Wagons and Wheels Ltd is a farm machinery dealership. In recent years, the company has experienced unsatisfactory profit results because of declining sales in the area. At the suggestion of the company’s public accountant, responsibility accounting was implemented at the beginning of 2018. The following departments were organised as profit centres:

·  new machinery sales

·  used machinery sales

·  service

·  tyres

·  parts and accessories.

Monthly reports are prepared showing the profit results of each of the five departments. On 13 April 2018, the parts and accessories manager and the used machinery manager requested a meeting with the company’s general manager to discuss the way responsibility accounting was being applied. In particular, they are protesting against two policies that currently are in effect:

1. The parts and accessories department must transfer all parts and accessories internally to other departments at their original invoice cost.

2. The used machinery sales department is charged the full dollar amount allowed by the new machinery sales department on a used machine traded in for a new machine. In many cases, this amount exceeds the ultimate selling price of the used machine. The used machinery sales manager tells the general manager about a recent case that is typical. A machine with a wholesale market value of $19 000 was traded in on a new machine with a list price of $48 000 and a dealer cost of $40 600. A trade-in allowance of $26 100 was given on the used machine to promote the deal and the customer paid cash of $21 900. Consequently, a profit of $7400 (i.e. $26 100  $21 900  $40 600) was recognised by the new machinery sales department.

The retail market value of the used machine was $22 080 and it was sold at that price 2 weeks later. Since the used machine sales department was charged $26 100 when the used machine was added to the inventory, it incurred a loss of $4020 on the ultimate sale.

Both managers (parts and accessories and used machinery) are upset by what they consider unfair practices and violation of the basic premise of responsibility accounting.

Required

A.    Do you agree or disagree with the two managers?

B.    What would you do to improve the situation, if anything?