The president of North Short Railroad wants to obtain an overview of the company's operations, particularly with respect to comparing freight and passenger business. He has heard about contribution approaches to cost allocations that emphasize cost behavior patterns and contribution margins, contributions controllable by segment managers and contributions by segments. The president has hired you as a consultant to help him. He has given you the following information:
Total revenue for 20x3 was $80 mil, of which $72 mil was caused by freight traffic and $8 mil was passenger traffic. 50% of the passenger revenue was generated by division 1, 40% by division 2, and 10% by division 3.
Total variable costs were $40 mil, of which $36 mil was caused by freight traffic. Of the $4 mil allocable to passenger traffic, $2.1 , $1.6, and $0.3 mil could be allocated to divisions 1, 2, and 3, respectively.
Total separable discretionary fixed costs were $8 mil, of which $7.6 mil applied to fright traffic. For the remaining $400,000 applicable to passenger traffic, $80,000 could not be allocated to specific divisions, while $200,000, $100,000 and $20,000 were allocable to divisions 1, 2, and 3 respectively.
Total separable committed costs, which were not regarded as being controllable by segment managers, were $25 mil of which 80% was allocable to freight traffic. Of the 20% traceable to passenger traffic, divisions 1, 2, and 3 should be allocated $3 mil, $700,000, and $300,000 respectively; the balance was unallocable to specific divisions.
The common fixed costs not clearly allocable to any part of the company amounted to $800,000
1) The president asks you to prepare statements, dividing the data for the company as a whole between freight and passenger traffic and then subdividing the passenger traffic into three divisions.
2) Some competing railroads actively promote a series of one-day sightseeing tours on summer weekends. Most often, these tours are times so that the cars with tourists are hitched on with regularly scheduled passenger trains. What costs are relevant for making decisions to run such tours? Other railroads, facing the same general cost structure, refuse to conduct such sightseeing tours. Why?
3) Suppose that the railroad has petitioned government authorities for permission to drop division 1. What would be the effect on overall company net income for 20x4 assuming that the figures are accurate and that 20x4 operations are expected to be in all respects a duplication of 20x3 operations.