ACTG 2020 Midterm: Sohni Company Case - Summary Solution
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BOR CPAs, Inc. is a closely held corporation owned by threestockholders who used the initials of their last names to form thecorporationâs name: Cyrus Bailey, John Ogden, and Samuel Rogers.The firmâs Certified Public Accountants (CPAs) perform audits ofboth public companies and privately owned companies. BORâs 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 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, enterâ0â.
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 |
You are now able to put together all the information youâvecollected and analyze the data. In the following table, âROIâstands for âReturn on Investment.â
Complete the following tables using the information from theother panels and selection lists provided.
Audit Division | |||||
|---|---|---|---|---|---|
| Profit Margin | x | Investment Turnover | = | ROI | |
| No Transfer | x | = | |||
| Market Price | x | = | |||
| Negotiated Price | x | = | |||
| Cost Price | x | = | |||
Tax Division | |||||
|---|---|---|---|---|---|
| Profit Margin | x | Investment Turnover | = | ROI | |
| No Transfer | x | = | |||
| Market Price | x | = | |||
| Negotiated Price | x | = | |||
| Cost Price | x | = | |||
BOR CPAs, Inc. | |||||
|---|---|---|---|---|---|
| Profit Margin | x | Investment Turnover | = | ROI | |
| No Transfer | x | = | |||
| Market Price | x | = | |||
| Negotiated Price | x | = | |||
| Cost Price | x | = | |||
