Thunder Bolt Inc., is a manufacturer of the very popular G36 motorcycles. The management at Thunder Bolt has recently adopted absorption costing and is debating which denominator-level concept to use. The G36 motorcycles sell for an average price of $8,200. Budgeted fixed manufacturing overhead costs for 2012 are estimated at $6,480,000. Thunder Bolt Inc., uses subassembly operators that provide component parts. The following are the denominator-level options that management has been considering:a. Theoretical capacity--based on three shifts, completion of five motorcycles per shift, and a 360-day year--3 x 5 x 360 = 5,400.b. Practical capacity--theoretical capacity adjusted for unavoidable interruptions, breakdowns, and so forth--3 x 4 x 320 = 3,840.c. Normal capacity utilization--estimated at 3,240 units. d. Master-budget capacity utilization--the strengthening stock market and the growing popularity of motorcycles have prompted the marketing department to issue an estimate for 2012 of 3,600 units. Required:1. Calculate the budgeted fixed manufacturing overhead cost rates under the four denominator-level concepts.2. What are the benefits to Thunder Bolt, Inc., of using either theoretical capacity or practical capacity?3. Under a cost-based pricing system, what are the negative aspects of a master-budget denominator level? What are the positive aspects?

Explanation:

Ans1. budgeted fixed manufacturing overhead costs rates:

denominator, level capacity concept budgeted fixed manufacturing overhaed per period budgeted capacity level budgeted fixed manufacturig overhead cost rate ;

theoritical= $6,480,000 5,400$1,200.00

practical 6,48,000 3,840 1,687.50

normal 6,480,000 3240 2,000.00

master - budget 6,480,000 3,600 1,800

The rates are different because of varying denominator- level concepts. theoriitical and practical capacity levels are driven by supply-side concepts,i.e," how much can I produce?" Normal and master budgete capacity levels are driven by demand- side concepts, i.e ," how much can I sell"/

Ans 2 :- The variance that arise from use of the theoritical or practical levels concepts will signal that there is a divergence between for capacity. this is useful input to managers. As a general rule, however , it is important not to place undue reliance on the production volume variance as a measure of the economic costs of unused capacity.

Ans 3:- Under a cost - based pricing system, the choice of a master - budget level deniminator will lead to high prices when demand is low (more fixed costs allocated to the individual product level), further eroding demand ; conversely ,it will lead to low prices when demand ; conversely , it will lead to low prices when demand is high, forgoig profits. This has been refered to as the downward demand spiral- the continuing reduction in demand that occurs when the prices of the competitors are not met and demand drops , resulting in even higher unit costs and even more reluctance to meet the prices of competitors. The positive aspects of the master - budget denominator level are that it is based on demand for the product and indicates the price at which all costs per unit would be recovered to enable teh company to make a profit.Master budget denominator level is also a good bench mark against which to evaluate performance.

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