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 $1,035,000 per year. Variable and fixed selling and administrative expenses are $0.40 per bulb sold and $240,000, respectively. Because its light bulbs are currently popular with environmentally conscious customers, GES can sell the bulbs for $9.50 each. GES is deciding among various concepts of capacity for calculating the cost of each unit produced. Its choices are as follows: (Click the icon 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 mig overhead rate Variable production cost Inventoriable cost per unit Now calculate the inventoriable cost per unit at each level of capacity Inventoriable cost per unit 3.25 Capacity type Theoretical Practical Normal Master Budget $ 4.35 $ 6.60 7.85 $ Requirement 2. Suppose GES actually produces 200,000 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 Total fixed mfg overhead -( Fixed mig 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 volume-variance Theoretical $ 805,000 Practical S 585,000 U Normal 135,000 U Master-Budget 115,000 F S S Requirement 3. Assume GES has no beginning inventory. If this year's actual sales are 180,000 bulbs, calculate operating income for GES 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). Theoretical Revenue Less: Cost of goods sold Production-volume variance Gross margin Variable selling Fixed selling Operating income Data Table Theoretical capacity 900,000 bulbs Practical capacity 460,000 bulbs Normal capacity 230,000 bulbs (average expected output for the next three years) Master-budget capacity 180,000 bulbs expected production this year Print Done 1. Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturing cost per unit. 2. Suppose GES actually produces 200,000 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 180,000 bulbs, calculate operating income for GES using each type of capacity to compute fixed manufacturing cost per unit
