Mr. Bailey asks that you prepare Divisional Income Statements showing what 20Y1
ID: 2594433 • Letter: M
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 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 $80.00 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.
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
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
Service department charges for payroll
15
Income from operations
BOR CPAs, Inc.
Income Statements
For the Year Ended December 31, 20Y1
Explanation / Answer
1
Audit Division
Tax Division
Total Company
2
Fees earned:
3
Audit fees (20 engagements)
$15,00,000.00
(1200000/16*20)
$1,200,000.00
4
Tax fees (45 engagements)
$708,750.00
708,750.00
5
Transfer-pricing fees
$64000.00
(800*80)
$64000
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
$54000.00
(216000/16*4)
11
Audit hours provided by Tax Division
$64000.00
$64000
12
Fixed expenses
50,000.00
65,500.00
115,500.00
13
Income from operations before service department charges
$11,70,000
$369750
$1539750
14
Service department charges for payroll
15
Income from operations
$11,70,000
$369750
$1539750
.
1
Audit Division
Tax Division
Total Company
2
Fees earned:
3
Audit fees (20 engagements)
$15,00,000.00
(1200000/16*20)
$1,200,000.00
4
Tax fees (45 engagements)
$708,750.00
708,750.00
5
Transfer-pricing fees
$64000.00
(800*80)
$64000
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
$54000.00
(216000/16*4)
11
Audit hours provided by Tax Division
$64000.00
$64000
12
Fixed expenses
50,000.00
65,500.00
115,500.00
13
Income from operations before service department charges
$11,70,000
$369750
$1539750
14
Service department charges for payroll
15
Income from operations
$11,70,000
$369750
$1539750
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