Question

# Que Lunner Planet Light First (PLF), 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, PLF 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 $2.60 per bulb. Fixed manufacturing costs are $1,170,000 per year. Variable and fixed selling and administrative expenses are $0.30 per bulb sold and $250,000, respectively. Because ils light bulbs are currently popular with environmentally conscious customers, PLF can sell the bulbs for $9.10 each. PLF is deciding among various concepts of capacity for calculating the cost of each unit produced. Its choices are as follows: (Click the icon to view the capacity information.) Read the requirements. Requirement 1. Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturing cost per unit. Begin by determining the formula to calculate the inventoriable cost per unit. (Abbreviations used: mfg - Manufacturing, admin. - administration) i Data Table Now calculate the inventoriable cost per unit at each level of capacity Inventorlable cost per unit Capacity type Theoretical Practical Theoretical capacity Practical capacity Normal capacity Master-budget capacity 900,000 bulbs 520,000 bulbs 260,000 bulbs (average expected output for the next three years) 225,000 bulbs expected production this year Normal Master Budget Print Done Requirement 2. Suppose PLF actually produces 300,000 bulbs. Calc Head allocation rate. Determine the formula that is used to calculate the production-volume variance. (Abbreviation used: mig manufacturing.) Production-volume variance Next calculate the production-volume variance at each level of capacity. Label each variance as favorable (F) or unfavorable (U). Production Choose from any list or enter any number in the input fields and then continue to the next question

Answer 1

1	Inventoriable cost per unit=Fixed manufacturing overhead rate+Variable cost of production
	Fixed manufacturing overhead rate=Fixed manufacturing cost/Capacity in bulbs
	Capacity type		Capacity in bulbs	Fixed manufacturing cost	Fixed manufacturing overhead rate	Variable cost of production	Inventoriable cost per unit
			a	b	c=b/a	d	e=c+d
	Theoratical		900000	1170000	1.3	2.6	3.9
	Practical		520000	1170000	2.25	2.6	4.85
	Normal		260000	1170000	4.5	2.6	7.1
	Master budget		225000	1170000	5.2	2.6	7.8
2	Production volume variance=Fixed manufacturing cost-(Fixed manufacturing overhead rate*Actual production)
	If the answer is positive variance is Unfavorable.Otherwise favorable.
	Actual production=300000 bulbs
	Capacity type		Capacity in bulbs	Fixed manufacturing cost	Fixed manufacturing overhead rate	Fixed manufacturing overhead rate * Actual production	Production volume variance
			a	b	c=b/a	d=c*300000	e=b-d
	Theoratical		900000	1170000	1.3	390000	780000	U
	Practical		520000	1170000	2.25	675000	495000	U
	Normal		260000	1170000	4.5	1350000	180000	F
	Master budget		225000	1170000	5.2	1560000	390000	F
3					Theoratical	Practical	Normal	Master budget
	Revenue			(225000*9.10)	2047500	2047500	2047500	2047500
	Less: Cost of goods sold				877500	1091250	1597500	1755000
	(Bulbs sold*Inventoriable cost per unit)				(225000*3.9)	(225000*4.85)	(225000*7.1)	(225000*7.8)
	Production volume variance			(Note:1)	780000	495000	-180000	-390000
	Gross margin				390000	461250	630000	682500
	Variable selling			(225000*0.30)	67500	67500	67500	67500
	Fixed selling				250000	250000	250000	250000
	Operating income				72500	143750	312500	365000
	Note:1
	Reduce Unfavorable production volume variance from revenue to get gross margin
	Add favorable production volume variance with revenue to get gross margin