KU Overhead Allocation Memorandum

Assume that your company sells portable housing to both general contractors and the government. It sells jobs to contractors on a bid-basis. A contractor asks for three bids from different manufacturers. The combination of low bid and high quality wins the job. However, jobs sold to the government are bid on a cost-plus basis. This means the price is determined by adding all costs plus a profit based on cost at a specified percent, such as 10%. You observe that the amount of overhead allocated to government jobs is higher than that allocated to contract jobs. This concerns you.

Write a memo (minimum 100 words) to your company’s Chief Financial Officer outlining your concerns regarding the overhead allocation and the possible long-term effects this may have on one or more of the following – a) the company’s long-term profitability, b) the potential for wasteful overhead practices, c) the company’s reputation, and/or d) the ethical implications of placing a greater overhead burden on the American taxpayer.