The Pure Water Company operates as the municipal water supplier for North Country Town. The town allows the Pure Water Company to charge consumers of the town water the costs to provide the water plus 10 percent. The Pure Water Company also sells bottled water to grocery stores. These sales are not regulated, and the Pure Water Company can charge what the market will bear. The costs of the two types of water per liter are:

The overhead costs to provide water are $2 million per month. Each month, the Pure Water Company sells 10 million liters of water to its municipal customers. It also sells 10,000 liters of bottled water for $1 per liter.

a. What is the company’s profit if overhead costs are allocated by direct labor dollars?

b. What is the company’s profit if overhead costs are allocated by direct material dollars?

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Direct labor Direct materials Municipal Water $0.001 $0.001 Bottled Water $0.10 $0.01