Problem
A-One Freight 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, 20Y3
Revenues--Air Division $5,000,000
Revenues--Rail Division 6,000,000
Revenues--Truck Division 9,000,000
Operating Expenses--Air Division 4,100,000
Operating Expenses--Rail Division 4,900,000
Operating Expenses--Truck Division 7,555,000
Corporate Expenses--Shareholder Relations 220,000
Corporate Expenses--Customer Support 990,000
Corporate Expenses--Legal 880,000
General Corporate Officers' salaries 500,000
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:
Air Rail Truck
Number of customer contacts 1,500 4,500 16,000
Number of hours billed 900 2,400 6,700
Instructions:
1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: Air, Rail, and Truck.
2. Identify the most successful division according to the profit margin. Round to one decimal place.
3. 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.