9-30 Denominator-level problem. (LO 1, 2) AJG Inc. is a manufacturer of the very popular G36 motorcycles. The management at AJG has recently adopted absorption costing and is debating which denominator-level concept to use. The G36 motorcycles sell for an average price of $8,500. Budgeted fixed manufacturing overhead costs for the year are estimated at $4,000,000. AJG Inc. uses subassembly operators that provide component parts. The following are the denominator-level options that management has been considering:

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1. Theoretical capacitybased on two shifts, completion of four motorcycles per shift, and a 360-day year24360=2,88024360=2,880.
2. Practical capacitytheoretical capacity adjusted for unavoidable interruptions, breakdowns, and so forth23320=1,92023320=1,920.
3. Normal capacity utilizationestimated at 1,200 units.
4. Master-budget capacity utilizationthe growing popularity of motorcycles has prompted the marketing department to issue an estimate for the year of 1,500 units.

Required

1. Calculate the budgeted fixed manufacturing overhead cost rates under the four denominator-level concepts.
2. What are the benefits to AJG Inc. 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?

Check Figure: 1. Theoretical budgeted fixed manufacturing overhead cost rate, $1,388.89