DOD'S POLICY REQUIRES THAT MERCHANDISE PURCHASED IN THE UNITED STATES BE MOVED AT NONAPPROPRIATED FUND EXPENSE TO THE PORT OF EMBARKATION NEAREST THE OVERSEAS DESTINATION. ALTHOUGH NONAPPROPRIATED FUND ACTIVITIES SAVED LAND TRANSPORTATION COSTS BY SELECTING PORTS CLOSER TO THE MERCHANDISE SOURCES, APPROPRIATED FUND COSTS INCREASED BECAUSE OF THE LONGER OCEAN DISTANCES TO OVERSEAS DESTINATIONS. DOD WAS OFTEN NOT REIMBURSED FOR NONAPPROPRIATED FUND ACTIVITIES THAT USED THE DEFENSE TRANSPORTATION SYSTEM WHEN APPROPRIATED FUND SUPPORT WAS NOT AUTHORIZED. UNREIMBURSED COSTS FOR THE PERIOD 1964 TO 1976 TOTALED OVER $7 MILLION. IN ADDITION, THE NAVY FINANCED OVERSEAS LAND TRANSPORTATION COSTS WITH APPROPRIATED FUNDS, AND FOREIGN MADE MERCHANDISE WAS SHIPPED FROM NEW YORK TO HAWAII AT APPROPRIATED FUND EXPENSE. GAO RECOMMENDS THAT DOD DIRECT THE NONAPPROPRIATED FUND ACTIVITIES TO REIMBURSE OCEAN COSTS INCURRED IN EXCESS OF THOSE APPLICABLE TO SHIPMENT THROUGH THE PORT OF EMBARKATION NEAREST THE OVERSEAS DESTINATION. DOD SHOULD ALSO INSTITUTE PROCEDURES FOR ASSURING THAT NONAPPROPRIATED FUND ACTIVITIES ARE PROPERLY CHARGED FOR REIMBURSABLE TRANSPORTATION SERVICES. OTHER SUGGESTIONS ARE NOTED. APPENDIXES CONTAIN SUPPLEMENTARY CORRESPONDENCE AND THE NAMES OF SOME DOD OFFICERS. (WJR)