=+7-24 KK Application of capacity concepts OBJECTIVE 7 Motion Ltd is a manufacturer of the very popular G36 motorcycles. The management at Motion Ltd has recently adopted absorption costing and is debating which denominator-level concept to use. The G36 motorcycles sell for an average price of $8200. Budgeted fixed manufacturing overhead costs for 2014 are estimated at $6480000. Motion Ltd uses subassembly operators that provide component parts. The following are the denominator-level options that management has been considering:

a Theoretical capacity—based on three shifts, completion of five motorcycles per shift, and a 360-day year: 3 × 5 × 360 = 5400.