4-25 (Static) Prepare and Interpret Income Statements; Changes in Both Sales and Production; Lean Production [LO4-1, LO4-2, LO4-3] Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Sales Cost of goods sold Year 1 $ 800,000 580,000 Gross margin Selling and administrative expenses 220,000 190,000 Year 2 $ 640,000 400,000 240,000 180,000 Year 3 $ 800,000 620,000 180,000 190,000 Net operating income (loss) $ 30,000 $ 60,000 $ (10,000) In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. As a result, Starfax's sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 50,000 units; the increased production was designed to provide the company with a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that it had excess inventory and that spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below: Production in units Year 1 50,000 Year 2 60,000 Sales in units 50,000 40,000 Year 3 40,000 50,000 Additional information about the company follows: a. The company's plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $2 per unit, and fixed manufacturing overhead expenses total $480,000 per year. b. A new fixed manufacturing overhead rate is computed each year based that year's actual fixed manufacturing overhead costs divided by the actual number of units produced. c. Variable selling and administrative expenses were $1 per unit sold in each year. Fixed selling and administrative expenses totaled $140,000 per year. d. The company uses a FIFO inventory flow assumption. (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first.) Starfax's management can't understand why profits doubled during Year 2 when sales dropped by 20% and why a loss was incurred during Year 3 when sales recovered to previous levels. Required: 1. Prepare a variable costing income statement for each year. Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 2B Req 5B Prepare a variable costing income statement for each year. Variable expenses: Total variable expenses Fixed expenses: Total fixed expenses Starfax, Inc. Variable Costing Income Statement Year 1 Year 2 Year 3 0 0 0 0 0 0 0 0 0 $ 0 $ 0 $ Net operating income (loss)