Electromix, Inc., manufactures and sells a unique electronic part. Operating results for the first three years of activity were as follows (absorption costing basis):

	Year 1		Year 2		Year 3
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)

Sales dropped by 20% during Year 2 due to the entry of several foreign competitors into the market. Electromix had expected sales to remain constant at 40,000 units for the year; production was set at 50,000 units in order to build a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that spurts in demand were unlikely and that the inventory was excessive. To work off the excessive inventories, Electromix cut back production during Year 3, as shown below:

	Year 1	Year 2	Year 3
Production in units	40,000	50,000	32,000
Sales in units	40,000	32,000	40,000

Additional information about the company follows:

a.	The company