Assignment
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:
|
Revenues-East
|
$1,214,900
|
|
Revenues-West
|
1,468,200
|
|
Revenues-Central
|
2,601,300
|
|
Operating Expenses-East
|
769,900
|
|
Operating Expenses-West
|
873,800
|
|
Operating Expenses-Central
|
1,573,100
|
|
Corporate Expenses-Shareholder Relations
|
184,800
|
|
Corporate Expenses-Customer Support
|
623,700
|
|
Corporate Expenses-Legal
|
283,200
|
|
General Corporate Officer's Salaries
|
408,000
|
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 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:
| |
East
|
West
|
Central
|
|
Number of customer contacts
|
4,700
|
5,700
|
8,500
|
|
Number of hours billed
|
1,200
|
1,900
|
1,700
|
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.
|
Division
|
Profit Margin
|
|
East Division
|
%
|
|
West Division
|
%
|
|
Central Division
|
%
|
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.