EIP Project
S2-1: Multiple Allocation Bases and Ethical Dilemmas The profitability of the two types of products can be impacted by changing the allocation base in the way that the text implies. As stated in the case study, the controller’s reasoning is he wants the highest percentage of overhead cost assigned to the military contracts (Whitecotton, 2011). This impacts the profitibility of both product lines by (a.) increasing the apparent “cost” of each unit so as to increase the sale price in a “cost-plus” contract and (b.) to reduce the amount of actual cost being charged to each unit sold on the open market, thereby improving the profit margin. In other words, the higher the cost base for each unit, the more the company can charge the government affording the company the ability to sell the other line at a more competitive price as a greater portion of the cost has been allocated to the military line. With a greater portion of the civilian line’s cost allocated to the military line, the company now can enjoy greater profit potential through the civilian line as well. With a lower cost allocation attributed to the civilian line, the company can lower prices and gain a greater competitive advantage, increase unit sales, and though profit margins would then be lower, volume increases through reduced pricing would provide improved revenue. Although there is specific information that lacking to make an absolute decision on what is the best allocation base for applying overhead (total costs, price of the helicopters, difference between market value and cost, number of set-ups, cost per labor hour, and cost per machine hour), the difference in percent of total between labor and machine hours and between military contracts and civilian contracts provides enough information to suggest a solution. In order to comply with the controller’s request to find a