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. $110 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) Average hourly cost rate for staff (the average price the company pays to its staff) Number of paychecks issued by Audit Division $50 110 340 Number of paychecks issued by Tax Division Total expense for Payroll Office $29,250 $10,000,000 Amount of assets invested in Audit Division by BOR CPAs, Inc. Amount of assets invested in Tax Division by BOR CPAs, Inc. $4,000,000 Payroll Mr. Bailey would like you to start by analyzing the Payroll Office expenses, and allocating the total expenses to each division. He has decided to use the number of payroll checks as the activity base for the allocation. Fill in the following blanks allocating the total aynence for the Dayroll Office to each of the two divisions 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 $110 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 "O". BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 2018 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 88,000 88,000 Expenses: (180,000) Variable: Audit hours provided by Audit Division Tax hours provided by Tax Division Excess capacity hours paid to salaried staff (236,250) 0 (180,000) (236,250) o Audit hours nrovided by Tav Divician Agnnn 48 Onn Y 126 nnn y Divisional Income Statements For the Year Ended December 31, 20Y8 Audit Division Tax Division Total Company Fees earned: $1,200,000 $1,200,000 Audit fees (16 engagements) Tax fees (45 engagements) $708,750 708,750 Transfer-pricing fees 88,000 88,000 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 0 0 Audit hours provided by Tax Division 88,000 48,000 x 136,000 X Fixed expenses (50,000) (65,500) (115,500) Operating income before support department allocations s 846,000 X $ $ Support department allocations for payroll 7,700 x Operating income 878,300 X Feedback Check My Work 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 $80 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, 2018 Audit Division Tax Division Total Company Fees earned: $1,200,000 $1,200,000 Audit fees (16 engagements) Tax fees (45 engagements) $708,750 708,750 Transfer pricing fees 4,800,000 Expenses: Variable: Audit hours provided by Audit Division (180,000) (180,000) (236,250) Tax hours provided by Tax Division (236,250) CompICEGLI TUNTUwMy DIVISION TO COMOLCHICHTE. I LICISTI MUUT VI OVUTI ZETUT CILI . BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 2048 Audit Division Tax Division Total Company Fees earned: Audit fees (16 engagements) Tax fees (45 engagements) $1,200,000 $1,200,000 708,750 $ 708,750 4,800,000 x Transfer pricing fees Expenses: Variable: Audit hours provided by Audit Division Tax hours provided by Tax Division Excess capacity hours paid to salaried staff Audit hours provided by Tax Division (180,000) (180,000) (236,250) (236,250) Fixed expenses (50,000) (65,500) (115,500) Operating income before support department allocations Support department allocations for payroll Operating income Feedback 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 "O". BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 2018 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 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 1..dit barranidad b. Tas nisician Check My Work BOR CPAS, Inc. Divisional Income Statements For the Year Ended December 31, 2048 Audit Division Tax Division Total Company Fees earned: $1,200,000 $1,200,000 Audit fees (16 engagements) Tax fees (45 engagements) $708,750 708,750 (180,000) Transfer pricing fees Expenses: Variable: Audit hours provided by Audit Division Tax hours provided by Tax Division Excess capacity hours paid to salaried staff Audit hours provided by Tax Division Fixed expenses (180,000) (236,250) (236,250) (50,000) (65,500) (115,500) Operating income before support department allocations $ Support department allocations for payroll Operating income $ VA +