Alpha Electronics Corp (AEC) manufactures and sells a unique intermediate component part that is widely used in various household electronic products. Operating results for the latest three financial years were as follows:

Table 1	2019	2020	2021
Sales	$1,000,000	$800,000	$1,000,000
Cost of goods sold	760,000	512,000	788,500
Gross margin	240,000	288,000	211,500
Selling and administrative expenses	230,000	198,000	230,000
Net operating income / (loss)	$10,000	$90,000	$(18,500)

As the industry matures, the company is facing stiff competition from several regional players. Sales dropped 20% during 2020, against an original expectation of 40,000 units. Production for 2020 was budgeted at 50,000 units so as to build a sufficient buffer to prevent any stock- out situation from unexpected demand surge.

The excess stocks from 2020 was carried over into 2021, and accordingly the budgeted production for 2021 was cut.

There are the following additional information about the AEC:

	2019	2020	2021
Production in units	40,000	50,000	32,000
Sales in units	40,000	32,000	40,000

Fixed manufacturing overhead costs Fixed selling and administrative costs Variable costs per unit:

Manufacturing cost Selling and administrative cost

$600,000 per annum $70,000 per annum

$4 $4

• The fixed manufacturing overhead costs are applied to units of production on the basis of actual production for the year.

• The company uses the FIFO inventory flow assumption.

• There were no opening inventories for 2019. AECs senior management is perplexed as to why the operating results does not fluctuate in

  tandem with the sales numbers.

Required:

(a) Prepare a contribution margin format variable costing income statement for each year, and reconcile the variable costing net operating income figures against those reflected

(c) (i)

Explain how operations would have differed in 2020 and 2021 if the company had been using Lean Production with the results that ending inventory was zero.

in Table 1.

(24 marks)

(b) Refer to the company operating results reflected in Table 1. Prepare a brief report (not more than 250 words) to AECs senior management to explain the fluctuations in net

operating income from 2019 to 2021.

(16 marks)

(ii) If Lean production has been in use during 2020 and 2021, and the pre- determined overhead absorption rate is based on 40,000 units per year, compute the companys net operating income/(loss) for each year under absorption costing. Explain the reason for any differences between these income figures and those reported using variable costing. Justify your explanation with a brief computation.

(15 marks)