(1)
Prepare the income statements for N, S, and W Divisions of Incorporation TR for the quarter ended December 31.
(1)
Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Service department charges: These are the indirect expenses incurred by profit center. These are charged for the services received by the department or division, based on the activity base of the service department.
Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.
Formula of profit margin:
Prepare divisional income statements for N, S, and W Divisions of Incorporation TR for the quarter ended December 31.
Incorporation TR | |||
Divisional Income Statements | |||
For the Quarter Ended December 31 | |||
N Division | S Division | W Division | |
Sales | $3,780,000 | $5,673,000 | $5,130,000 |
Operating expenses | 2,678,500 | 4,494,890 | 3,770,050 |
Income from operations before service department charges | 1,101,500 | 1,178,110 | 1,359,950 |
Less: Service department charges: | |||
Dispatching | (1) 45,500 | (2) 77,350 | (3) 59,150 |
Equipment management | (4)300,000 | (5) 420,000 | (6) 480,000 |
Income from operations | $756,000 | $680,760 | $820,800 |
Table (1)
Working Notes:
(1) Determine the service charges to be charged for dispatching department of N Division.
(2) Determine the service charges to be charged for dispatching department of S Division.
(3) Determine the service charges to be charged for dispatching department of W Division.
(4) Determine the service charges to be charged for equipment management department of N Division.
(5) Determine the service charges to be charged for equipment management department of S Division.
(6) Determine the service charges to be charged for equipment management department of W Division.
(2)
Ascertain the Profit margin and indicate the most profitable division.
(2)
Explanation of Solution
Compute profit margin for N Division.
Note: Refer to part (a) for value and computation of income from operations of N Division.
Compute profit margin for S Division.
Note: Refer to part (a) for value and computation of income from operations of S Division.
Compute profit margin for W Division.
Note: Refer to part (a) for value and computation of income from operations of W Division.
The division with highest profit margin is considered as the most profitable division. Hence, N Division is the most profitable division with highest profit margin of 20%.
(3)
Recommend the chief executive officer to use better measure to evaluate the performance or profitability of the division
(3)
Explanation of Solution
The following are the recommendations:
- ■ Profit margin is used as the performance measure to evaluate the profitability of the divisions. But profit margin measures the operating profitability only.
- ■
ROI is used to evaluate the operating income earned from the resources invested. So, the profitability of all the divisions of a decentralized company could be compared on the basis of operating income earned from the assets invested by the division. - ■ Residual income from operations after deducting the desired acceptable income.
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Chapter 10 Solutions
Managerial Accounting
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