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Denominator-level problem. 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 2018 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:

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

a.

Theoretical capacity?based on two shifts, completion of four motorcycles per shift, and a 360-

24360=2,880

day year?

b. Practical capacity?theoretical capacity adjusted for unavoidable interruptions, breakdowns, and so

23320=1,920

forth?

c.

Normal capacity utilization?estimated at 1,200 units.

d.

Master-budget capacity utilization?the growing popularity of motorcycles has prompted the

marketing department to issue an estimate for 2018 of 1,500 units.