AP Koolie Kooler Company just finished its year-end rush. Sales over the holidays were strong, helping the

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Question:

AP Koolie Kooler Company just finished its year-end rush. Sales over the holidays were strong, helping the company come close to its budgeted practical capacity level. Meili had run the numbers for the company’s profitability using the actual (and budgeted) $465 selling price per unit. While profits looked acceptable, she knew upper management was hoping for better. She wondered if the results might look better if Koolie Kooler had used a different level of budgeted production.

Meili gathered the following information, showing three different denominator levels that had been considered, along with budgeted costs and actual results for the year just ended.

Theoretical Practical Normal
Budgeted production (units) 5,000 4,000 3,500
Budgeted Costs
Fixed manufacturing costs $450,000
Fixed operating costs of 390,000
Variable operating costs (per unit) 45
Actual Results
Units produced 3,800
Units sold 3,500
Fixed manufacturing costs $470,000
Variable manufacturing costs $665,000
There was no beginning FG Inventory, and there were no variable cost variances this year. Fixed operating costs also came in on budget. Any other standard cost variances were to be written off directly to the cost of goods sold.

Required

1. Calculate the budgeted fixed-MOH rate for each possible denominator level. Further, determine the cost per unit that Meili would include in inventory for each level.
2. Prepare income statements for each denominator level, in good form, for the year that just ended.
3. For which budgeted level of production would income have looked the best? Worst? Explain why operating income is the same or different for these different denominator levels.
4. If the company expects to draw down its FG Inventory next year, will the same denominator level show the best operating income as in part (c)? Why or why not?