Question
Mr. Bailey asks that you prepare Divisional Income Statements showing what 20Y1 results would have been had the Audit Division purchased all the excess capacity
Mr. Bailey asks that you prepare Divisional Income Statements showing what 20Y1 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 $50.00 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 Income Statements. Enter all amounts as positive numbers. If there is no amount or an amount is zero, enter 0.
BOR CPAs, Inc. |
Income Statements |
For the Year Ended December 31, 20Y1 |
1 | Audit Division | Tax Division | Total Company | |
2 | Fees earned: | |||
3 | Audit fees (16 engagements) | $1,200,000.00 | $1,200,000.00 | |
4 | Tax fees (45 engagements) | $708,750.00 | 708,750.00 | |
5 | Transfer-pricing fees | |||
6 | Expenses: | |||
7 | Variable: | |||
8 | Audit hours provided by Audit Division | 180,000.00 | 180,000.00 | |
9 | Tax hours provided by Tax Division | 236,250.00 | 236,250.00 | |
10 | Excess capacity hours paid to salaried staff | |||
11 | Audit hours provided by Tax Division | |||
12 | Fixed expenses | 50,000.00 | 65,500.00 | 115,500.00 |
13 | Income from operations before service department charges | |||
14 | Service department charges for payroll | 7150 | 22100 | 29250 |
15 | Income from operations |
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 panels 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 | = |
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? Check all that apply.
Variable standard cost transfer price of $50.00 per hour
No transfer between divisions
Market transfer price of $110.00 per hour
Negotiated transfer price of $80.00 per hour
2. Which transfer pricing option(s) would the manager of the Audit Division prefer? Check all that apply.
Negotiated transfer price of $80.00 per hour
No transfer between divisions
Variable standard cost transfer price of $50.00 per hour
Market transfer price of $110.00 per hour
3. Which transfer pricing option(s) would the manager of the Tax Division prefer? Check all that apply.
Variable standard cost transfer price of $50.00 per hour
No transfer between divisions
Negotiated transfer price of $80.00 per hour
Market transfer price of $110.00 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?
Use the negotiated transfer price, so that each entity is better off than it would be without any transfers between divisions.
The company should use the market transfer price, since its important for the divisions to operate under real market conditions.
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.
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.
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