Alternative denominator-level capacity concepts, effect on operating income. Lissom Lager has just purchased Austin Brewery. The brewery is two years old and uses absorption costing. It will “sell” its product to Lissom Lager at $45 per barrel. Paul Brandon, Lissom Lager’s controller, obtains the following information about Austin Brewery’s capacity and budgeted fixed manufacturing costs for 2009:

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 2009, Austin 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 Austin Brewery’s operating income when the denominator-level capacity is

(a) theoretical capacity,

(b) practical capacity, and

(c) normal capacity utilization.LO1

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Denominator-Level Capacity Concept per period Budgeted fixed manufacturing overhead Days of Production per Period Hours of Production per Day Barrels per Hour Theoretical capacity $28,000,000 360 Practical capacity $28,000,000 350 Normal capacity utilization $28,000,000 350 2222 24 540 20 500 20 400 Master-budget capacity for each half year (a) January-June 2009 $14,000,000 175 (b) July-December 2009 $14,000,000 175 220 320 480