of these choices (a, b & c) would be included.
Revenues-East $1,040,700 Revenues-West 1,215,200 Revenues-Central 2,173,000 Operating Expenses-East 659,500 Operating Expenses-West 723,200 Operating Expenses-Central 1,314,100 Corporate Expenses-Shareholder Relations 158,300 Corporate Expenses-Customer Support 569,700 Corporate Expenses-Legal 190,400 General Corporate Officer's Salaries 349,500Explanation / Answer
1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central. Do not round your interim calculations. Johnson Products Inc. Divisional Income Statements For the Quarter Ended December 31, 2016 East West Central Revenues $1,040,700 $1,215,200 $2,173,000 Operating expenses $659,500 $723,200 $1,314,100 Income from operations before service department charges $381,200 $492,000 $858,900 Less service department charges: Customer support (569700/21100) x # of customer Contacts $143,100 $170,100 $256,500 Legal (190400/3400)x # of hours Billed $50,400 $78,400 $61,600 Subtotal $286,200 $340,200 $513,000 Income from operations $95,000 $151,800 $345,900 Working of service department charges: East West Central Total Number of customer contacts 5300 6300 9500 21100 Number of hours billed 900 1400 1100 3400 The Shareholder Relations Department and general corporate officers’ salaries are not controllable by division management and thus are not included in determining division income from operations 2. What is the profit margin of each division? Round to one decimal place. Division Profit Margin East Division = 95000/1040700 9.13% West Division = 151800/1215200 12.49% Central Division = 345900/2173000 15.92% Identify the most successful division according to the profit margin. Central Division has the highest profit margin 3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the divisions? The method used to evaluate the performance of the divisions should be reevaluated. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets). A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets). None of these choices would be included. All of these choices (a, b & c) would be included.
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