9-29 Variable and absorption costing, sales, and operating income changes. Headsmart, athree-year-old company, has been producing and selling a single type of bicycle helmet. Headsmart usesstandard costing. After reviewing the statements of comprehensive income for the first three years, StuartWeil, president of Headsmart, commented, I was told by our accountantsand in fact, I have memo-rizedthat our breakeven volume is 50,000 units. I was happy that we reached that sales goal in each of ourfirst two years. But, heres the strange thing: In our first year, we sold 50,000 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 incomefell by more than 80% relative to the second year! We didnt change our selling price or cost structure overthe past three years and have no price, efficiency, or rate variances...so whats going on?!LO233. Operating income for 2020,2021 = $0Absorption Costing 2020 2021 2022Sales (units) 50,000 50,000 60,000Revenues $2,100,000 $2,100,000 $2,520,000Cost of goods sold:Beginning inventory 0 0 380,000Production 1,900,000 2,280,000 1,900,000Available for sale 1,900,000 2,280,000 2,280,000Deduct ending inventory 0 (380,000) 0Adjustment for production-volume variance 0 (240,000) 0Cost of goods sold 1,900,000 1,660,000 2,280,000Gross margin 200,000 440,000 240,000Selling and administrative expenses (all fixed) 200,000 200,000 200,000Operating income $ 0 $ 240,000 $ 40,000Beginning inventory 0 0 10,000Production (units) 50,000 60,000 50,000Sales (units) 50,000 50,000 60,000Ending inventory 0 10,000 0Variable manufacturing cost per unit $ 14 $ 14 $ 14Fixed manufacturing overhead costs $1,200,000 $1,200,000 $1,200,000Fixed manufacturing costs allocated per unit produced $ 24 $ 24 $ 24Required1. What denominator level is Headsmart using to allocate fixed manufacturing costs to the bicycle hel-mets? How is Headsmart disposing of any favourable or unfavourable production-volume variance atthe end of the year? Explain your answer briefly.2. How did Headsmarts accountants arrive at the breakeven volume of 50,000 units?3. Prepare a variable-costingbased statement of comprehensive income for each year. Explain the vari-ation in variable-costing operating income for each year based on contribution margin per unit andsales 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 2021 and the drop in operat-ing income in 2022.