Dill Shipyards operates a dry dock on the East Coast, where it builds and repairs ships. The company’s Payroll Department supports its two divisions, Naval and Private. The Naval division has contracts with the Department of Defense and the Private division works primarily with commercial shippers, specializing in tankers. The annual cost of the Payroll Department is $8.3 million.

Selected data for the two divisions for the most recent year follow:

Required

a. What is the cost charged to each division if Dill allocates Payroll Department costs based on the number of employees?

b. What is the cost charged to each division if Dill allocates Payroll Department costs based on the total payroll?

c. Contracts with the Defense Department are on a cost-plus fixed fee basis, meaning the price is based on the cost of repairing or building the ship, including any overhead assigned to the division. Contracts with commercial shipping companies are almost all fixed price, meaning the price does not depend directly on the cost. Will this affect Dill’s choice of an allocation base? Should it? 

Transcribed Image Text:

Naval. Private. Number of Employees 10,080 13,920 Total Payroll ($000) $526,400 413,600