Your boss, Festus B. Thorneapple, stopped by your office today. Among other things, he said:

| know that we apply overhead to jobs in proportion to their relative num- ber of direct labor hours and that we currently allocate overhead at a rate of $60 per direct labor hour. But that bothers me a little. Here’s why. | know, for example, that we expect to use 10 direct labor hours and 500 KWH of electricity on the Smith job. And we expect to use 100 direct labor hours and 100 KWH of electricity on the job for Calloway Corp. According to my calculations, that means that we will allocate $600 in overhead costs to the Smith job (10 direct labor hours X $60 per direct labor hour) and $6,000 to the Calloway job (100 direct labor hours X $60 per direct labor hour). The thing that bothers me is that we use much more electricity for the Smith job than for the Calloway job. Since our utility costs are overhead costs, it seems like we should be allocating more overhead costs to the Smith job. | looked at the numbers, and if we applied overhead based on KWH, we would apply overhead at a rate of $11 per KWH, which would change the costs of both jobs.

Anyway, to make a long story short, this made me start wondering whether we are making faulty decisions based on the way we are allocating overhead costs. To start with, how might applying overhead costs based on KWH affect our decisions about what selling prices to charge? Our current policy is to set the selling price at 1.6 times the cost of a job. We have projected that the Smith job will cost $1,800 ($600 factory overhead + $1,000 direct materials + $200 direct labor) and the Calloway job will cost $1 1,000

($6,000 factory overhead + $3,000 direct materials + $2,000 direct labor).

So, we're planning to sell the Smith job for $2,880 (1.6 X $1,800) and the Calloway job for $17,600 (1.6 < $11,000). If we were to change our method of applying overhead costs from using direct labor hours to using KWH, how would that affect our decisions about the selling prices to charge for these jobs? When you get a chance, will you please think about this and write me a memo addressing this question? TLK=2 Required: Write your boss a memo responding to his question.