Mastery Problem: Evaluating Decentralized Operations BOR CPAs, Inc. , BOR CPAS, Inc. is a dosely held axporation owned by three stockholders who used the initials of their last names to for the corporation's name: Orus Bailey, can Ogden, and Samuel Ragers. The firm's Certified Public Accountants (CPA) perform audits af bath public companies and privately cwned companies. WOR'S OPIs also provide ax services to both individuals and businesses. Teration is divided into two it cantars: the Audit Division and the Tax Division. Fach division comedor two cents. The Audit Division is composed of the Icerter departments: PB Company Audits and Private Comaany Audits. The Tax Division is composed of two cost-center departments also: Individual Tax and Busness Tax. BOR, a cocentralized organization, is interested in evaluating the performance of the two divisions. The stockholders are responsible for deciding on investment in the two divisions. Cyrus Balley is in charge of the performance evaluation, and sums so you for assistance. Mr. Balley is only interested in evaluating operations at the profitante: (division) level, and not at the cost center department) level. Mr. Ballcy is considering temporarily using some of the staff from the Tax Division to assist the Audit Division during the upcoming busy audit scason, and would like to evaluate the effect of this on net income. The Tax Division testimated to have 300 hours of excess capacity. The unit for determining sales revenue in both divis ons is the 'engagement, which means the total agreed upon work for a given client in either audit ar 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: Huurly market rate for staff (the price the cenery would have to pay from an outside $110 contractor for staff services Average Hourly Custrale forskell(the everal price the company puys tus aff) $60 Number of paychecks issued by Audit Division 110 Number of paychecks issued by Tex Division 340 Total expense for Payroll Office $31,500 Amount of assets irwested in Audit Division by BOR CRAS, Inc. $10,000,000 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 Paptal office senses, and allocating the total expenses to each division. He has decided to use the number of payroll check as the activity base for the location Fill in the following banks, allocating the total expense for the Payrall Office to cach of the two divisions. Payrall Charge Rates por payroll check Support Department Division Allocations Audit Division tu Tax Division No Transfer Mr. Bailey has prepared the following divisional income statement for you to review, assuming no transfer of excess capacity hours occurs. He has also included the total amounts for BOR CPAs, Inc. in the rightmost column. 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: $900,000 $900,000 Audit fees (12 engagements) Tax fees (45 engagements) $708,750 708,750 Transfer-pricing fees 0 Expenses: Variable: Audit hours provided by Audit Division (216,000) (216,000) (283,500) Tax hours provided by Tax Division (283,500) Excess capacity hours paid to salaried staff (48,000) (48,000) Audit hours provided by Tax Division 0 0 Fixed expenses (50,000) (65,500) (115,500) Operating income before support department allocations $634,000 $311,750 $945,750 Support department allocations for payroll Operating income 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 "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 Expenses: Variable: Audit hours provided by Audit Division (216,000) (216,000) Tax hours provided by Tax Division (283,500) (283,500) Excess capacity hours paid to salaried staff Audit hours provided by Tax Division Fixed expenses (50,000) (65,500) (115,500) DATA 10. Operating income before support department allocations $ $ Support department allocations for payroll Operating income 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: $1,200,000 Audit fees (16 engagements) Tax fees (45 engagements) $1,200,000 708,750 $708,750 Transfer-pricing fees Expenses: Variable: (216,000) (216,000) Audit hours provided by Audit Division Tax hours provided by Tax Division (283,500) (283,500) Excess capacity hours paid to salaried staff Audit hours provided by Tax Division Fixed expenses (50,000) (65,500) (115,500) Operating income before support department allocations ml 1 1001 Support department allocations for payroll Operating income 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 $60 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, 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 Expenses: Variable: Audit hours provided by Audit Division (216,000) (216,000) (283,500) Tax hours provided by Tax Division (283,500) Excess capacity hours paid to salaried staff Audit hours provided by Tax Division Fixed expenses (50,000) (65,500) (115,500) Operating income before support department allocations Support department allocations for payroll Operating income