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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 a costtransfer price. The divisional managers tell you that, with theexcess capacity of the Tax Division of 800 hours, the AuditDivision can perform 4 more audits during the year, and the AuditDivision would pay the Tax Division's internal hourly rate of$50.00 per hour for the additional hours required, with the TaxDivision selling all its excess capacity to the Audit Division. TheTax Division would still be responsible for paying the salaries oftheir employees.

Complete the following Income Statements. Enter all amounts aspositive numbers. If there is no amount or an amount is zero, enter“0”.

Score: 1/64

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			BOR CPAs, Inc. is a closely held corporation owned by threestockholders who used the initials of their last names to form thecorporation’s name: Cyrus Bailey, John Ogden, and Samuel Rogers.The firm’s Certified Public Accountants (CPAs) perform audits ofboth public companies and privately owned companies. BOR’s CPAsalso provide tax services to both individuals and businesses. 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 ratefor staff (the price the company would have to pay from an outsidecontractor for staff services) $110.00 Average hourly costrate for staff (the average price the company pays to itsstaff) $50.00 Number of paychecksissued by Audit Division 110 Number of paychecksissued by Tax Division 340 Total expense forPayroll Office $29,250 Amount of assetsinvested in Audit Division by BOR CPAs, Inc. $10,000,000 Amount of assetsinvested in Tax Division by BOR CPAs, Inc. $4,000,000