Helmetsmart, a three year old company has been producing and selling a single type of bicycle helmet. Helmetsmart uses standard costing. After reviewing the income statements for the first three years, Stuart Weil, presidnet of Helmetsmart, commented, "I was told by our accountants- and in fact, I have memorized- that our breakeven volume is 49,000 units. I was happy that we reached that sales goal in each of our first two years. But, here's the strang thing: In our first ear, we sold 49,000 nited and indeed we brokeven. 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 whats going on?!"

Absorption Costing
	2011	2012	2013
Sales (units)	49000	49000	58800
Revenues	1960000	1960000	2352000
Cost of Goods Sold
Beginning inventory	0	0	352800
production	1764000	2116800	1764000
available for sale	1764000	2116800	2116800
deducting ending inventory	0	(352800)	0
adjustment for production-volume variances	0	(215600)	0
cost of goods sold	1764000	1548400	2116800
gross margin	196000	411600	235200
selling and admin expenses (all fixed)	196000	196000	196000
operating income	0	215600	39200
beginning inventory	0	0	9800
production (units)	49000	58800	49000
sales (units)	49000	49000	58800
ending inventory	0	9800	0
variable manufacturing cost per unit	14	14	14
fixed manuf. overhead cost	1078000	1078000	1078000
fixed. manuf. costs allocated per unit produced	22	22	22

Required:

1. 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 at the end of the year? Explain briefly.

2. How did Helmetsmart's accountants arrive at the breakeven volume of 49,000 units?

3. prepare a varible costing-based income statement for each year. explain the variation in 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 2012 and the drop in operating income in 2013.