chapter 7 question 8

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 Grossmariin Selling and administrative expenses Net operating Incone (loss) Year a Year 2 $1,050,000 $ 820,000 850,000 600,000 200,000 220,000 160.000 140,000 $ 40.000 $10,000 Year $1,050,000 900,000 150,000 160,000 (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, Startax cut back production during Year 3, as shown below: Year 1 Year 2 Production in units 50,000 60,000 Sales in units 50,000 40,000 Year 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 $5.00 per unit, and fixed manufacturing overhead expenses total $600,000 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, Variable selling and administrative expenses were $2 per unit sold in each year. Fixed selling and administrative expenses totaled $60,000 per year The remontin ICC are in frunther than a. The company's plant is highly automated. Variable manufacturing expenses (direct materials, direct labor and variable manufacturing overhead) total only $5.00 per unit, and fixed manufacturing overhead expenses total $600,000 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, Variable selling and administrative expenses were $2 per unit sold in each year. Fixed selling and administrative expenses totaled $60,000 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, 2. Refer to the absorption costing income statements above a. Compute the unit product cost in each year under absorption costing Show how much of this cost is variable and how much is fixed b. Reconcile the variable costing and absorption costing net operating income figures for each year, 5b. If Lean Production had been used during Year 2 and Year 3. what would the company's net operating income (or loss) have been in each year under absorption costing? Complete this question by entering your answers in the tabs below. Reg! Reg 2A Reg 20 Reg 5 If Lean Production had been used during Year 2 and Year 3, what would the company's net operating income (or loss) have Reg 1 Req 2A Reg 28 Reg 5B Prepare a variable costing Income statement for each year. Starfax, Inc. Variable Costing Income Statement Year 1 Year 2 Sales $ 1,050,000S 820,000 Variable expenses Variable cost of goods sold 250,000 200,000 Vanable selling and administrative expenses 100 000 800,000 Year 3 1,050 000 S 250,000 100,000 350.000 350.000 Total variable expenses Contribution margin 1.000.000 (180,000) 700,000 700,000 Fixed expenses 600,000 Fixed manufacturing overhead Fixed selling and administrative expenses 600,000 60,000 600,000 60,000 60,000 Total fixed expenses Net operating income (loss) 660,000 660,000 40,000 S (840,000) $ 660,000 40,000 s PALA Complete this question by entering your answers in the tabs below. Reg 1 Req 2A Req 2B Reg 5B Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much fixed. (Do not round intermediate calculations and round your final answers to 2 decimal places.) Year 1 Year 2 Year 3 S 5.00 $ 5.00 $ 5.00 Variable manufacturing cost Fixed manufacturing cost Unit product cost $ 5.00 $ 5001S 5.00 Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 28 Reg 5B Reconcile the variable costing and absorption costing net operating income figures for each year. (Enter any losses or deductions as negative value.) Year 2 Year 3 Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Variable costing net operating income (loss) Add fixed manufacturing overhead deferred in inventory Deduct fixed manufacturing overhead cost released from inventory Absorption costing net operating income (oss) Complete this question by entering your answers in the tabs below. Reg 1 Reg 2A Reg 2B Reg 5B If Lean Production had been used during Year 2 and Year 3, what would the company's net operating income (or loss) have been in each year under absorption costing? (Loss amounts should be indicated with a minus sign.) Year 1 Year 2 Year 3