Profit center responsibility reporting
Johnson Products 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, 2012:
Revenues—East $ 720,000
Revenues—West 860,000
Revenues—Central 1,560,000
Operating Expenses—East 456,150
Operating Expenses—West 511,700
Operating Expenses—Central 943,550
Corporate Expenses—Shareholder Relations 112,000
Corporate Expenses—Customer Support 385,000
Corporate Expenses—Legal 152,000
General Corporate Officers’ Salaries 240,000
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:
East West Central
Number of customer contacts 4,375 5,250 7,875
Number of hours billed 950 1,520 1,330
Instructions
1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central.
2. Identify the most successful division according to the profit margin.
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.