[SOLVED] Binding Machines Ltd sells wire-loop binding

Binding Machines Ltd sells wire-loop binding machines to printing units. The company has three separate departments: Department A: sells new machines Department B: sells second-hand machines Department C: repairs machines for external customers and overhauls machines at the request of Departments A and B. Each department is regarded as a responsibility center and a profit center. The following information relates to the year ended 31 December Year 8:

Further information: Department A sold 240 new machines during the year. Each machine had a selling price of Â£9,900 and cost Â£7,000 to purchase from the manufacturer. Department A took 80 old machines in part exchange at an average allowance of Â£2,000 per machine. Of these, five were scrapped and the rest were passed to Department C for repair, before being returned to Department B for sale. These second-hand machines were sold at an average price of Â£4,000 each. Repair work was carried out by Department C. The repair of each machine was estimated in advance to require an average of 15 hours labor in Department C. In fact, the work required an average of 18 hours per machine. Department C claimed the extra hours were due to lack of care by Department A in scrutinizing machines taken in part-exchange. Department C applied a charge-out rate for labor hours of Â£7 per hour calculated as follows:

Costs of materials required for repair were charged directly to customers and therefore do not appear in the statement of costs and revenues. Materials for repairs of second-hand machines taken by Department A were charged to Department B at a cost of Â£5,000. Fixed workshop cost in Department C is based on an annual budget of 8,000 hours. The actual hours worked were 10,000. Actual fixed costs incurred were equal to budgeted expenditure Through an agreement with the manufacturer, Binding Machines Ltd will undertake repairs free of charge where any machine fails during a period of 12 months from the date of purchase. The manufacturerâ€™s charge of Â£7,000 to Department A for the cost of a new machine is stated after making an allowance of Â£200 per machine to cover repairs under warranty. Any such repair costs incurred in excess of this allowance must be borne by Binding Machines Ltd. Department A claims that an outside repair shop would carry out all the work of Department C at a cost of Â£6 per labor hour. No stocks of new or second-hand machines were held at the start or end of the year. Required: Explain the problems of applying the concepts of profit centers and responsibility centers in practice, illustrating your answer by reference to the information provided.

Question: Binding Machines Ltd sells wire-loop binding