BOR CPAs, Inc BOR CPAs, Inc is a closely held corporation owned by three stockholders who used the initials of their last names to form the corporations name Cyrus Bailey, John Ogden, and Samuel Rogers The firms Certified Public Accountants (CPAs) perform audits of both public companies and privately owned companies BORs 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 support department allocations The following chart shows some basic data for the company Hourly market rate for staff (the price the company would have to pay from an outside contractor for staff services) $110 Average hourly cost rate for staff (the average price the company pays to its staff) $60 Number of paychecks issued by Audit Division 110 Number of paychecks issued by Tax Division 340 Total expense for Payroll Office $31,500 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 Analysis You are now able to put together all the information youve collected and analyze the data In the following table, ROI stands for Return on Investment Complete the following tables using the information from the other requirements and selection lists provided Audit Division Profit Margin x Investment Turnover ROI No Transfer x Market Price x Negotiated Price x Cost Price x Tax Division Profit Margin x Investment Turnover ROI No Transfer x Market Price x Negotiated Price x Cost Price x BOR CPAs, Inc Profit Margin x Investment Turnover ROI No Transfer x Market Price x Negotiated Price x Cost Price x Final Questions After analyzing the data, you are able to answer Mr Baileys questions (1) (4) that follow 1 Given that Mr Bailey is evaluating BOR CPAs, Inc , which is an investment center, what transfer pricing option(s) would he most prefer that the divisions use a No transfer between divisions b Market transfer price of $110 per hour c Negotiated transfer price of $90 per hour d Variable standard cost transfer price of $60 per hour 2 Which transfer pricing option would the manager of the Audit Division prefer a No transfer between divisions b Market transfer price of $110 per hour c Negotiated transfer price of $90 per hour d Variable standard cost transfer price of $60 per hour 3 Which transfer pricing option would the manager of the Tax Division prefer a No transfer between divisions b Market transfer price of $110 per hour c Negotiated transfer price of $90 per hour d Variable standard cost transfer price of $60 per hour 4 Given the preferences of the managers of the Audit and Tax Divisions, and also considering the preferences of BOR CPAs, Inc , what might be the decision that provides the best outcome for all levels and entities within the company a Use the negotiated transfer price, so that each entity is better off than it would be without any transfers between divisions b If the divisional managers cannot come to an agreement, its best to forgo any transfers between divisions in order to reduce conflict within the company c The company should use the market transfer price, since its important for the divisions to operate under real market conditions d The company should use the variable standard cost transfer price, because it would be unfair for the Tax Division to make a profit in dealing with the Audit Division, since theyre in the same company

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BOR CPAs, Inc. BOR CPAs, Inc. is a closely held corporation owned by three stockholders who used the initials of their last names to form

BOR CPAs, Inc.

BOR CPAs, Inc. is a closely held corporation owned by three stockholders who used the initials of their last names to form the corporations name: Cyrus Bailey, John Ogden, and Samuel Rogers. The firms Certified Public Accountants (CPAs) perform audits of both public companies and privately owned companies. BORs 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 support department allocations.

The following chart shows some basic data for the company:

Hourly market rate for staff (the price the company would have to pay from an outside contractor for staff services)	$110
Average hourly cost rate for staff (the average price the company pays to its staff)	$60
Number of paychecks issued by Audit Division	110
Number of paychecks issued by Tax Division	340
Total expense for Payroll Office	$31,500
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

Analysis

You are now able to put together all the information youve collected and analyze the data. In the following table, ROI stands for Return on Investment.

Complete the following tables using the information from the other requirements and selection lists provided.

Audit Division

Profit Margin x Investment Turnover = ROI

No Transfer x =

Market Price x =

Negotiated Price x =

Cost Price x =

Tax Division

Profit Margin x Investment Turnover = ROI

No Transfer x =

Market Price x =

Negotiated Price x =

Cost Price x =

BOR CPAs, Inc.

Profit Margin x Investment Turnover = ROI

No Transfer x =

Market Price x =

Negotiated Price x =

Cost Price x =

Final Questions

After analyzing the data, you are able to answer Mr. Baileys questions (1) - (4) that follow.

1. Given that Mr. Bailey is evaluating BOR CPAs, Inc., which is an investment center, what transfer pricing option(s) would he most prefer that the divisions use?

a. No transfer between divisions

b. Market transfer price of $110 per hour

c. Negotiated transfer price of $90 per hour

d. Variable standard cost transfer price of $60 per hour

2. Which transfer pricing option would the manager of the Audit Division prefer?

a. No transfer between divisions

b. Market transfer price of $110 per hour

c. Negotiated transfer price of $90 per hour

d. Variable standard cost transfer price of $60 per hour

3. Which transfer pricing option would the manager of the Tax Division prefer?

a. No transfer between divisions

b. Market transfer price of $110 per hour

c. Negotiated transfer price of $90 per hour

d. Variable standard cost transfer price of $60 per hour

4. Given the preferences of the managers of the Audit and Tax Divisions, and also considering the preferences of BOR CPAs, Inc., what might be the decision that provides the best outcome for all levels and entities within the company?

a. Use the negotiated transfer price, so that each entity is better off than it would be without any transfers between divisions.

b. If the divisional managers cannot come to an agreement, its best to forgo any transfers between divisions in order to reduce conflict within the company.

c. The company should use the market transfer price, since its important for the divisions to operate under real market conditions.

d. The company should use the variable standard cost transfer price, because it would be unfair for the Tax Division to make a profit in dealing with the Audit Division, since theyre in the same company.