$9-25$ ABSORPTION COSTING AND PRODUCTION$-$VOLUME VARIANCE$-$ ALTERNATIVE CAPACITY BASES.$$

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 busness, ELF has decided to evaluate its financial performance using absorption costing income. The production$-$volume variance is written off to COGS. The variable cost of production is $$2\mathrm{.}50$ per bulb. Fixed manufacturing costs are $$1,000,000$ per year. Variable and fixed selling and administrative expenses are $$0\mathrm{.}25$ per bulb sold and $$250,000,$ respectively. Because its light bulbs are currently popular with environmentally conscious customers, ELF can sell the bulbs for $$9$ each.$$

ELF is deciding whether to use, when calculating the cost of each unit produced,$$

Theoretical capacity $800,000$ bulbs$$

Practical capacity $500,000$ bulbs$$

Normal capacity $250,000$ bulbs $($average production for the next three years$)$

Master$-$budget capacity $200,000$ bulbs produced this year$$

Required$$

$1.$ 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 and this year's production of $220,000$ bulbs.

$4.$ Assume that ELF produces $260,000$ bulbs and sells $200,000$ bulbs. Calculate operating income for ELF using each type of capacity as the denominator level.

$5.$ a$)$ Prepare variable costing income statement. Assume that ELF produces $220,000$ bulbs and sells $200,000$ bulbs. b$)$ Prepare variable costing I$/$S$.$ Assume that ELF produces $260,000$ bulbs and sells $200,000$ bulbs.