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American Public Income Statement Analysis and Cost Analysis Case Discussion

Description

Smart Safety, a three-year-old company, has been producing
and selling a single type of bicycle helmet. Smart Safety uses standard
costing. After reviewing the income statements for the first three years,
Stuart Weil, president of Smart Safety, commented, “I was told by our
accountants—and in fact, I have memorized—that our breakeven volume is 52,000
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 52,000 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?!”

What denominator level is Smart Safety using to allocate
fixed manufacturing costs to the bicycle helmets? How is Smart Safety disposing
of any favorable or unfavorable production-volume variance at the end of the
year? Please explain your answer.

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