Question

Obj.3 tive officer o Sorganized as profit centers. The chief execu- operating income as a percent of ise accounts were provided from the 4-2 Profit center responsibility reporting One Freight Inc. has three regional divisions organized as profit centers. The officer (CEO) evaluates divisional performance using operating income wes. The following quarterly income and expense accounts were al balance as of December 31, 20Y3. Revenues-Air Division $5,000,000 Revenues-Rail Division 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 1. Operating income, Air Division, $753,300 6,000,000 The company operates three service departments Shareholder Relations. Customer Sup- port, and Legal. The Shareholde departments: Shareholder Relations, Customer Sup- shareholders of the company. The Customer Support Department is the company's pom s Department conducts a variety of services for 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 Division management does not control activities related to the shareholder relations department and general corporate officers' salaries. Instructions 1. Prepare quarterly income statements showing operating income for the three divisions. Use three column headings: Air, Rail, and Truck. 2. Identify the most successful division according to operating income as a percent of revenues. 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.

Answer 1

Answer to Question 1
Income Statement of A-One Freight Inc
for the Quarter ending on 31.12.2013
Particulars	Air Division	Rail Division	Truck Division	Total
Revenues	$ 5,000,000.00	$ 6,000,000.00	$ 9,000,000.00	$20,000,000.00
Less:- Operating Expenses	$ 4,100,000.00	$ 4,900,000.00	$ 7,555,000.00	$16,555,000.00
Operating Income	$   900,000.00	$ 1,100,000.00	$ 1,445,000.00	$ 3,445,000.00
Attributable Corporate Expenses
Customer Support (WN-1)	$     67,500.00	$   202,500.00	$   720,000.00	$     990,000.00
Legal   (WN-2)	$     79,200.00	$   211,200.00	$   589,600.00	$     880,000.00
Toal Coroprate Expenses	$   146,700.00	$   413,700.00	$ 1,309,600.00	$ 1,870,000.00
Net Non-operating Income	$   753,300.00	$   686,300.00	$   135,400.00	$ 1,575,000.00
Non-attributable Corporate Expenses
Shareholder Relation				$     220,000.00
Officers Salary				$     500,000.00
Total expenses				$     720,000.00
Net Non-operating Corporate Income				$     855,000.00
Working Note - 1
Number of Customer Contacts	1500	4500	16000	22000
Customer Support Expenses	67500	202500	720000	990000
Working Note - 2
Number of Hours Billed	900	2400	6700	10000
Legal Expenses	79200	211200	589600	880000
Answer to Question 2
Particulars	Air Division	Rail Division	Truck Division	Total
Revenues	$ 5,000,000.00	$ 6,000,000.00	$ 9,000,000.00	$20,000,000.00
Operating Income	$   900,000.00	$ 1,100,000.00	$ 1,445,000.00	$ 3,445,000.00
% of Operating Income	18.00%	18.33%	16.06%
Note :-   As the percentage of Operating Income of Rail division is the highest, we can state based on Operating Incomes, that the Rail Division is the most successful division.
Answer to Question 3
Particulars	Air Division	Rail Division	Truck Division	Total
Revenues	$ 5,000,000.00	$ 6,000,000.00	$ 9,000,000.00	$20,000,000.00
Net Non-operating Income	$   753,300.00	$   686,300.00	$   135,400.00	$ 1,575,000.00
% of Operating Income	15.07%	11.44%	1.50%
Note :-   It can be suggested that the CEO should take into consideration the overall profit % generated by all the divisions to ascertain the profitability of the divisions.             We have reasonable basis for the apportionment of some of the corporate expenses to each division. considering those, it can be stated that the Air division is the most profitable division. The major weakness of the current system is that it is not considering all the expense components for the measurement of the profitability of the Divisions.