Effects of denominator-level choice. The Shen Company is a manufacturer of MP3 players. It installed standard costs and a flexible budget on January 1, 2009. The president has been pondering how fixed manufacturing overhead should be allocated to products. Machine-hours have been chosen as the allocation base. Her remaining uncertainty is the denominator level for machine-hours. She decides to wait for the first month’s results before making a final choice of what denominator level) should be used from that day forward.

In January 2009, the actual units of output had a standard of 28,000 machine-hours allowed. If the company used practical capacity as the denominator level, the fixed manufacturing overhead spending variance would be $4,000, unfavorable, and the production-volume variance would be $14,400, unfavorable. If the company used normal capacity utilization as the denominator level, the production-volume variance would be $8,000, favorable. Budgeted fixed manufacturing overhead was $48,000 for the month.

1. Compute the denominator level, assuming that the normal-capacity-utilization concept is chosen.

2. Compute the denominator level, assuming that the practical-capacity concept is chosen.

3. Suppose you are the executive vice president. You want to maximize your 2009 bonus, which depends on 2009 operating income. Assume that the production-volume variance is written off to cost of goods sold at year-end. Which denominator level would you favor? Why?