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 $1,043,000 $834,400 $1,073,000 Sales Cost of goods sold: Beginning inventory Add: cost of goods manufactured Goods available for sale Less: ending inventory Cost of goods sold Gross margin Selling and administrative expenses Operating income (loss) 3 273,000 811,000 837,000 763,000 811,000 837,000 1,036,000 273,000 168,000 811,000 564,000 868,000 232,000 270,400 205,000 161,000 57,400 212,000 71,000 $213,000 $ (7,000) $ 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 53,000 units for the year; production was set at 63,000 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 53,000 53,000 Year 2 63,000 43,000 Year 3 43,000 53,000 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 $640,000 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 $69,800 per year. d. The company uses a FIFO inventory flow assumption. The management of Electron Plus 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 0 0 0 0 0 0 Fixed expenses 0 0 0 Total fixed expenses Operating income (loss) $ 0 S 0 S 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.) Year 1 Year 2 Year 3 Variable manufacturing cost Fixed manufacturing cost Unit product cost S 0.00 $ 0.00 $ 0.00 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.) Variable costing operating income (loss) Add(Deduct): Fixed manufacturing overhead cost deferred in inventory from Year 2 to Year 3 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) $ 0 s 0 S 0 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 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)
