BOR CPAs, Inc

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.

Hourly market rate for staff (the price the company would have to pay from an outside contractor for staff services)	$100
Average hourly cost rate for staff (the average price the company pays to its staff)	$50
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

Complete the following Divisional Income Statements with your data from the Payroll.

BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 20Y8
	Audit Division	Tax Division	Total Company
Fees earned:
Audit fees (12 engagements)	$900,000		$900,000
Tax fees (45 engagements)		$708,750	708,750
Transfer-pricing fees			0
Expenses:
Variable:
Audit hours provided by Audit Division	(180,000)		(180,000)
Tax hours provided by Tax Division		(236,250)	(236,250)
Excess capacity hours paid to salaried staff		(40,000)	(40,000)
Audit hours provided by Tax Division		0	0
Fixed expenses	(50,000)	(65,500)	(115,500)
Operating income before support department allocations	$670,000	$367,000	$1,037,000
Support department allocations for payroll	fill in the blank 95a9e007a011fae_1	fill in the blank 95a9e007a011fae_2	fill in the blank 95a9e007a011fae_3
Operating income	$fill in the blank 95a9e007a011fae_4	$fill in the blank 95a9e007a011fae_5	$fill in the blank 95a9e007a011fae_6

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Include your answers from the Payroll on the appropriate line of the Divisional Income Statements.

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Market Transfer Price

Mr. Bailey asks that you prepare Divisional Income Statements showing what 20Y8 results would have been had the Audit Division purchased all the excess capacity of the Tax Division, using a market 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 Tax Division would charge the Audit Division the market rate of $100 per hour for the additional hours required, 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 Divisional Income Statements. If there is no amount or an amount is zero, enter 0.

BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 20Y8
	Audit Division	Tax Division	Total Company
Fees earned:
Audit fees (16 engagements)	$1,200,000		$1,200,000
Tax fees (45 engagements)		$708,750	708,750
Transfer-pricing fees		fill in the blank adb96e028f9efaa_1	fill in the blank adb96e028f9efaa_2
Expenses:
Variable:
Audit hours provided by Audit Division	(180,000)		(180,000)
Tax hours provided by Tax Division		(236,250)	(236,250)
Excess capacity hours paid to salaried staff		fill in the blank adb96e028f9efaa_3	fill in the blank adb96e028f9efaa_4
Audit hours provided by Tax Division	fill in the blank adb96e028f9efaa_5	fill in the blank adb96e028f9efaa_6	fill in the blank adb96e028f9efaa_7
Fixed expenses	(50,000)	(65,500)	(115,500)
Operating income before support department allocations	$fill in the blank adb96e028f9efaa_8	$fill in the blank adb96e028f9efaa_9	$fill in the blank adb96e028f9efaa_10
Support department allocations for payroll	fill in the blank adb96e028f9efaa_11	fill in the blank adb96e028f9efaa_12	fill in the blank adb96e028f9efaa_13
Operating income	$fill in the blank adb96e028f9efaa_14	$fill in the blank adb96e028f9efaa_15	$fill in the blank adb96e028f9efaa_16

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Feedback

Compute the price charged by the Tax Division to the Audit Division, and both the transfer-pricing fees and cost to the Tax Division of the sale of its excess hours. Be sure to revise the Total Company, Operating income before support department allocations, and Operating income totals using your revised amounts.

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Negotiated Transfer Price

Mr. Bailey asks that you prepare Divisional Income Statements showing what 20Y8 results would have been had the Audit Division purchased all the excess capacity of the Tax Division, using a negotiated 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 agree to a negotiated rate of $90 per hour to be paid to the Tax Division 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 Divisional Income Statements. If there is no amount or an amount is zero, enter 0.

BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 20Y8
	Audit Division	Tax Division	Total Company
Fees earned:
Audit fees (16 engagements)	$1,200,000		$1,200,000
Tax fees (45 engagements)		$708,750	708,750
Transfer-pricing fees		fill in the blank 2bcc40f8e03dfd3_1	fill in the blank 2bcc40f8e03dfd3_2
Expenses:
Variable:
Audit hours provided by Audit Division	(180,000)		(180,000)
Tax hours provided by Tax Division		(236,250)	(236,250)
Excess capacity hours paid to salaried staff		fill in the blank 2bcc40f8e03dfd3_3	fill in the blank 2bcc40f8e03dfd3_4
Audit hours provided by Tax Division	fill in the blank 2bcc40f8e03dfd3_5	fill in the blank 2bcc40f8e03dfd3_6	fill in the blank 2bcc40f8e03dfd3_7
Fixed expenses	(50,000)	(65,500)	(115,500)
Operating income before support department allocations	$fill in the blank 2bcc40f8e03dfd3_8	$fill in the blank 2bcc40f8e03dfd3_9	$fill in the blank 2bcc40f8e03dfd3_10
Support department allocations for payroll	fill in the blank 2bcc40f8e03dfd3_11	fill in the blank 2bcc40f8e03dfd3_12	fill in the blank 2bcc40f8e03dfd3_13
Operating income	$fill in the blank 2bcc40f8e03dfd3_14	$fill in the blank 2bcc40f8e03dfd3_15	$fill in the blank 2bcc40f8e03dfd3_16

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Feedback

Compute the price charged by the Tax Division to the Audit Division, and both the transfer-pricing fees and cost to the Tax Division of the sale of its excess hours. Be sure to revise the Total Company, Operating income before support department allocations, and Operating income totals using your revised amounts.

Question Content Area

Cost Transfer Price

Mr. Bailey asks that you prepare Divisional Income Statements showing what 20Y8 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 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 Divisional Income Statements. If there is no amount or an amount is zero, enter 0.

BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 20Y8
	Audit Division	Tax Division	Total Company
Fees earned:
Audit fees (16 engagements)	$1,200,000		$1,200,000
Tax fees (45 engagements)		$708,750	708,750
Transfer-pricing fees		fill in the blank 024148f92007061_1	fill in the blank 024148f92007061_2
Expenses:
Variable:
Audit hours provided by Audit Division	(180,000)		(180,000)
Tax hours provided by Tax Division		(236,250)	(236,250)
Excess capacity hours paid to salaried staff		fill in the blank 024148f92007061_3	fill in the blank 024148f92007061_4
Audit hours provided by Tax Division	fill in the blank 024148f92007061_5	fill in the blank 024148f92007061_6	fill in the blank 024148f92007061_7
Fixed expenses	(50,000)	(65,500)	(115,500)
Operating income before support department allocations	$fill in the blank 024148f92007061_8	$fill in the blank 024148f92007061_9	$fill in the blank 024148f92007061_10
Support department allocations for payroll	fill in the blank 024148f92007061_11	fill in the blank 024148f92007061_12	fill in the blank 024148f92007061_13
Operating income	$fill in the blank 024148f92007061_14	$fill in the blank 024148f92007061_15	$fill in the blank 024148f92007061_16