Earth Light First (ELF), 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, ELF 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 $2.50 per bulb. Fixed manufacturing costs are $1,000,000 per year. Variable and fixed selling and administrative expenses are $0.25 per bulb sold and $250,000, respectively. 
Because its light bulbs are currently popular with environmentally conscious customers, ELF can sell the bulbs for $9.00 each.
ELF is deciding whether to use, when calculating the cost of each unit produced:
Theoretical capacity ...... 800.0 bulbs
Practical capacity ....... 500,000 bulbs
Normal capacity ...... 250.0 bulbs (average production for the next three years)
Master-budget capacity .... 200,000 bulbs produces this year
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 220,000 bulbs.
3. Assuming ELF has no beginning inventory, calculate operating income for ELF using each type of capacity to compute fixed manufacturing cost per unit and this year’s sales of
200,000 bulbs.

  • CreatedJuly 31, 2015
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