Refer to the information in Exercise 7-35. The controller at Marine Components chose direct labor cost as the allocation base in year 2, based on what she considered reflected the relation between overhead and direct labor cost. Year 3 is approaching and again the company only expects two clients: client 1 and client 3. Work for client 1 will continue to be billed using fixed price contracts, and client 3 will be billed based on cost-plus contracts.
Manufacturing overhead for year 3 is estimated to be $12 million. Other budgeted data for year 3 include:

Information From Exercise 7-35
Client 1 Client 3
Machine-hours (thousands) . . . . . . 3,000 7,000
Direct labor cost ($000) . . . . . . . . . $3,000 $3,000
Required
a. Compute the predetermined rate assuming that Marine Components uses machine-hours to apply overhead.
b. Compute the predetermined rate assuming that Marine Components uses direct labor cost to apply overhead.
c. Which allocation base will provide higher income for Marine Components?
d. The controller decides that for year 3 the firm will use machine-hours to apply overhead to jobs. Is this ethical?

Client 1 Client 3 3,0007000