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 costs. 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 $60,0000 of overhead, $6,000,000 of direct labor and 600,000 machine hours. Consider the Model KV10 gauge that is produced for both civilian and military uses.
Civilian Military
Direct material $3,000 $3,500
Direct Labor $900 $1,200
Machine Hours 100 100
Required:
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.