Sweetdelight uses standard costing to produce a particularly popular type of candy. Sweetdelight's President, Sam Rohr was unhappy after reviewing the income statements for the first three years of business. He said, "I was told by our accountants--and in fact, I have memorized--that our breakeven volume is 23,000 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 23,000 units and indeed we broke even. Then, in our second year we sold the same volume and had a significant, positive operating income. I didn't complain, of course. but here's the bad part. In our third year, we sold 10% 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 three years and have no price, efficiency, or spending variances...50 what's going on?!" (Click the icon to view the absorption costing income statements for the three years.) Read the requirements Requirement 1. What denominator level is Sweetdelight using to allocate fixed manufacturing costs to the candy? How is Sweetdelight 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 - Data Table Absorption Costing 2016 2017 2018 Sales (units) 23,000 23,000 25,300 $ 1,909,000 $ 1,909,000 $ 2,099,900 0 1,748,000 0 1,922,800 174,800 1,748,000 1,748,000 1,922,800 Revenues Cost of goods sold Beginning inventory Production Available for sale Deduct ending inventory Adjustment for production-volume variance Cost of goods sold Gross margin Selling and administrative expenses (all fixed) Operating income Beginning inventory Droduction lunite) 0 0 1,922,800 (174,800) (154,100) 1,593,900 0 0 1,748,000 1,922,800 161,000 161,000 315,100 161,000 177.100 161,000 $ 0 $ 154,100 16,100 0 0 22.000 2,300 22.000 25 20 Print Done Data Table Production 1,748,000 1,922,800 1.748,000 Available for sale 1,748,000 1,922,800 1.922,800 Deduct ending inventory 0 (174,800) 0 0 (154,100) 0 Adjustment for production-volume variance 1,748,000 1,593,900 Cost of goods sold 1,922,800 Gross margin 161,000 315,100 177,100 Selling and administrative expenses (all fixed) 161,000 161,000 161,000 $ 0 $ 154,100 16,100 Operating income Beginning inventory 0 0 2,300 Production (units) 23,000 25,300 23,000 Sales (units) 23,000 23,000 25,300 Ending inventory 0 I 2,300 0 Variable manufacturing cost per unit 9 $ 9 $ 9 Fixed manufacturing overhead costs $ 1,541,000 $ 1,541,000 $ 1,541,000 Fixed manuf. costs allocated per unit produced $ 67 $ 67 $ 67 Print Done Requirements 1. What denominator level is Sweetdelight using to allocate fixed manufacturing costs to the candy? How is Sweetdelight disposing of any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly. 2. How did Sweetdelight's accountants arrive at the breakeven volume of 23,000 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. oncile the operating incomes under variable chisting and absorption costing for each year, and use this information to explain to Sam Rohr the positive operating income in 2017 and the drop in operating income in 2018. Print Done