Space Products manufactures commercial and military satellites. Under its government contracts, the company is permitted to allocate administrative and other costs to its military division. These costs are then reimbursed by the government department. Government guidelines allow administrative costs to 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 appear here.

Support departments

Operating departments

Administrative

MIS

Commercial

Military

Direct costs

$$600000$

$$200000$

$$2000000$

$$4000000$

Employees

$20$

$10$

$40$

$50$

CPUs $($millions$)$

$20$

$50$

$30$

$70$

The MIS department is responsible for computer equipment and systems, and it maintains databases for the entire organisation.

Required

Suppose Space 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. How much support department cost will be allocated to the military division?

Space Products produced $100$ military satellites in the period considered in this problem. Assuming the company uses the allocations calculated in part $($a$),$ what is the average cost per military satellite?

Is the average cost that you calculated in part $($b$)$ most likely an underestimate, an overestimate or an unbiased estimate of the incremental cost of producing one more military satellite? Explain.

Suppose Space Products uses the direct method of allocating support department costs. What is the maximum amount of support department cost that can be allocated to the military division under the government rules?

Suppose the management of Space Products always calculates its support department cost allocations to maximise the amount of contribution received from the government. Management selects this policy because it allows the company to be more competitive in its commercial markets.

Discuss possible reasons why the government does not specify a single, unambiguous support cost allocation method.

From a taxpayer$$s point of view, discuss whether you would agree with Space Products$$ policy.

From a competitor$$s point of view, discuss whether you would agree with Space Products$$ policy.