Question 1 (20 points) MS Products manufactures commercial and military satellites. Under its defence contracts, the company is permitted to allocate administrative (admin) and other costs to its military division. These costs are then reimbursed by the government. Assume that under the government guidelines, administrative costs can be allocated using either the direct costs incurred in the operating divisions or the number of employees as an allocation base. Management information systems (MIS) costs can be allocated either on the basis of direct costs incurred in the operating divisions or on the basis of CPUs (a measure of computer resources used). Data concerning the company's operations are as follows: Direct costs Employees CPUs (millions) Support Departments Admin MIS $600,000 $200,000 20 10 20 50 Operating Departments Commercial Military $2,000,000 $4,000,000 40 50 30 70 The MIS department is responsible for computer equipment and systems, and it maintains databases for the entire organization. Required 1. Assume MS Products uses the step-down method for allocating support department costs. Administrative costs are allocated first on the basis of the number of employees, and then MIS costs are allocated on the basis of CPUs. Prepare the allocation using the step-down method. Conclude on how much support department cost will be allocated to the military division. 2. MS Products produced 100 military satellites in the period considered in the situation presented. Assuming that the company uses the allocations, calculated in Part 1, what is the average cost per military satellite? 3. Is the average cost that you calculated in Part 2 most likely an underestimate, overestimate, or unbiased estimate of the incremental cost of producing one more military satellite? Explain. 2. Assume that MS Products uses the direct method of allocating support department costs. Prepare the allocation using the direct method. What is the maximum amount of support department cost that can be allocated to the military division under the government rules? 5. Suppose the management of MS Products always calculates its support department cost allocation to maximize the amount of contribution received from the government Management uses this policy because it allows the company to be more competitive in its commercial markets. a. Discuss possible reasons why the government does not specify a single, unambiguous support cost allocation method. b. From a taxpayer's point of view, discuss whether you agree with MS Products policy. From a competitor's point of view, discuss whether you agree with MS Products policy liitti
