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 service department charges.

The chart below 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)	$110.00
Average hourly cost rate for staff (the average price the company pays to its staff)	$60.00
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.	$4,000,000

1. 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 blanks below, allocating the total expense for the Payroll Office to each of the two divisions.

payroll Charge Rate ( ) per payroll check

Division	Allocated Service Department Charges
Audit Division	( )
Tax Division	( )

2. 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 14 and 15 from the Divisional Income Statements with your data from the Payroll panel. Enter all amounts as positive numbers.

1		Audit Division	Tax Division	Total Company
2	Fees earned:
3	Audit fees (12 engagements)	$900,000.00		$900,000.00
4	Tax fees (45 engagements)		$708,750.00	708,750.00
5	Transfer-pricing fees			0.00
6	Expenses:
7	Variable:
8	Audit hours provided by Audit Division	216,000.00		216,000.00
9	Tax hours provided by Tax Division		283,500.00	283,500.00
10	Excess capacity hours paid to salaried staff		48,000.00	48,000.00
11	Audit hours provided by Tax Division		0.00	0.00
12	Fixed expenses	50,000.00	65,500.00	115,500.00
13	Income from operations before service department charges	$634,000.00	$311,750.00	$945,750.00
14	Less service department charges for payroll
15	Income from operations

3. Mr. Bailey asks that you prepare Divisional Income Statements showing what 2016 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 $110.00 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 Divisional Income Statements below. Enter all amounts as positive numbers. If there is no amount or an amount is zero, enter 0.

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	216,000.00		216,000.00
9	Tax hours provided by Tax Division		283,500.00	283,500.00
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	Less service department charges for payroll
15	Income from operations

4. Mr. Bailey asks that you prepare Divisional Income Statements showing what 2016 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 $90.00 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 Divisional Income Statements below. Enter all amounts as positive numbers. If there is no amount or an amount is zero, enter 0

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	216,000.00		216,000.00
9	Tax hours provided by Tax Division		283,500.00	283,500.00
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	Less service department charges for payroll
15	Income from operations

5. Mr. Bailey asks that you prepare Divisional Income Statements showing what 2016 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 $60.00 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.

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	216,000.00		216,000.00
9	Tax hours provided by Tax Division		283,500.00	283,500.00
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	Less service department charges for payroll
15	Income from operations