PART 1

Leafs Ale recently purchased a brewing plant from a bankrupt company. It was constructed only two years ago. The plant has budgeted fixed manufacturing overhead of $50 million per year ($4.167 million each month) in 2020. Austin Matthews, the controller of the brewery, must decide on the denominator level concept to use in its absorption costing system for 2020. The options available to him are:

1. Theoretical capacity: 600 barrels an hour for 24 hours a day for 365 days=5,256,000365 days=5,256,000 barrels
2. Practical capacity: 500 barrels an hour for 20 hours a day for 350 days=3,500,000350 days=3,500,000 barrels
3. Normal capacity utilization for 2020: 400 barrels an hour for 20 hours a day for 350 days=2,800,000350 days=2,800,000 barrels
4. Master-budget capacity utilization for 2020 (separate rates computed for each half-year):
   1. January to June 2020 budget320 barrels an hour for 20 hours a day for 175 days=1,120,000175 days=1,120,000 barrels
   2. July to December 2020 budget480 barrels an hour for 20 hours a day for 175 days=1,680,000175 days=1,680,000 barrels

Variable standard manufacturing costs per barrel are $51.40 (variable direct materials, $38.40; variable manufacturing labour, $6.00; and variable manufacturing overhead, $7.00). The brewery sells its output to the sales division of Leafs Ale at a budgeted price of $82.00 per barrel.

In 2020, the brewery of Leafs Ale showed these results:

Number of Barrels:
Inventory, January 1, 2020	0
Production	2,600,000
Inventory, December 31, 2020	200,000

The brewery had actual costs of:

Variable Manufacturing	$ 144,456000
Fixed Manufacturing Overhead	48,758,400

The sales division of Leafs Ale purchased 2,400,000 barrels in 2020 at the $82 per barrel rate. All manufacturing variances are written off to COGS in the period in which they are incurred.

Required

1. Compute the budgeted fixed manufacturing overhead rate using each of the four denominator-level concepts for

(a) beer produced in March 2020 and

(b) beer produced in September 2020.

Explain why any differences arise.

2. Compute the operating income of the brewery using the following:

(a) theoretical capacity,

(b) practical capacity, and

(c) normal capacity utilization denominator-level capacity concepts.

Explain any differences between (a), (b), and (c).

PART 3

Betty's Book and Music Store has two service departments, Warehouse and Data Centre. Warehouse Department costs of $175,000 are allocated on the basis of budgeted warehouse-hours. Data Centre Department costs of $75,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $125,000 and $150,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:

	Support Departments		Production Departments
	Warehouse Department	Data Centre Department	Music	Books
Budgeted costs	$175,000	$75,000	$125,000	$150,000
Budgeted warehouse-hours	NA	250	500	750
Number of computer hours	100	NA	400	500

Required:

1. Assign the support department costs to the production departments using
   1. The Direct Method
   2. The Step-Down Method assigning the Warehouse Department first
   3. The Step-Down Method assigning the Data Centre Department first

PART 2

Husky Crafts currently sells motor boats for $60,000. It has costs of $46,500. A competitor is bringing a new motor boat to the market that will sell for $55,000. Management believes it must lower the price to $55,000 to compete in the market for motor boats. Marketing believes that the new price will cause sales to increase by 12.5%, even with a new competitor in the market. Husky Crafts' sales are currently 2,000 motor boats per year.

Required:

a. What is the new target cost if target operating income is 25% of sales?

b. What is the change in operating income if marketing is correct and only the sales price is changed?

c. What is the target cost if the company wants to maintain its same income level, and marketing is correct?