Earth Light First (ELF) is a producer of energy-efficient light bulbs and expects demand to increase markedly over the next decade (growth stage of product life cycle). Due to the high fixed costs involved in the business, ELF has decided to evaluate its financial performance using absorption costing income. The production volume variance is written off to Cost of Goods Sold. The variable production cost per bulb is $2.50. Fixed manufacturing costs at $1,000,000 per year. Variable and fixed selling and administrative expenses are $0.25 per bulb sold and $250,000 respectively.

Because the light bulbs are popular with environmentally conscious customers, ELF can sell the bulbs for $9.00 each. When calculating the cost per unit, ELF is unsure about which denominator level capacity to use:

Theoretical 800,000

Practical 500,000

Normal 250,000 (average for next three years)

Master-Budget 200,000

Required:

a) Calculate the product cost (inventoriable cost) for the bulbs under each capacity level.

b) Calculate the production volume variance for each capacity level assuming this year's production was 220,000 bulbs.

c) Comment on the results and recommend a capacity level to use