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 General Audit Section of the U.S. Navy. He believes it is from an ex-employee of Aerospace.

Dear Sir,

Aerospace Comfort manufactured 100 X7 seats for the Navy in 2020. You may be interested to know the following:

1. Direct materials costs billed for the 100 X7 seats were $25,000.
2. Direct manufacturing labor costs billed for 100 X7 seats were $6,000. These costs included 16 hours of setup labor at $25 per hour, an amount included in the manufacturing overhead cost pool as well. The $6,000 also includes 12 hours of design time at $50 an hour. Design time was explicitly identified as a cost the Navy would not reimburse.
3. Manufacturing overhead costs billed for 100 X7 seats were $9,000 (150% of direct manufacturing labor costs). This amount includes the 16 hours of setup labor at $25 per hour that is incorrectly included as part of direct manufacturing labor 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 Halperns brother.

For obvious reasons, this letter will not be signed.

cc: The Wall Street Journal

Jack Halpern, CEO of Aerospace Comfort

Aerospace Comforts contract states that the Navy reimburses Aerospace at 130% of total manufacturing costs.

REQUIRED:

1. What is the cost amount per X7 seat that Aerospace Comfort billed the Navy? Assume that the actual direct material costs are $25,000
2. What is the amount per X7 seat that Aerospace Comfort should have billed the Navy? Assume that the actual direct material costs are $25,000.
3. What should the Navy do to tighten its procurement procedures to reduce the likelihood of such situations recurring in the future?