Wild Sun Airlines inc.
Divisional income Statements
For the Year ended December 31, 2014
passenger Division Cargo Division
Revenues$3,025,000 $3,025,000
Operating expenses 2,450,000 2,736,000
Income from operations before
service department charges $ 575,000 $ 289,000
Less service department charges:
Training $125,000 $125,000
Flight scheduling 108,000 108,000
Reservations 151,200 384,200 151,200 384,200
Income from operations $ 190,800 $ (95,200)
The service department charge rate for the service department costs was based on
revenues. Since the revenues of the two divisions were the same, the service department charges to each division were also the same.
The following additional information is available:
Passenger | Cargo |
Division | Division | Total
Number of personnel trained 350 | 150 | 500
Number of flights 800 | 1,200 | 2,000
Number of reservations requested 20,000 | 0 | 20,000
a. Does the income from operations for the two divisions accurately measure performance? Explain.
b. Correct the divisional income statements, using the activity bases provided above in revising the service department charges.
Answer:
a. The reported income from operations does not accurately measure performance because
the service department charges are based on revenues. Revenues are not associated
with the profit center manager’s use of the service department services. For example,
the Reservations Department serves only the Passenger Division. Thus, by charging
this cost on the basis of revenues, these costs are incorrectly charged to the Cargo
Division. Additionally, the Passenger Division requires additional personnel. Since
these personnel must be trained, the training costs assigned to the Passenger Division
should be greater than the Cargo Division.
b.
WILD SUN AIRLINES INC.
Divisional Income Statements
For the Year Ended December 31, 2014
Passenger Division Cargo Division
Revenues $3,025,000 $3,025,000
Operating expenses 2,450,000 2,736,000
Income from operations
before service department
charges $ 575,000 $ 289,000
Less service department
charges:
Training (Note 1) $175,000 $ 75,000
Flight Scheduling (Note 2) 86,400 129,600
Reservations (Note 3) 302,400 563,800 0 204,600
Income from operations $ 11,200 $ 84,400
Supporting calculations for controllable service department charges:
Training: Passenger Division, ($250,000 ÷ 500 personnel trained) × 350
personnel trained
Cargo Division, ($250,000 ÷ 500 personnel trained) × 150
personnel trained
Flight Scheduling: Passenger Division, ($216,000 ÷ 2,000 flights) × 800 flights
Cargo Division, ($216,000 ÷ 2,000 flights) × 1,200 flights
Reservations: Passenger Division, ($302,400 ÷ 20,000 reservations) × 20,000
reservations
Cargo Division, ($302,400 ÷ 20,000 reservations) × 0 reservations