Question

The corporation is divided into two profit centers: the AuditDivision and the Tax Division. Each division is composed of twocost centers. The Audit Division is composed of two cost-centerdepartments: Public Company Audits and Private Company Audits. TheTax Division is composed of two cost-center departments also:Individual Tax and Business Tax.

BOR, a decentralized organization, is interested in evaluatingthe performance of the two divisions. The stockholders areresponsible for deciding on investment in the two divisions. CyrusBailey is in charge of the performance evaluation, and turns to youfor assistance. Mr. Bailey is only interested in evaluatingoperations at the profit center (division) level, and not at thecost center (department) level.

Mr. Bailey is considering temporarily using some of the stafffrom the Tax Division to assist the Audit Division during theupcoming busy audit season, and would like to evaluate the effectof this on net income. The Tax Division is estimated to have 800hours of excess capacity.

The unit for determining sales revenue in both divisions is the"engagement", which means the total agreed-upon work for a givenclient in either audit or tax for a given year. The company chargeson average a fee of $75,000 per audit engagement, and $15,750 pertax engagement.

The company has its own Payroll Office, which provides payrollservices to both divisions and will allocate its total expenses tothe two divisions as service department charges.

The following chart shows some basic data for the company:

Hourly market rate for staff (theprice the company would have to pay from an outside contractor forstaff services)	$110.00
Average hourly cost rate for staff(the average price the company pays to its staff)	$50.00
Number of paychecks issued by AuditDivision	110
Number of paychecks issued by TaxDivision	340
Total expense for PayrollOffice	$29,250
Amount of assets invested in AuditDivision by BOR CPAs, Inc.	$10,000,000
Amount of assets invested in TaxDivision by BOR CPAs, Inc.	$4,000,000

Mr. Bailey asks that you prepare Divisional Income Statementsshowing what 20Y1 results would have been had the Audit Divisionpurchased all the excess capacity of the Tax Division, using anegotiated transfer price. The divisional managers tell you that,with the excess capacity of the Tax Division of 800 hours, theAudit Division can perform 4 more audits during the year, and theAudit Division would agree to a negotiated rate of $80.00 per hourto be paid to the Tax Division for the additional hours required,with the Tax Division selling all its excess capacity to the AuditDivision. The Tax Division would still be responsible for payingthe salaries of their employees.

Complete the following Income Statements. Enter all amounts aspositive 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
15	Income from operations