Castle Lager has just purchased the Jacksonville Brewery. The brewery is two years old and uses absorption costing. It will “sell” its product to Castle Lager at $ 47 per barrel. Peter Bryant, Castle Lager’s controller, obtains the following information about Jacksonville Brewery’s capacity and budgeted fixed manufacturing costs for 2014:

Required
1. Compute the budgeted fixed manufacturing overhead rate per barrel for each of the denominator-level capacity concepts. Explain why they are different.
2. In 2014, the Jacksonville Brewery reported these production results:

There are no variable cost variances. Fixed manufacturing overhead cost variances are written off to cost of goods sold in the period in which they occur. Compute the Jacksonville Brewery’s operating income when the denominator-level capacity is
(a) Theoretical capacity,
(b) Practical capacity,
(c) Normal capacityutilization.

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B. Budgeted Fixed Daysof Hours of Denominator-Level Capacity Concept Manufacturing Production Production Barrels Overhead per Period | per Period | Per Day | per Hour $27,900,000 S27,900,000 $27 900,000 358 348 348 545 510 410 al c Practical capacity Normal capacity utlization Master-budget capacity for each 20 20 $13,950,000 174 174 20 20 315 505 b July-December 2014 Production in barrels 2,670,000 210,000 $80,634,000 S26,700,000 Actual variable manufacturing costs Actual fixed manufacturing overhead costs