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Mastery Problem: Evaluating Decentralized Operations BOR CPAS, Inc. BORCPAS, 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 (CPA) perform 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 the cost centers, The Audit Division is composed of two cost-center departments: Public Company Audits and Private Company Audits. The Tax Division is composed of two cost-conter departments also Indeedual Tax and Business Thx BOR, a decentralized organization, is interested in evaluating the performance of the two divisionsThe stockholders are responsible for deciding on investment in the two divisions. Cyrus Bailey is a charge of the performance evaluation, and turns to you for assistance. Mr. Bailey is only interested in evaluating operations at the petit ceter (divon) level, and not at the cost center (department) level Mr. Bailey is considering temporanly 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 division is the engagement, which means the total agreed upon work for a given client in either wuditor 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 disions and will allocate its total expenses to the two divisions as support department allocation 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) 5110 Average hourly cost rate for staff (the average price the company pays to its stay $60 Number of paychecks issued by Audit Division 110 Number of paychecks issued by Tax Division 340 Total expense for Payroll Office $29,250 Amount of assets invested in Audit Division by BOR CPAS, Inc. $10,000,000 Amount of assets invested in Tax Division by BOR CPA, the $4,000,000 Payroll Mr. Boley 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 il in the following blanks, allocating the total expense for the Payroll Office to each of the two dimens, Payroll Charge Rates 65 per payroll check Support Department Division Allocations Audit Division 7,150 Tax Division 22,100 amounts for BOCINAS, Unce in the nightmost 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, 2048 Audit Division Tax Division Total Company $900,000 $900,000 708,750 5708,750 0 (216,000) Pees earned: Audit fees (12 engagements) Tax fees (45 engagements) Transfer pricing fees Expenses Variable Audit hours provided by Audit Division The hours provided by The Division Excess capacity hours paid to salaried stall Audit hus provided by the Division Fixed expenses Operating income before support department allocations Support department allocations for payroll Operating income (283.500) (40,000) (216,000) (283,500) (48,000) 0 0 (50,000) $634,000 7,150 (65,500) 5311,750 22,100 (115.500) 3945,750 29,250 626,50 289,650 916,500 Market Transfer Price Mr. Baley asks that you prepare Divisional Income Statements showing what 2078 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 employeen. Complete the following Divisional Income Statements. If there is no amount or an amount is zero, entre "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) Tax fees (45 engagements) $1.200,000 5708,250 $1,200,000 708,750 88,000 Transfer pricing fees 88,000 (216,000) 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 (283,500) De 09 (216,000) (283,500) 07 38,000 BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 2018 Audit Division Tax Division Total Company $1,200,000 $708,750 51,200,000 708,750 88,000 88,000 Fees earned: Audit fees (16 engagements) Tax fees (45 engagements) Transfer pricing fees Expenses: Variable: Audit hours provided by Audit Division Tax hours provided by Tax Division Excess capacity hours paid to salaried staff (216,000) (210,000) (283,500) (283,500) -88,000 Audit hours provided by Tax Division (65,500) (115.500) Fixed expenses (50,000) 846,000 00:00 Operating income before support department allocations 7,150 22,100 29,250 Support department allocations for payroll 838,850 Operating income Negotiated Transfer Price Mr. Bailey asks that you prepare Divisional Income Statements showing what 20 results would have been had the Audit Division purchased at the excess capacity of the Tax Division, using a negotiated transfer pnce. The divisional managers tell you that with the excess capacity of the Tax Division of 800 hours, the Audt Division can perform 4 more audits during the year, and the Audit Division would agree to a negotiated rate of 590 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 51,200,000 $1,200,000 708,750 5705,750 Fees earned: Audit lees (16 engagements) Tay fees (45 engagements) Transfer pricing fees Expenses Variable (216,000) (283,500) (216,000) (283,500) 07 0 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 Total Company $1,200,000 708,750 Complete the following Divisional Income Statements. If there is no amount or an amount is zero, enter to BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 2018 Audit Division Tax Division Fees earned: Audit fees (16 engagements) $1,200,000 Tax fees (45 engagements) $708,750 Transfer pricing fees Expenses Variable: Audit hours provided by Audit Division (216,000) Tax hours provided by Tax Division (283,500) 0 Cross capacity hours paid to salaried stall Audit hours provided by Tax Division (50,000) (65,500) Fixed expenses Operating income before support department allocations 7,150 22,100 Support department allocations for payroll (210,000) (283,500) 0 (115,500) 29,250 Operating income Cost Transfer Price Me 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 Divion can perform A more sud 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 stories of their employees Complete the following Divisional Income Statements. If there is no amount or an amount is zero, enter " BOR CPAS, Inc Divisional Income Statements For the Year Ended December 31, 2018 Audit Division Tax Division Total Company Fees earned: 51,200,000 $1,200,000 706,750 $700,0 Audit fees (16 engagements) Tak foes (45 engagements) Transfer pricing fees Expenses Variable: Audit hours provided by Audit Division Tax hours provided by Tax Division Excess capacity hours paid to salaried stati Audit hours provided by Tax Division (216,000) (210,000) (285,500) (283,500) 0 Previous Next BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 2018 Audit Division Tax Division Total Company Fees earned: $1,200,000 $1,200,000 708,750 $708,750 Audit fees (16 engagements) Tax fees (45 engagements) 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 (216,000) (283,500) (216,000) (283,500) 07 0 (50,000) (65,500) (115,500) Fixed expenses 000 D'DE! Operating income before support department allocations Support department allocations for payroll 22,100 29,250 7,1507 Operating income