P $14-2$ Profit center responsibility reporting

Obj. $3$

A$-$One Freight Inc. has three regional divisions organized as profit centers. The chief executive officer $($CEO$)$ evaluates divisional performance using operating income as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December $31,20$Y$3.$

Details

Information given is 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:

Details

Additional information given is Air Number of customer contacts: $1,500$ Number of hours billed: $900$ Rail Number of customer contacts: $4,500$ Number of hours billed: $2,400$ Truck Number of customer contacts: $16,000$ Number of hours billed: $6,700$

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.

ANSWER: Operating income, Air Division, $$753,300$

$2.$ 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.