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9-26: Denominator-level problem. The Spalding Sails company produces the Spalding 26, a very popular 26-foot recreational sail boat. Spalding Sails takes pride in the high
9-26: Denominator-level problem. The Spalding Sails company produces the Spalding 26, a very popular 26-foot recreational sail boat. Spalding Sails takes pride in the high quality it builds into its affordable boats. The company has been in business for 35 years. Management has recently adopted absorption costing and is debating which denominator-level concept to use. The Spalding 26 sells for an average price of $15,000. Budgeted fixed manufacturing overhead costs for 2019 are estimated at $3,800,000. Spalding uses subassembly operators that provide component parts. The following are the denominator-level options that management has been considering: a. Theoretical capacity- based on two shifts, completion of four boats per shift, and a 360-day year- 2 x 4 x 360 = 2,880. b. Practical capacity- theoretical capacity adjusted for unavoidable interruptions, breakdowns, and so forth- 2 x 3 x 300 = 1,800. c. Normal capacity utilization-estimated at 1,000 units. d. Master-budget capacity utilization- the strengthening stock market and a record number of baby boomers retiring over the coming year has prompted the Marketing Department to issue an estimate for 2019 of 1,200 units. 1. Calculate the budgeted fixed manufacturing overhead cost rates under the four denominator-level concepts. 2. What are the benefits of Spalding Sails of using either theoretical capacity or practical capacity? 3. Under a cost-based pricing system, what are the negative aspects of a master-budget denominator-level? What are the positive aspects? 9-26: Denominator-level problem. The Spalding Sails company produces the Spalding 26, a very popular 26-foot recreational sail boat. Spalding Sails takes pride in the high quality it builds into its affordable boats. The company has been in business for 35 years. Management has recently adopted absorption costing and is debating which denominator-level concept to use. The Spalding 26 sells for an average price of $15,000. Budgeted fixed manufacturing overhead costs for 2019 are estimated at $3,800,000. Spalding uses subassembly operators that provide component parts. The following are the denominator-level options that management has been considering: a. Theoretical capacity- based on two shifts, completion of four boats per shift, and a 360-day year- 2 x 4 x 360 = 2,880. b. Practical capacity- theoretical capacity adjusted for unavoidable interruptions, breakdowns, and so forth- 2 x 3 x 300 = 1,800. c. Normal capacity utilization-estimated at 1,000 units. d. Master-budget capacity utilization- the strengthening stock market and a record number of baby boomers retiring over the coming year has prompted the Marketing Department to issue an estimate for 2019 of 1,200 units. 1. Calculate the budgeted fixed manufacturing overhead cost rates under the four denominator-level concepts. 2. What are the benefits of Spalding Sails of using either theoretical capacity or practical capacity? 3. Under a cost-based pricing system, what are the negative aspects of a master-budget denominator-level? What are the positive aspects
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