$7-41.$ Predetermined Overhead Rates: Ethical Issues

Wanda Instrumentation produces navigational equipment for ships, aircraft $($both staffed and drones$),$ and land vehicles. The parts are produced to specification by their customers. Depending on the customer and the type of job, the customer pays according to the terms of either a $$fixed$-$price$$ contract $($the price does not depend directly on the cost of the job$)$ or a $$cost$-$plus$$ contract $($the price is equal to recorded cost plus a fixed fee$).$ Wanda expects only two clients $($Ivanhoe Aviation and Rolf$$s Shipyard$)$ in Year $2.$ The work done for Ivanhoe will all be done under cost$-$plus contracts, while the work done for Rolf$$s will all be done under fixed$-$price contracts.

Selected budget data for Year $2$ include the following:

Required

Compute the predetermined rate assuming that Wanda Instrumentation uses direct labor costs to apply overhead.

Compute the predetermined rate assuming that Wanda Instrumentation uses direct materials cost to apply overhead.

Which allocation base will provide higher income for Wanda Instrumentation?

Is it ethical to choose an allocation method based on which one leads to higher income for the firm?