Required 9-38 Motivational considerations in denominator-level capacity selection continuation of 9-37). 1. If the plant manager of the Jacksonville Brewery gets a bonus based on operating income, which denominator-level capacity concept would he prefer to use? Explain. 2. What denominator-level capacity concept would Castle Lager prefer to use for U.S. income tax report- ing? Explain. 3. How might the IRS limit the flexibility of an absorption-costing company like Castle Lager attempting to minimize its taxable income? operating income. Magic Me is effect 9-37 Alternative denominator-level capacity concepts, effect on operating income. Castle Lager has just purchased the Jacksonville Brewery. The brewery is two years old and uses absorption costing. It will "sell" information about Jacksonville Brewery's capacity and budgeted fixed manufacturing costs for 2017: is product to Castle Lager at $47 per barrel. Peter Bryant, Castle Lager's controller, obtains the following Review View Home Insert Page Layout Formulas Data A B 1 Budgeted Fixed 2 Denominator-Level Manufacturing 3 Capacity Concept Overhead per Period 4 Theoretical capacity $27,900,000 5 Practical capacity $27,900,000 6 Normal capacity utilization $27,900,000 Master-budget capacity utilization 7 for each half year. 8 (a) January-June 2017 $13,950,000 9 (6) July-December 2017 $13,950,000 D E Days of Hours of Production Production Barrels per Period per Day per Hour 358 22 545 348 20 510 348 20 410 174 174 20 20 315 505 1. Compute the budgeted fixed manufacturing overhead rate per barrel for each of the denominator-level capacity concepts. Explain why they are different. 2 In 2017, the Jacksonville Brewery reported these production results: CE Home Insert Page Layout Formulas Data B 12 Beginning inventory in barrels, 1-1-2017 0 13 Production in barrels 2,670,000 14 Ending inventory in barrels, 12-31-2017 210,000 15 Actual variable manufacturing costs $80,634,000 16 Actual fixed manufacturing overhead costs $26,700,000 There are no variable cost variances. Fixed manufacturing overhead cost variances are written off to cost of goods sold in the period in which they occur. Compute the Jacksonville Brewery's operating income when the denominator-level capacity is (a) theoretical capacity. (b) practical capacity, and (c) normal capacity utilization. niderations in denominator-level capacity selection (continuation of 9-37)