Question
Pelton Instruments manufactures a variety of electronic instruments that are used in military and civilian applications. Sales to the military are generally on a cost-plus-profit
Pelton Instruments manufactures a variety of electronic instruments that are used in military and civilian applications. Sales to the military are generally on a cost-plus-profit basis with profit equal to 10 percent of cost. Instruments used in military applications require more direct labor time because fail-safe devices must be installed. (These devices are generally omitted in civilian applications.)
At the start of the year, Pelton estimates that the company will incur $75,000,000 of overhead, $7,500,000 of direct labor, and 750,000 machine hours. Consider the Model KV10 gauge that is produced for both civilian and military uses:
Civilian | Military | |
Direct Material | $3000 | $3500 |
Direct Labor | $900 | $1200 |
Machine Hours | 100 | 100 |
a. | Calculate the cost of civilian and military versions of Model KV10 using both direct labor dollars and machine hours as alternative allocation bases. |
b. | Explain why Pelton Instruments may decide to use direct labor as an overhead allocation base. |
c. | Is it ethical for Pelton to select an allocation base that tends to allocate more of overhead costs to government contracts? Explain. |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started