Jack Halpern is the owner and CEO of Aerospace Comfort, a firm specializing in the manufacture of seats for air transport. He has just received a copy of a letter written to the Auditor General of the Canadian government. He believes it is from an ex-employee of Aerospace.

Dear Sir,

Aerospace Comfort in 2013 manufactured 100 X7 seats for the Canadian Forces. You may be interested to know the following:

1. Direct materials cost billed for the 100 X7 seats was $40,000.

2. Direct manufacturing labour cost billed for 100 X7 seats was $8,400. This cost includes 16 hours of setup labour at $50 per hour, an amount included in the manufacturing overhead cost pool as well. The $8,400 also includes 15 hours of design time at $120 an hour. Design time was explicitly identified as a cost the Canadian Forces was not to reimburse.

3. Manufacturing overhead cost billed for 100 X7 seats was $14,700 (175% of direct manufacturing labour costs). This amount includes the 16 hours of setup labour at $50 per hour that is incorrectly included as part of direct manufacturing labour costs.

You may also want to know that over 40% of the direct materials is purchased from Frontier Technology, a company that is 51% owned by Jack Halpern’s brother. For obvious reasons, this letter will not be signed.

c.c.: The Globe and Mail

Jack Halpern, CEO of Aerospace Comfort

Aerospace Comfort’s contract states that the Canadian Forces reimburses Aerospace at 130% of manufacturing costs.

REQUIRED

Assume that the facts in the letter are correct as you answer the following questions.

1. What is the cost amount per X7 seat that Aerospace Comfort billed the Canadian Forces?

Assume that the actual direct materials costs are $40,000.

2. What is the amount per X7 seat that Aerospace Comfort should have billed the Canadian Forces? Assume that the actual direct materials costs are $40,000.

3. Based on the problems highlighted in the letter, what should the Canadian Forces do to tighten its procurement procedures to reduce the likelihood of such situations recurring?