ElectronPlus 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	$	1,036,000		$	828,800		$	1,056,000
Cost of goods sold:
Beginning inventory		0			0			269,000
Add: cost of goods manufactured		806,000			836,000			761,000
Goods available for sale		806,000			836,000			1,030,000
Less: ending inventory		0			269,000			180,000
Cost of goods sold		806,000			567,000			850,000
Gross margin		230,000			261,800			206,000
Selling and administrative expenses		177,000			102,800			211,000
Operating income (loss)	$	53,000		$	159,000		$	(5,000	)

Sales dropped by 20% during year 2 due to the entry of several foreign competitors into the market. ElectronPlus had expected sales to remain constant at 48,000 units for the year; production was set at 58,000 units in order to build a buffer 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, ElectronPlus cut back production during year 3, as shown below:

	Year 1	Year 2	Year 3
Production in units	48,000	58,000	38,000
Sales in units	48,000	38,000	48,000

Additional information about the company follows:

a. The companys plant is highly automated. Variable manufacturing costs (direct materials, direct labour, and variable manufacturing overhead) total only $4 per unit, and fixed manufacturing overhead costs total $653,000 per year.

b. Fixed manufacturing overhead costs are applied to units of product on the basis of each years planned production. (That is, a new fixed overhead rate is computed each year).

c. Variable selling and administrative expenses are $2 per unit sold. Fixed selling and administrative expenses total $71,900 per year.

d. The company uses a FIFO inventory flow assumption.

The management of ElectronPlus cant understand why profits tripled 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 income statement for each year using variable costing.

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.) (Round your answer to 2 decimal places.)

b. Reconcile the variable costing and absorption costing operating income figures for each year. (Losses and deductible amounts should be indicated by a minus sign. Do not leave any empty spaces; input a 0 wherever it is required. Round your intermediate calculations to 2 decimals and round your final answer to the nearest whole dollar.)

3. This part of the question is not part of your Connect assignment.

4. This part of the question is not part of your Connect assignment.

5-a. This part of the question is not part of your Connect assignment.

5-b. If lean production had been in use during year 2 and year 3, what would the companys operating income (or loss) have been in each year under absorption costing? (Loss amounts should be indicated by a minus sign.)

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