Reference no: EM132863229

Question - Monitors-4-Us (M4U) manufactures a monitor called the ULTRA-Low. The ULTRA-Low monitor is designed specifically to reduce eyestrain by using a low blue light filter and flicker free technology. They market their product to online retailers who sell to home office workers requiring good monitors at a midrange price to reduce eyestrain.

M4U's management team is determining manufacturing budgets for 2020 and has set the following standards for each monitor:

Direct materials, $24.00

Direct manufacturing labour, $14.00

Variable manufacturing overhead, $5.00

Fixed annual manufacturing costs for the year are budgeted for $1,440,000.

Effective use of capacity is a key strategic focus of the organization. As such, M4U ensures the appropriate denominator level is used when assessing its capacity usage of resources and accountability to its stakeholders. The following paragraph describes the management team's discussion relating to this.

Denominator activity levels:

To satisfy demand for the 2020 year the vice-president of production plans to produce 47,000 monitors. However, the marketing manager has identified that the demand between 2017 and 2019 has averaged 45,000 monitors per year. M4U's manufacturing plant has the capacity to produce 60,000 monitors annually assuming the plant is operating 365 days of the year. However, taking into consideration usual closures for such situations as weekends, holidays, and sick time, it is more likely the plant could produce 48,000 monitors annually.

Required -

1) Based on the descriptions in the paragraph titled, "Denominator activity levels" above, state the production level of monitors that is related to master budget capacity. Explain when this level of capacity is used to calculate inventory cost.

2) State which of the production levels described in the paragraph titled "Denominator activity levels" represents practical capacity. Explain what decisions can be made when overhead is applied using practical capacity.