Operating income effects of denominator-level choice and disposal of production- volume variance.

In 9-26

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

REQUIRED

1. If ELF sells all 220,000 bulbs produced, what would be the effect on operating income of using each type of capacity as a basis for calculating manufacturing cost per unit?

2. Compare the results of operating income at different capacity levels when 200,000 bulbs are sold and when 220,000 bulbs are sold. What conclusion can you draw from the comparison?

3. Using the original data (that is, 220,000 units produced and 200,000 units sold), if ELF had used the proration approach to allocate the production-volume variance, what would operating income have been under each method?