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, â€œI was told by our accountantsâ€”and in fact, I have memorizedâ€”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 hereâ€™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 didnâ€™t complain, of course.â€‰.â€‰.â€‰but hereâ€™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 didnâ€™t change our selling price or cost structure over the past three years and have no price, efficiency, or spending variances.â€‰.â€‰.â€‰so whatâ€™s going on?!â€
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.