Bob Haynes is the managing director of Prather Industries, which provides services to both state government agencies and private organizations. Both types of contracts are awarded on the basis of competitive bids. The government agencies require that the cost of the services be calculated using a specific methodology. In the past, Prather has used this methodology for costing both government and private contracts. Bob€™s contracts with government agencies provide for reimbursement of costs plus a predetermined markup of 30 percent. Bob€™s contracts with private organizations are based on negotiated fees and are not directly a function of the estimated costs of the service. The relative profitability of the two types of contracts, based on average-cost information, is as follows:

Bob€™s recently completed ABC analysis shows that government contracts are much less costly than estimated previously and that the private contracts are more costly.

Required

If Bob uses the ABC analysis for contracting and does not renegotiate the fee for the private contract, overall profitability will decrease. Bob would like to use the old method to cost (and price) the government contracts and to use the ABC information to renegotiate the fee for the private contracts. Is this strategyethical?

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Costs and Government Private Revenues Contract Contract Total Costs $20,000 $20,000 $40,000 Cost + 30% 26,000 26,000 Negotiated fee 30,000 30,000 Profit $ 6,000 $10,000 $16,000