In-A-Flash, Inc. is a manufacture of the very popular G36 motor cycles. The management at In-A-Flash has recently adopted absorption costing and is debating which denominator-level concept to use. The G36 motorcycles sell for an average price of $8,900. Budgeted fixed manufacturing overhead costs for 2014 are estimated at $3,024. In-A-Flash, Inc., uses subassembly operators’ tha provide component parts. The following are the denominator-level options that management has been considering:
a. Theoretical capacity-based on two shifts, completion of three motorcycles per shift, and 360 day year-2 x3 x 360=2,160
b. Practical capacity-theoretical capacity adjusted for unavoidable interuptions, breakdowns, and so forth-2 x 2 x 320=1,280
c. Normal capacity utilization-estimated at 560 units.
d. Master-budget capacity utilization-the strengthening stock market and the growing popularity of motorcycles have promoted the marketing department to issue an estimate for 2014 of 960 units.
Requirements
1. Calculate the budgeted fixed manufacturing overhead cost rates under the four denominator-level concepts.
2. What are the benefits to In-A-Flash, Inc., of using either theoretical capacity or practical capacity?
3. Under a cost-based pricing system, what are the negative aspects of a master-budget denominator level? What are the positive aspects.