Jerome Shipyards does work for both the U.S. Navy and private shipping companies. Jerome’s major business is renovating ships, which it does at one of two company dry docks referred to by the names of the local towns: Casgrain and Lyndon. Data on operations and costs for the two dry docks follow:

Virtually all dry dock costs consist of depreciation. The Lyndon dry dock is much newer, so the depreciation on it is much higher. Dry dock overhead is charged to jobs based on direct labor-hours for the specific dock. 

Jerome is about to start two jobs, one for the Navy under a cost-plus contract and one for a private shipping company for a fixed fee. Both jobs will require the same number of hours. You have been asked to prepare some costing information. Your supervisor is sure the Navy job will be done at Lyndon and the private job will be done at Casgrain. 

Required

a. Compute the overhead rate at the two shipyards.

b. Why do you think your supervisor says that the Navy job will be done at Lyndon?

c. Is the choice of the production location ethical? Why?

Transcribed Image Text:

Overhead cost ($000).... Direct labor-hours (000). Casgrain Lyndon $16,800 $67,200 140,000 140,000