Helmetsmart, a three year old company has been producing and selling a single ty
ID: 2473499 • Letter: H
Question
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?!"
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.
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 22Explanation / Answer
Answer:1 The annual fixed manuf. costs are $1,078,000. For each unit produced it allocates $22 of fixed manuf. costs. Which means it is producing approximately 49,000 ($1,078,000÷$22) units each year (this is the denominator level) this is used to allocate fixed manufacturing costs to the units produced.
According to the income statement Helmetsmarts changes of all production variances are (previous inventory) contrary to cost of goods sold. There were 49,000 units budgeted to be produced in 2012 and however there were 58,800 produced instead. This gave a production volume variance of $215,600F 58,800 units - 49,000 units = 9,800 units x $22 unit = $215,600 This is the amount that the gross margin is increased by and is written off by the cost of goods sold.
Answer:2 The breakeven calculation, same for each year, is shown below:
Calculation of breakeven volume:
Answer:3
Particulars 2011 2012 2013 Selling price $40 $40 $40 Variable cost per unit (all manufacturing 14 14 14 Contribution margin 26 26 26 Total fixed costs 1274000 1274000 1274000 Breakeven quantity = Total fixed costs ÷ contribution margin per unit 49000 49000 49000Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.