ElectronPlus manufactures and sells a unique electronic part. Operating results for the first three years of activity were as follows (absorption costing basis):<\/p>
YEAR 1:<\/strong><\/p> Sales 1010000<\/p> Cost of goods sold:<\/p> Beginning inventory: 0<\/p> Add: cost of goods manufactured: 800000<\/p> Goods available for sale: 800000<\/p> Less: ending inventory: 0<\/p> Cost of goods sold: 800000<\/p> Gross margin : 210000<\/p> Selling and administrative expenses: 166000<\/p> Operating income (loss): 44000<\/p> <\/p> YEAR 2:<\/strong><\/p> Sales: 808000<\/p> Cost of goods sold:<\/p> Beginning inventory: 0<\/p> Add: cost of goods manufactured : 837000<\/p> Goods available for sale: 837000<\/p> Less: ending inventory : 289000<\/p> Cost of goods sold 548000<\/p> Gross margin 260000<\/p> Selling and administrative expenses 128000<\/p> Operating income (loss) 132000<\/p> <\/p> YEAR 3:<\/strong><\/p> Sales 1010000<\/p> Cost of goods sold:<\/p> Beginning inventory 289000<\/p> Add: cost of goods manufactured 763000<\/p> Goods available for sale 1052000<\/p> Less: ending inventory 177000<\/p> Cost of goods sold 875000<\/p> Gross margin 135000<\/p> Selling and administrative expenses 167000<\/p> Operating income (loss) (32000)<\/p> <\/p> 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 49,000 units for the year; production was set at 59,000 units in order to bulld 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 back production during year 3, as shown below:<\/p> Year 1:<\/p> Production in units 49,000<\/p> Sales in units 49,000<\/p> Year 2:<\/p> Production in units 59,000<\/p> Sales in units 39,000<\/p> Year 3:<\/p> Production in units 39,000<\/p> Sales in units 49,000<\/p> <\/p> Additional information about the company follows:<\/p> a. The company's 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 $627,000 per year.<\/p> b. Fixed manufacturing overhead costs are applied to units of product on the basis of each year's planned production. (That is, a new fixed overhead rate is computed each year).<\/p> c. Variable selling and administrative expenses are $2 per unit sold. Fixed selling and administrative expenses total $68,600 per year.<\/p> d. The company uses a FIFO inventory flow assumption.<\/p> The management of ElectronPlus can't 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.<\/p> Required:<\/strong> If lean production had been in use during year 2 and year 3, what would the company's operating income (or loss) have been in each year under absorption costing?<\/strong> (Loss amounts should be indicated by a minus sign.)<\/p> Operating income (loss) in year 1: 20800<\/strong><\/p> ?YEAR 2?? (I am struggling with this year 2)<\/strong><\/p> year3: 19800<\/strong><\/p>",
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