Exercise 7-38 (Static) Predetermined Overhead Rates: Ethical Issues (LO 7-3, 5) Marine Components produces parts for airplanes and ships. The parts are produced to specification by their customers,...

Marine Components produces parts for airplanes and ships. The parts are produced to specification by their customers, who pay either a fixed price (the price does not depend directly on the cost of the job) or price equal to recorded cost plus a fixed fee (cost plus). For the upcoming year (year 2), Marine expects only two clients (client 1 and client 2). The work done for client 1 will all be done under fixed-price contracts while the work done for client 2 will all be done under cost-plus contracts.

Manufacturing overhead for year 2 is estimated to be $10 million. Other budgeted data for year 2 include the following:

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.