Question

1. Profit Center Responsibility Reporting

   A-One Freight Inc. has three regional divisions organized 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, 20Y3.

   Revenues—Air Division	$ 919,700
   Revenues—Rail Division	1,078,900
   Revenues—Truck Division	1,935,200
   Operating Expenses—Air Division	582,800
   Operating Expenses—Rail Division	642,100
   Operating Expenses—Truck Division	1,170,300
   Corporate Expenses—Shareholder Relations	139,900
   Corporate Expenses—Customer Support	515,000
   Corporate Expenses—Legal	159,900
   General Corporate Officers’ Salaries	308,900

   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:

   	Air		Rail		Truck
   Number of customer contacts	5,200		6,200		9,200
   Number of hours billed	1,000		1,600		1,300

   Division management does not control activities related to the shareholder relations department and general corporate officers’ salaries.

   Required:

   a. Prepare quarterly income statements showing operating income for the three divisions. Use three column headings: Air, Rail, and Truck.

   A-One Freight Inc.
   Divisional Income Statements
   For the Quarter Ended December 31, 20Y3
   	Air	Rail	Truck
   Revenues Accounts receivable Cash Net income Revenues	$	$	$
   Operating expenses Accounts receivable Cash Net income Operating expenses
   Operating income before service department charges Cash Customer support Operating income before service department charges Net income	$	$	$
   Less service department charges:
   Customer support Accounts payable Cash Customer support Revenues	$	$	$
   Legal Cash Legal Manufacturing department charges Revenues
   Total service department charges	$	$	$
   Operating income	$	$	$

   Feedback

   1. Determine the customer contact rate by dividing service cost by output. For each division's customer support, multiply the customer contact rate by the number of customer contacts. Repeat this process for the other service department charges. Subtract the service department charges for a division from that division's operating income before such charges.

   b. What is the A component of the rate of return on investment, computed as the ratio of operating income to sales.profit margin percentage of each division? Round to one decimal place.

   Division	Profit Margin
   Air Division	%
   Rail Division	%
   Truck Division	%

   Identify the most successful division according to the profit margin percentage.
   Truck

   • Air
   • Rail
   • Truck

   3. All of the following statements are true regarding the evaluation of divisional performance for A-1 except:

   1. A better measure for A-1 Freight than the amount of operating income per dollar of earned revenue would be either rate of return on investment or residual income, because both measures incorporate asset utilization into the measures.
   2. A better measure for A-1 Freight than the amount of operating income per dollar of earned revenue would be either rate of return on investment or residual income, because the amount of assets used by a division in earning a return is a very important consideration in evaluating divisional performance.
   3. A better measure for A-1 Freight than the amount of operating income per dollar of earned revenue would be either rate of return on investment or residual income, because this company requires a significant investment in fixed assets and distribution facilities.
   4. All of these choices are correct.

   Select the correct answer from the choices above.:
   d

   • a
   • b
   • c
   • d

Answer 1