Problem:
A.G. Bell Communications Company 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, 2006.
| Revenues-Central Division |
$620,000 |
| Revenues-Coastal Division |
$856,000 |
| Revenues-Metro Division |
$1,180,000 |
| Operating Expenses-Central Division |
$370,000 |
| Operating Expenses-Coastal Division |
$495,700 |
| Operating Expenses-Metro Division |
$675,200 |
| Corporate Expenses-Shareholder Relations |
$65,000 |
| Corporate Expenses-Customer Support |
$192,000 |
| Corporate Expenses-Central Accounting |
$102,000 |
| General Corporate Officers' Salaries |
$190,000 |
The company operates three service departments: Shareholder Relations, Customer Support, and Central Accounting.
The Shareholder Relations Department conducts a variety of services for shareholders of the company.
The Customer Support Depart-ment is the company’s telephone point of contact for new service, complaints and requests for repair.
The department believes that the number of customer calls is an active base for this work. The Central Accounting Department provides reports for division management. The department believes that the number of reports is an active base for this work. The following additional information has been gathered:
| |
Central |
Coastal |
Metro |
| Number of customer calls |
4,000 |
4,600 |
7,400 |
| Number of accounting reports |
800 |
1,400 |
1,200 |
Instructions
1. Prepare quarterly income statements showing income from operations for the three divisions.
Use three column headings: Central, Coastal, and Metro.
2. Identify the most successful division according to the profit margin. Round whole percentages to two decimal places.
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.