Wild Sun Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division

Wild Sun Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared:


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