Global Energy Saver (GES ), 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, GES 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 $ 2.10 per bulb. Fixed manufacturing costs are $ 1,125,000 per year. Variable and fixed selling and administrative expenses are $ 0.20 per bulb sold and $ 220,000, respectively. Because its light bulbs are currently popular with environmentally conscious customers, GES can sell the bulbs for $ 9.20 each. GES is deciding among various concepts of capacity for calculating the cost of each unit produced. Its choices are as follows:

1. Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturing cost per unit.

2. Suppose GES actually produces 250,000 bulbs. Calculate the production-volume variance using each level of capacity to compute the fixed manufacturing overhead allocation rate.

3. Assume GES has no beginning inventory. If this year's actual sales are 187,500 bulbs, calculate operating income for GES using each type of capacity to compute fixed manufacturing cost per unit.

Theoretical capacity Practical capacity Normal capacity Master-budget capacity 750,000 bulbs 375,000 bulbs 225,000 bulbs (average expected output for the next three years) 187,500 bulbs expected production this year Theoretical capacity Practical capacity Normal capacity Master-budget capacity 750,000 bulbs 375,000 bulbs 225,000 bulbs (average expected output for the next three years) 187,500 bulbs expected production this year