Honeyland uses standard costing to produce a particularly popular type of candy. Honeyland's President, Tim Thorne was unhappy after reviewing the income statements for the first 3 years of business. He said, "I was told by our accountantsand in fact, I have memorizedthat our breakeven volume is 29,000 units. I was happy that we reached that sales goal in each of our first 2 years. But here's the strange thing: In our first year, we sold 29,000 units and indeed we broke even. Then, in our second year we sold the same volume and had a signficant, positive operating income. I didn't complain, of course. . . but here's the bad part. In our third year, we sold 20% more candy, but our operating income dropped by nearly 90% from what it was in the second year! We didn't change our selling price or cost structure over the past 3 years and have no price, efficiency, or spending variances . . . so what's going on?!"

1	Absorption Costing	2019	2020	2021
2	Sales (units)	29,000	29,000	34,800
3	Revenues	$2,233,000	$2,233,000	$2,679,600
4	Cost of goods sold
5	Beginning inventory	0	0	406,000
6	Production	2,030,000	2,436,000	2,030,000
7	Available for sale	2,030,000	2,436,000	2,436,000
8	Deduct ending inventory	0	(406,000)	0
9	Adjustment for production-volume variance	0	(324,800)	0
10	Cost of goods sold	2,030,000	1,705,200	2,436,000
11	Gross margin	203,000	527,800	243,600
12	Selling and administrative expenses (all fixed)	203,000	203,000	203,000
13	Operating income	$0	$324,800	40,600
14	Beginning inventory	0	0	5,800
15	Production (units)	29,000	34,800	29,000
16	Sales (units)	29,000	29,000	34,800
17	Ending inventory	0	5,800	0
18	Variable manufacturing cost per unit	$14	$14	$14
19	Fixed manufacturing overhead costs	$1,624,000	$1,624,000	$1,624,000
20	Fixed manuf. costs allocated per unit produced	$56	$56	$56

1.	What denominator level is Honeyland using to allocate fixed manufacturing costs to the candy? How is Honeyland treating any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly.
2.	How did Honeyland's accountants arrive at the breakeven volume of 29,000 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 Tim Thorne the positive operating income in 2020 and the drop in operating income in 2021.