Question

Earth's Best Light (EBL), 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, EBL has dec 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 co $1,020,000 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 cons EBL can sell the bulbs for $9.90 each. (Click the icon to view the capacity information.) Requirements 1. Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturing cost per unit. 2. Calculate the production-volume variance using each level of capacity to compute the fixed manufacturing overhead allocation rate and this year's production of 260,000 bulbs. 3. Assuming EBL has no beginning inventory, calculate operating income for EBL using each type of capacity to compute fixed manufacturing cost per unit and this year's sales of 212,500 bulbs. Requirement 1 Begin by determining the formula to calculate the inventoriable cost per unit. More Info - X le Cost Per Unit EBL is deciding whether to use, when calculating the cost of each unit produced: Theoretical capacity 850,000 bulbs Practical capacity 425,000 bulbs Normal capacity 272,000 bulbs (average production for the next three years) Master-budget capacity 212,500 bulbs produced this year

Answer 1

1	Calculation of Inventory cost per unit			Variable Production cost + Fixed manufacturing overhead
					Capacity
	1	A	B	C=B/A	D = Variable	E=C+D
	Capacity	bulbs	Fixed cost		COP
	Theretical	850000	$1,020,000	$1.20	$2.10	$3.30
	Practical	425000	$1,020,000	$2.40	$2.10	$4.50
	Normal	272000	$1,020,000	$3.75	$2.10	$5.85
	Master-budget	212500	$1,020,000	$4.80	$2.10	$6.90
2	PLF's actual production level is 260,000 bulbs
	Computing the production-volume variance as:
		Prodn. Vol. Variance =
		Budgeted Fixed Mfg. O/H - (Fixed Mfg. O/H rate & times ; Actual Prodn. Level)
					D
	1	A	B	C=B/A	Prodn.	E = B - D
	Capacity	bulbs	Fixed cost		260000
	Theretical	850000	$1,020,000	$1.20	$312,000	$708,000
	Practical	425000	$1,020,000	$2.40	$624,000	$396,000
	Normal	272000	$1,020,000	$3.75	$975,000	$45,000
	Master-budget	212500	$1,020,000	$4.80	$1,248,000	($228,000)

						Sales
						215500
1	A	B	C=B/A	Prodn.	E = B - D	9.8			Gross Margin	V. cost	Fixed cost	Total
Capacity	bulbs	Fixed cost		215500		2111900		212500		212500 x 0.40		Cost	Profit/Loss
Theretical	850000	$1,020,000	$1.20	$258,600	$761,400	$1,350,500	$3.30	$701,250.00	$60,150.00	85000	240000	325000	($264,850.00)
Practical	425000	$1,020,000	$2.40	$517,200	$502,800	$1,609,100	$4.50	$956,250.00	($453,450.00)	85000	240000	325000	($778,450.00)
Normal	272000	$1,020,000	$3.75	$808,125	$211,875	$1,900,025	$5.85	$1,243,125.00	($1,031,250.00)	85000	240000	325000	($1,356,250.00)
Master-budget	212500	$1,020,000	$4.80	$1,034,400	($14,400)	$2,126,300	$6.90	$1,466,250.00	($1,480,650.00)	85000	240000	325000	($1,805,650.00)