ElectronPlus manufactures and sells a unique electronic part. Operating results for the first three years of activity were as follows (absorption costing basis): Sales Year 1 $1,000,000 Year 2 $ 800,000 Year 3 $1,000,000 Cost of goods sold: Beginning inventory Add: cost of goods manufactured 0 840,000 280,000 760,000 800,000 Goods available for sale Less: ending inventory 800,000 0 840,000 280,000 1,040,000 190,000 Cost of goods sold 800,000 560,000 850,000 Gross margin Selling and administrative expenses 200,000 170,000 240,000 150,000 150,000 170,000 Operating income (loss). $ 30,000 es 90,000 (20, 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 50,000 units for the year, production was set at 60,000 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: Production in units Sales in units Year 1 Year 2 Year 3 50,000 60,000 40,000 50,000 40,000 50,000 Additional information about the company follows: 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 $600,000 per year. 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). c. Variable selling and administrative expenses are $2 per unit sold. Fixed selling and administrative expenses total $70,000 per year. d. The company uses a FIFO inventory flow assumption. 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. Required: 1. Prepare a contribution-format income statement for each year using variable costing. Year 1 Year 2 Year 3 Variable expenses Total variable expenses Fixed expenses Total fixed expenses Operating income (loss) 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.) Year 1 Year 2 Year 3 Variable manufacturing cost Fixed manufacturing cost Unit product cost 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.) Variable costing operating income (loss) Add(Deduct): Fixed manufacturing overhead cost deferred in inventory from Year 2 to Year 3 the future under absorption costing Add: Fixed manufacturing overhead cost deferred in inventory from Year 3 to the future under absorption costing Absorption costing operating income (loss) 3. Not available in Connect. 4. Not available in Connect. 5-a. Not available in Connect. 5-b. 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? (Loss amounts should be indicated by a minus sign.) Year 1 Year 2 Year 3 Operating income (loss)
