60. Two types of contracts are commonly used when private firms contract to provide services to governmental agencies: cost-plus and fixed-price contracts. The cost-plus contract allows the contracting firm to recover the costs associated with providing the product or service plus a reasonable profit. The fixed-price contract provides for a fixed payment to the contractor. When a fixed-price contract is used, the contractor’s profits will be based on its ability to control costs relative to the price received.

A Wall Street Journal article announced that, in May 1996, Alliant Techsystems Inc. was being investigated for the way that it accounted for its government contracts. Specifically, the company was being investigated because of suspicions that costs related to fixed-price government contracts were being shifted to cost-plus government contracts.

SOURCE: Andy Pasztor, “Alliant Unit Is Said to Face Criminal Probe,” The Wall Street Journal (May 3, 1996), pp. A3, A6.

Reprinted by permission of The Wall Street Journal, © 1996 Dow Jones & Company, Inc. All rights reserved worldwide.

a. Why would a company that conducts work under both cost-plus and fixedprice contracts have an incentive to shift costs from the fixed-price to the cost-plus contracts?

b. From an ethical perspective, do you feel such cost shifting is ever justified?

Explain.