Answer (C) is correct . Theoretical (ideal) capacity is the maximum capacity given continuous operations with no holidays, downtime, etc. It assumes perfect efficiency at all times. Consequently, it can never be attained and is not a reasonable estimate of actual volume.
Answer (A) is incorrect because Normal capacity is the long-term average level of activity that will approximate demand over a period that includes seasonal, cyclical, and trend variations.
Answer (B) is incorrect because Expected annual activity is an approximation of actual volume levels for a specific year.
Answer (D) is incorrect because Master-budget capacity is the expected level of activity used for budgeting for a given year.
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When Nash Glassworks Company allocates fixed costs, management will select a capacity level to use as the denominator volume. All of the following are appropriate as the capacity level that approximates actual volume levels except