Denominator-level problem. The Spalding Sails company produces the Spalding 26, a very popular 8-metre recreational yacht. Spalding Sails takes pride in the high quality they build into their affordable yachts. The company has been in business for 35 years.

Management has recently adopted absorption costing and is debating which denominatorlevel concept to use. This Spalding 26 sells for an average price of $18,000. Budgeted fixed manufacturing overhead for 2007 is estimated at $4,560,000. Spalding uses subassembly operators that provide component parts. Assume for simplicity each yacht can be started and completed in a single shift. The following are the denominator-level options that manage¬

ment has been considering:

a. Theoretical capacity—based on 2 shifts, completion of 5 boats per shift, and a 360-day year—2 X 5 X 360 = 3,600.

b. Practical capacity—theoretical capacity adjusted for unavoidable interruptions, breakdowns, etc.—2 X 4 X 300 = 2,400.

c. Normal capacity utilization—based on the marketing department’s estimate of 1,200 units.

d. Master-budget capacity utilization—the booming stock market and a record number of baby boomers retiring over the coming year has prompted the marketing department to issue a special estimate for 2007 of 1,440 units.

Required 1. Calculate the budgeted fixed manufacturing overhead cost rates under the four alternative denominator-level concepts.

2. Why compute fixed costs at the individual product level? Why is this done under absorp¬

tion costing?

3. Why would Spalding Sails prefer to use either theoretical or practical capacity?

4. Under a cost-based pricing system, what is the negative aspect of a master budget denom¬

CHAPTER 9 inator level? What may be the positive aspect?