Vintage Cycles, Inc., is a manufacturer of the very popular G36 motorcycles. The management at Vintage Cycles has recently adopted absorption costing and is debating which denominator-level concept to use. The G36 motorcycles sell for an average price of $ 8400 . Budgeted fixed manufacturing overhead costs for 2014 are estimated at $ 5,940,000 . Vintage Cycles , Inc., uses subassembly operators that provide component parts. The following are the denominator-level options that management has been considering:

a. Theoretical capacitylong dash based on two shifts, completion of six motorcycles per shift, and a 360-day yearlong dash 2 x 6 x 360 = 4,320.

b. Practical capacitylong dash theoretical capacity adjusted for unavoidable interruptions, breakdowns, and so forthlong dash 2 x 5 x 320= 3,200 .

c. Normal capacity utilizationlong dash estimated at 2,700 units.

d. Master-budget capacity utilizationlong dash the strengthening stock market and the growing popularity of motorcycles have prompted the marketing department to issue an estimate for 2014 of 3,000 units.

Requirements

1. Calculate the budgeted fixed manufacturing overhead cost rates under the four denominator-level concepts.

2. What are the benefits to Vintage Cycles , Inc., of using either theoretical capacity or practical capacity?

3. Under a cost-based pricing system, what are the negative aspects of a master-budget denominator level? What are the positive aspects?