Bike Safety, a three-year-old company, has been producing and selling a single type of bicycle helmet. Bike Safety uses standard costing. After reviewing the income statements for the first three years, Stuart Weil, president of Bike Safety, commented, "I was told by our accountantsand in fact, I have memorizedthat our breakeven volume is 53,000 units. I was happy that we reached that sales goal in each of our first two years. But, here's the strange thing: in our first year, we sold 53,000 units and indeed we broke even. Then, in our second year we sold the same volume and had a positive operating income. I didn't complain, of course... but here's 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 didn't change our selling price or cost structure over the past three years and have no price, efficiency, or spending variances ... so what's going on?!" (Click the icon to view the absorption costing income statements for the three years.) Read the requirements. * Requirements X afd a fa th le 1. What denominator level is Bike Safety using to allocate fixed manufacturing costs to the bicycle helmets? How is Bike Safety disposing of any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly. 2. How did Bike Safety's accountants arrive at the breakeven volume of 53,000 units? 3. Prepare a variable costing-based income statement for each year. Explain the variation in the variable costing 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 use this information to explain to Stuart Weil the positive operating income in 2014 and the drop in operating income in 2015. S Print Done Requirement 1. What denominator level is Bike Safety using to allocate fixed manufacturing costs to the bicycle helmets? How is Bike Safety disposing of any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly. The denominator level used to allocate fixed manufacturing costs is units. In 2014, 63,600 units were produced instead of the budgeted 53,000 units. We can see from Bike Safety's income statements that it disposes of any production-volume variance against This resulted in a production-volume variance; which, when written off, gross margin. Requirement 2. How did Bike Safety's accountants arrive at the breakeven volume of 53,000 units? = Breakeven quantity 2013 = 2014 = 2015 II Requirement 3. Prepare a variable costing-based income statement for each year. Explain the variation in the variable costing operating income for each year based on contribution margin per unit and sales volume. (Enter a "0" for any zero amounts.) 2013 2014 2015 Sales (units) Revenues Variable cost of goods sold Beginning inventory Variable manufacturing costs Deduct ending inventory Variable cost of goods sold Contribution margin Fixed manufacturing costs Fixed selling and administrative costs Operating income Explain the variation in the variable costing operating income for each year based on contribution margin per unit and sales volume by completing the following table. (Enter a "0" for any zero amounts. 2013 2014 2015 Contribution margin Total fixed costs Operating income Requirement 4. Reconcile the operating incomes under variable costing and absorption costing for each year, and use this information to explain to Stuart Weil the positive operating income in 2014 and the drop in operating income in 2015. (Enter a "0" for any zero amounts. Use parentheses or a minus sign for negative differences.) 2013 2014 2015 Reconciliation of absorption/variable costing operating income (1) Absorption costing operating income (2) Variable costing operating income (3) Difference (1) - (2) (4) Fixed mfg. costs in ending inventory (Absorption) (5) Fixed mfg. costs in beginning inventory (Absorption) (6) Difference (4) - (5) Use the reconciliation table you completed above to explain to Stuart Weil the positive operating income in 2014 and the drop in operating income in 2015, that is shown on the absorption costing income statement. production was less than sales, i.e., all of the fixed costs that were included in a prior ending inventory, flowed through COGS in this year. The contribution margin in this year, for absorption costing, shows the COGS also contains the allocated fixed manufacturing costs of the units sold resulting in an operating income that is lower. there were units in ending inventory. These units had each absorbed $26 of fixed costs per unit, which would remain as assets on Bike Safety's balance sheet until they were sold. Cost of goods sold was accordingly reduced by the production volume variance, resulting in a positive operating income even though sales were at breakeven levels. Bike Safety, a three-year-old company, has been producing and selling a single type of bicycle helmet. Bike Safety uses standard costing. After reviewing the income statements for the first three years, Stuart Weil, president of Bike Safety, commented, "I was told by our accountantsand in fact, I have memorizedthat our breakeven volume is 53,000 units. I was happy that we reached that sales goal in each of our first two years. But, here's the strange thing: in our first year, we sold 53,000 units and indeed we broke even. Then, in our second year we sold the same volume and had a positive operating income. I didn't complain, of course... but here's 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 didn't change our selling price or cost structure over the past three years and have no price, efficiency, or spending variances ... so what's going on?!" (Click the icon to view the absorption costing income statements for the three years.) Read the requirements. * Requirements X afd a fa th le 1. What denominator level is Bike Safety using to allocate fixed manufacturing costs to the bicycle helmets? How is Bike Safety disposing of any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly. 2. How did Bike Safety's accountants arrive at the breakeven volume of 53,000 units? 3. Prepare a variable costing-based income statement for each year. Explain the variation in the variable costing 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 use this information to explain to Stuart Weil the positive operating income in 2014 and the drop in operating income in 2015. S Print Done Requirement 1. What denominator level is Bike Safety using to allocate fixed manufacturing costs to the bicycle helmets? How is Bike Safety disposing of any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly. The denominator level used to allocate fixed manufacturing costs is units. In 2014, 63,600 units were produced instead of the budgeted 53,000 units. We can see from Bike Safety's income statements that it disposes of any production-volume variance against This resulted in a production-volume variance; which, when written off, gross margin. Requirement 2. How did Bike Safety's accountants arrive at the breakeven volume of 53,000 units? = Breakeven quantity 2013 = 2014 = 2015 II Requirement 3. Prepare a variable costing-based income statement for each year. Explain the variation in the variable costing operating income for each year based on contribution margin per unit and sales volume. (Enter a "0" for any zero amounts.) 2013 2014 2015 Sales (units) Revenues Variable cost of goods sold Beginning inventory Variable manufacturing costs Deduct ending inventory Variable cost of goods sold Contribution margin Fixed manufacturing costs Fixed selling and administrative costs Operating income Explain the variation in the variable costing operating income for each year based on contribution margin per unit and sales volume by completing the following table. (Enter a "0" for any zero amounts. 2013 2014 2015 Contribution margin Total fixed costs Operating income Requirement 4. Reconcile the operating incomes under variable costing and absorption costing for each year, and use this information to explain to Stuart Weil the positive operating income in 2014 and the drop in operating income in 2015. (Enter a "0" for any zero amounts. Use parentheses or a minus sign for negative differences.) 2013 2014 2015 Reconciliation of absorption/variable costing operating income (1) Absorption costing operating income (2) Variable costing operating income (3) Difference (1) - (2) (4) Fixed mfg. costs in ending inventory (Absorption) (5) Fixed mfg. costs in beginning inventory (Absorption) (6) Difference (4) - (5) Use the reconciliation table you completed above to explain to Stuart Weil the positive operating income in 2014 and the drop in operating income in 2015, that is shown on the absorption costing income statement. production was less than sales, i.e., all of the fixed costs that were included in a prior ending inventory, flowed through COGS in this year. The contribution margin in this year, for absorption costing, shows the COGS also contains the allocated fixed manufacturing costs of the units sold resulting in an operating income that is lower. there were units in ending inventory. These units had each absorbed $26 of fixed costs per unit, which would remain as assets on Bike Safety's balance sheet until they were sold. Cost of goods sold was accordingly reduced by the production volume variance, resulting in a positive operating income even though sales were at breakeven levels