American Public Income Statement Analysis and Cost Analysis Case Discussion
Question Description
Smart Safety, a three-year-old company, has been producingand selling a single type of bicycle helmet. Smart Safety uses standardcosting. After reviewing the income statements for the first three years,Stuart Weil, president of Smart Safety, commented, “I was told by ouraccountantsand in fact, I have memorizedthat our breakeven volume is 52,000units. I was happy that we reached that sales goal in each of our first twoyears. But here’s the strange thing: In our first year, we sold 52,000 unitsand indeed we broke even. Then in our second year we sold the same volume andhad a positive operating income. I didn’t complain, of course. . . buthere’sthe bad part. In our third year, we sold 20% more helmets, but our operatingincome fell by more than 80% relative to the second year! We didn’t change ourselling price or cost structure over the past three years and have no price,efficiency, or spending variances. . . so what’s going on?!”
What denominator level is Smart Safety using to allocatefixed manufacturing costs to the bicycle helmets? How is Smart Safety disposingof any favorable or unfavorable production-volume variance at the end of theyear? Please explain your answer.
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