Variable and absorption costing, sales, and operating-income changes. Helmetsmart, a threeyear-old company, has been producing and selling a single type of bicycle helmet. Helmetsmart uses standardcosting. After reviewing the income statements for the first three years, Stuart Weil, president ofHelmetsmart, commented, I was told by our accountantsand in fact, I have memorizedthat our breakeven volume is 49,000 units. I was happy that we reached that sales goal in each of our first two years. But, heres the strange thing: In our first year, we sold 49,000 units and indeed we broke even. Then, in our second year we sold the same volume and had a positive operating income. I didnt complain, of course . . .but heres the bad part. In our third year, we sold 20% more helmets, but our operating income fell by more than 80% relative to the second year! We didnt change our selling price or cost structure over the past three years and have no price, efficiency, or spending variances . . . so whats going on?!(see attachment)Required1. What denominator level is Helmetsmart using to allocate fixed manufacturing costs to the bicycle helmets?How is Helmetsmart disposing of any favorable or unfavorable production-volume variance atthe end of the year? Explain your answer briefly.2. How did Helmetsmarts accountants arrive at the breakeven volume of 49,000 units?3. Prepare a variable costing-based income statement for each year. Explain the variation in variablecosting operating income for each year based on contribution margin per unit and sales volume.4. Reconcile the operating incomes under variable costing and absorption costing for each year, and usethis information to explain to Stuart Weil the positive operating income in 2012 and the drop in operatingincome in 2013.
Variable and absorption costing
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