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 companys plant is highly automated. Variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) total only $4 per unit, and fixed manufacturing overhead costs total $600,000 per year.
b.	Fixed manufacturing overhead costs are applied to units of product on the basis of each years production. That is, a new fixed overhead rate is computed each year.
c.	Variable selling and administrative expenses are $4 per unit sold. Fixed selling and administrative expenses total $70,000 per year.
d.	The company uses a FIFO inventory flow assumption.

Electromixs management cant understand why profits increased 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 contribution format variable costing income statement for each year. (Input all amounts as positive values except losses which should be indicated by a minus sign.)

Variable Costing Income Statement
	Year 1	Year 2	Year 3
Unit sales	40,000	32,000	40,000
(Click to select)SalesFixed manufacturing overheadNet operating income (loss)Contribution marginFixed selling and administrative expensesVariable cost of goods soldVariable selling and administrative expenses	$	$	$
Variable expenses:
(Click to select)Net operating income (loss)Fixed selling and administrative expensesSalesFixed manufacturing overheadVariable cost of goods soldDirect materialsContribution margin
(Click to select)SalesFixed manufacturing overheadsVariable selling and administrative expensesDirect materialsContribution marginNet operating income (loss)Fixed selling and administrative expenses
Total variable expenses
(Click to select)Gross marginContribution margin
Fixed expenses:
(Click to select)Variable selling and administrative expensesDirect materialsSalesFixed manufacturing overheadVariable cost of goods soldNet operating income (loss)Contribution margin
(Click to select)Variable cost of goods soldDirect materialsSalesFixed selling and administrative expensesContribution marginNet operating income (loss)Variable selling and administrative expenses
Total fixed expenses
Net operating income (loss)	$	$	$

2a.	Compute the unit product cost in each year under absorption costing. (Round your intermediate and final answers to 2 decimal places.)

	Year 1	Year 2	Year 3
Unit product cost	$	$	$

2b.	Reconcile the variable costing and absorption costing net operating incomes for each year. (Leave no cells blank - be certain to enter "0" wherever required. Loss amounts and amounts to be deducted should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
	Year 1	Year 2	Year 3
Variable costing net operating income (loss)	$	$	$
Add (Deduct) fixed manufacturing overhead cost deferred in (released from) Year 2 and released in year 3
Add (Deduct) fixed manufacturing overhead cost deferred in (released from) inventory from Year 3 to the future under absorption costing
Absorption costing net operating income (loss)	$	$	$

5b.	If Lean Production had been in use during Year 2 and Year 3, and the predetermined overhead rate is based on 40,000 units per year, what would the companys net operating income (or loss) have been in each year under absorption costing?(Loss amounts should be indicated with a minus sign.)

Year 1	(Click to select)Net operating incomeNet operating loss	$
Year 2	(Click to select)Net operating lossNet operating income
Year 3	(Click to select)Net operating lossNet operating income