Energy Glow Light (EGL), a producer of energy-efficient light bulbs, expects that demand will increase markedly over the next decade. Due to the high fixed costs involved in the business, EGL 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 cost of production is $2.70 per bulb. Fixed manufacturing costs are $1,020,000 per year. Variable and fixed selling and administrative expenses are so 20 per bulb sold and $290,000, respectively. Because its light bulbs are currently popular with environmentally conscious customers, EGL can sell the bulbs for $9.50 each. EGL is deciding among various concepts of capacity for calculating the cost of each unit produced. Its choices are as follows: (Click the icon to view the capacity information.) Read the requirements Requirement 1. Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturing cost per unit Begin by determining the formula to calculate the inventoriable cost per unit. (Abbreviations used: mfg = manufacturing, admin. = administration.) Fixed mfg overhead rate Variable production cost Inventoriable cost per unit Now calculate the inventoriable cost per unit at each level of capacity Inventoriable Capacity type cost per unit $ S 3.90 Theoretical Practical $ 5.10 Normal $ 6.45 Master Budget $ 7.50 Requirement 2. Suppose EGL actually produces 250.000 bulbs. Calculate the production-volume variance using each level of capacity to compute the fixed manufacturing overhead allocation rate. Determine the formula that is used to calculate the production-volume variance. (Abbreviation used: mfg = manufacturing.) Production-volume 1 Total fixed mfg overhead ( Fixed mfg overhead rate Actual production * ) = variance Next calculate the production-volume variance at each level of capacity. Label each variance as favorable (F) or unfavorable (U). Production Capacity type Theoretical Practical volume-variance S 720,000 S 420,000 S 82,500 S $ 180,000 F Normal Master-Budget Requirement 3. Assume EGL has no beginning inventory. If this year's actual sales are 212.500 bulbs (and production is 250.000 bulbs), calculate operating income for EGL using each type of capacity to compute fixed manufacturing cost per unit. Calculate the operating income for each type of capacity. We will do the operating income calculations one at a time, beginning with theoretical. Label each variance as favorable (F) or unfavorable (U). Normal Revenue $ $ $ $ $ Theoretical 2,040,000 (828.750) (720.000) Practical 2.040,000 (1.083,750) (420,000 Master budget 2,040.000 (1,593,750) ( 180.000 Less: Cost of goods sold Production-volume variance - U 2.040,000 (1.370.625) (82.500) 586,875 (42,500) (290.000) Gross margin 401.250 536,250 626.250 Variable selling (42,500) (42,500) (290.000) (42,500) (200.000) Fixed selling (290.000) $ 158,750 $ 203,750 S 254,375 $ 293.750 Operating income Data table Theoretical capacity 850.000 bulbs Practical capacity 425,000 bulbs Normal capacity 272.000 bulbs (average expected output for the next 3 years) Master-budget capacity 212,500 bulbs expected production this year Print Done