BOR CPAs Inc is a closely held corporation owned by three st

BOR CPAs, Inc. is a closely held corporation owned by three stockholders who used the initials of their last names to form the corporation’s name: Cyrus Bailey, John Ogden, and Samuel Rogers. The firm’s Certified Public Accountants (CPAs) perform audits of both public companies and privately owned companies. BOR’s CPAs also provide tax services to both individuals and businesses.

The corporation is divided into two profit centers: the Audit Division and the Tax Division. Each division is composed of two cost centers. The Audit Division is composed of two cost-center departments: Public Company Audits and Private Company Audits. The Tax Division is composed of two cost-center departments also: Individual Tax and Business Tax.

BOR, a decentralized organization, is interested in evaluating the performance of the two divisions. The stockholders are responsible for deciding on investment in the two divisions. Cyrus Bailey is in charge of the performance evaluation, and turns to you for assistance. Mr. Bailey is only interested in evaluating operations at the profit center (division) level, and not at the cost center (department) level.

Mr. Bailey is considering temporarily using some of the staff from the Tax Division to assist the Audit Division during the upcoming busy audit season, and would like to evaluate the effect of this on net income. The Tax Division is estimated to have 800 hours of excess capacity.

The unit for determining sales revenue in both divisions is the \"engagement\", which means the total agreed-upon work for a given client in either audit or tax for a given year. The company charges on average a fee of $75,000 per audit engagement, and $15,750 per tax engagement.

The company has its own Payroll Office, which provides payroll services to both divisions and will allocate its total expenses to the two divisions as service department charges.

The following chart shows some basic data for the company:

Mr. Bailey asks that you prepare Divisional Income Statements showing what 20Y1 results would have been had the Audit Division purchased all the excess capacity of the Tax Division, using a cost transfer price. The divisional managers tell you that, with the excess capacity of the Tax Division of 800 hours, the Audit Division can perform 4 more audits during the year, and the Audit Division would pay the Tax Division\'s internal hourly rate of $50.00 per hour for the additional hours required, with the Tax Division selling all its excess capacity to the Audit Division. The Tax Division would still be responsible for paying the salaries of their employees.

Complete the following Income Statements. Enter all amounts as positive numbers. If there is no amount or an amount is zero, enter “0”.

BOR CPAs, Inc.

Income Statements

For the Year Ended December 31, 20Y1

1

Audit Division

Tax Division

Total Company

2

Fees earned:

3

Audit fees (16 engagements)

$1,200,000.00

$1,200,000.00

4

Tax fees (45 engagements)

$708,750.00

708,750.00

5

Transfer-pricing fees

6

Expenses:

7

Variable:

8

Audit hours provided by Audit Division

180,000.00

180,000.00

9

Tax hours provided by Tax Division

236,250.00

236,250.00

10

Excess capacity hours paid to salaried staff

11

Audit hours provided by Tax Division

12

Fixed expenses

50,000.00

65,500.00

115,500.00

13

Income from operations before service department charges

14

Service department charges for payroll

15

Income from operations

Hourly market rate for staff (the price the company would have to pay from an outside contractor for staff services)	$110.00
Average hourly cost rate for staff (the average price the company pays to its staff)	$50.00
Number of paychecks issued by Audit Division	110
Number of paychecks issued by Tax Division	340
Total expense for Payroll Office	$29,250
Amount of assets invested in Audit Division by BOR CPAs, Inc.	$10,000,000
Amount of assets invested in Tax Division by BOR CPAs, Inc.	$4,000,000

Solution

Income statement Audit Division Tax Division Total Company Fees earned: Audit fees (16 engagements) 1200000 1200000 Tax fees (45 engagements) 708750 708750 Transfer-pricing fees 40000 40000 (50*800) Total Fees earned (A) 1200000 748750 1948750 Expenses: Variable: Audit hours provided by Audit Division 180000 180000 Tax hours provided by Tax Division 236250 236250 Excess capacity hours paid to salaried staff 40000 40000 (50*800) Audit hours provided by Tax Division 40000 40000 (50*800) Fixed expenses 50000 65500 115500 Total expenses (B) 270000 341750 611750 Income from operations before service department charges ©=(A)-(B) 930000 407000 1337000 Service department charges for payroll 7150 22100 29250 (29250/450)*110 (29250/450)*340 Income from operations 922850 384900 1307750