Illuminate Bright Light (IBL), 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, IBL 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 $2.50 per bulb. Fixed manufacturing costs are $1,000,000 per year. Variable and fixed selling and administrative expenses are $0.25 per bulb sold and $250,000, respectively. Because its light bulbs are currently popular with environmentally conscious customers, IBL can sell the bulbs for $9 each.

IBL is deciding whether to use (when calculating the cost of each unit produced):

Theoretical capacity = 800,000

bulbs Practical capacity = 500,000

bulbs Normal capacity = 250,000 bulbs (average production for the next three years)

Master-budget capacity = 200,000 bulbs produced this year

Required:

1) Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturing cost per unit. (8 marks)

2) Calculate the production-volume variance using each level of capacity to compute the fixed manufacturing overhead allocation rate and this years production of 220,000 bulbs. (8 marks)

3) Assuming IBL has no beginning inventory, calculate operating income for IBL using each type of capacity to compute fixed manufacturing cost per unit and this years sales of 200,000 bulbs. (14 marks)