Worldwide Air, Inc., has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared:
|
|
Passenger Division |
Cargo Division |
||
|
Revenues |
|
$600,000 |
|
$600,000 |
|
Operating expenses |
|
300,000 |
|
250,000 |
|
Income from operations before |
|
|
|
|
|
service department charges |
|
$300,000 |
|
$350,000 |
|
Less service department charges: |
|
|
|
|
|
Training |
$50,000 |
|
$50,000 |
|
|
Trip scheduling |
60,000 |
|
60,000 |
|
|
Reservations |
80,000 |
190,000 |
80,000 |
190,000 |
|
Income from operations |
|
$110,000 |
|
$160,000 |
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 |
40 |
10 |
50 |
|
Number of trips |
30 |
50 |
80 |
|
Number of reservations requested |
4,000 |
— |
4,000 |
a. Does the income from operations for the two divisions accurately measure performance?
b. Correct the divisional income statements, using the activity bases provided above in revising the service department charges.