Dave Riley is about to enter the highly competitive wearable electronics market with a new fitness tracker designed especially for runners. In anticipation of future growth, Riley has leased a large manufacturing facility and has purchased several expensive pieces of equipment. In 2020, Riley's first year of operations, the following information is available:

Budgeted production. 40,000 units

Budgeted sales 40,000 units

Practical capacity60,000 units

Fixed manufacturing overhead$1,400,000

Variable manufacturing costs per unit:

Direct materials.. $15

Direct manufacturing labor $20

Manufacturing overhead $10

Required:

1. Assume that Riley uses absorption costing and uses budgeted units of production as the denominator for calculating its fixed manufacturing overhead rate. Selling price is set at 150% of manufacturing cost. Compute Riley's selling price.

2. Riley enters the market with the selling price computed in part 1. However, despite growth in the overall market, sales are not as robust as had been expected, and a competitor has priced its product $15 lower than Riley's. Dave Riley insists that the competitor must be pricing its product at a loss, and that the competitor will be unable to sustain that. In response, Riley makes no price adjustments, but budgets production and sales for 2021 at 35,000 units. Variable manufacturing costs per unit and fixed manufacturing overhead costs are not expected to change.
3. 1. Compute Riley's new selling price for 2021.
   2. Comment on how Riley's choice of budgeted production to calculate its fixed manufacturing overhead rate affected its selling price and competitive position

(Hint: Comment on whether this is an example of the downward demand spiral).

Using the original information given above, (a) recompute the selling price using practical capacity (i.e., 60,000 units) as the denominator level of activity; (b) How would this choice affect the production-volume variance?