Mastery Problem: Evaluating Decentralized Operations 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 corporation's name: Cyrus Bailey, John Ogden, and Samuel Rogers. The firm's Certified Public Accountants (CPAs) pe 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 Comp 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 to 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 800 hours of excess capacity. $110 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) 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 $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. $5,000,000 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 expense for the Payroll Office to each of the two divisions. Payroll Charge Rates per payroll check Support Department Division Allocations Audit Division Tax Division 2. Review the definitions and the responsibilities of the divisions, and compare to the responsibilities of the company as a whole. 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 $708,750 708,750 Audit fees (12 engagements) Tax fees (45 engagements) Transfer-pricing fees Expenses: 0 Variable: Audit hours provided by Audit Division (180,000) (180,000) (236,250) Tax hours provided by Tax Division (236,250) (40,000) (40,000) Excess capacity hours paid to salaried staff Audit hours provided by Tax Division 0 0 Fixed expenses (50,000) (65,500) (115,500) $670,000 $367,000 $1,037,000 Operating income before support department allocations Support department allocations for payroll Operating income $ Feedback Check My Work Include your answers from the Payroll on the appropriate line of the Divisional Income Statements. 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, u 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 t 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 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, 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 Expenses: Variable: Audit hours provided by Audit Division (180,000) (180,000) (236,250) Tax hours provided by Tax Division (236,250) 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 $ 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 "O". 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 (180,000) (180,000) (236,250) Tax hours provided by Tax Division (236,250) 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 $ s 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 zero, enter "O". 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 Transfer-pricing fees Expenses: Variable: Audit hours provided by Audit Division Tax hours provided by Tax Division (180,000) (180,000) (236,250) (236,250) 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