Question

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	$938,000
Revenues—S Region	1,117,900
Revenues—W Region	1,945,600
Operating Expenses—N Region	594,400
Operating Expenses—S Region	665,300
Operating Expenses—W Region	1,176,600
Corporate Expenses—Dispatching	459,800
Corporate Expenses—Equipment Management	228,000
Corporate Expenses—Treasurer’s	142,700
General Corporate Officers’ Salaries	315,000

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:

	North		South		West
Number of scheduled trains	5,200		6,300		9,400
Number of railroad cars in inventory	1,000		1,500		1,300

Required:

1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.

Thomas Railroad Company
Divisional Income Statements
For the Quarter Ended December 31
	North	South	West
Revenues	$	$	$
Operating expenses
Income from operations before service department charges	$	$	$
Service department charges:
Dispatching	$	$	$
Equipment Management
Total service department charges	$	$	$
Income from operations	$	$	$

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2. What is the profit margin of each division? Round to one decimal place.

Region	Profit Margin
North Region	%
South Region	%
West Region	%

Answer 1

Solution 1:

Thomas Railroad Company
Divisional Income Statements
For the Quarter Ended December 31
Particulars	North	South	West
Revenues	$938,000.00	$1,117,900.00	$1,945,600.00
Operating expenses	$594,400.00	$665,300.00	$1,176,600.00
Income from operations before service department charges	$343,600.00	$452,600.00	$769,000.00
Service department charges:
Dispatching (52:63:94)	$114,400.00	$138,600.00	$206,800.00
Equipment Management (10:15:13)	$60,000.00	$90,000.00	$78,000.00
Total service department charges	$174,400.00	$228,600.00	$284,800.00
Income from operations	$169,200.00	$224,000.00	$484,200.00

Solution 2:

Profit margin = Income from operationg / Revenues

North Region = $169,200 / $938,000 = 18.0%

South region = $224,000 / $1,117,900 = 20.0%

West region = $484,200 / $1,945,600 = 24.9%