Denominator-level problem. 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 denominatorlevel concept to use. The G36 motorcycles sell for an average price of $8,200. Budgeted fixed manufacturing overhead costs for 2017 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-dayyear-3 x 5 x 360 = 5,400.b. Practical capacity-theoretical capacity adjusted for unavoidable interruptions, breakdowns, and soforth-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 mo-torcycles have prompted the marketing department to issue an estimate for 2017 of 3,600 units.1. Calculate the budgeted fixed manufacturing overhead costrates 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 denominatorlevel? What are the positive aspects?Required

1.Calculate the budgeted fixed manufacturing overhead cost rates under the four denominator-level…

Answered: a. Theoretical capacity-based on three…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Denominator-level problem. 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 denominatorlevel concept to use. The G36 motorcycles sell for an average price of $8,200. Budgeted fixed manufacturing overhead costs for 2017 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 mo-
torcycles have prompted the marketing department to issue an estimate for 2017 of 3,600 units.
1. Calculate the budgeted fixed manufacturing overhead costrates 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?
Required

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