Halliburtons foods division specializes in the production and distribution of freeze-dried dinners to the military and disaster relief. The first of the two operating departments cooks the food. The second is responsible for packaging and freeze drying the dinners. The dinners are sold by the case, each case containing 25 dinners. Two departments provide support for Halliburtons operating units: Maintenance and Power. Budgeted data for the coming quarter are given below. The company does not separate fixed and variable costs.

The predetermined overhead rate for cooking is computed on the basis of

machine hours; direct labor hours are used for packaging and freeze drying. The prime costs for one case of standard dinners total $16. It takes 2 machine hours to produce a case of dinners in the cooking department and 0.5 direct labor hours to process a case of standard dinners in the packaging and freeze-drying department.

Recently, the Federal Emergency Management Agency (FEMA) has requested a bid on a three-year contract that would supply standard freeze-dried dinners to disaster relief victims. FEMA has decided that providing freeze-dried dinners was the most economical way to supply food for these victims at a moments notice (within 24 hours).

The bidding policy of Halliburton Foods is full manufacturing costs plus 20%. Assume that the lowest bid of other competitors is $48.80 per case.

Required:

1. Prepare bids for Halliburton Foods using each of the following allocation methods:
   1. Direct method
   2. Step method
2. Refer to Requirement 1. Did both methods produce winning bids? Which method most accurately reflects the cost of producing the cases of dinners? Why?
3. Explain the effect on the companys profits if you had lost the bid because you over-costed the dinners. (Note: had you accurately costed the dinners you would have won the bid.)
4. As an alternative scenario, explain the effect on the companys profits if you had won the bid because you under-costed the dinners. (Note: had you accurately costed the dinners you would not have won the bid.

Overhead costs Machine hours Kilowatt-hours Direct labor hours --Support Departments--- Maintenance Power $340,000 $200,000 40,000 20,000 ----Producing Departments---- Cooking Pack & Freeze Dry $75,000 $55,000 40,000 20,000 100,000 80,000 5,000 30,000 Overhead costs Machine hours Kilowatt-hours Direct labor hours --Support Departments--- Maintenance Power $340,000 $200,000 40,000 20,000 ----Producing Departments---- Cooking Pack & Freeze Dry $75,000 $55,000 40,000 20,000 100,000 80,000 5,000 30,000