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Question 1: (10 points) Problem 7-16 Prepare and Interpret Income Statements; Changes in Both Sa [LO1, LO2, LO3, LO4] Starfax, Inc., manufactures a small part that is widely used in various electronic pr results for the first three years of activity were as follows (absorption costing basis Year 1 Year 2 Year 3 Sales $ 1,612,000 Cost of goods sold 780,000 Gross margin 832,000 Selling and administrative expenses 124,000 Net operating income (loss) $ 708,000 In the latter part of Year 2, a competitor went out of business and in the proc market. As a result, Starfax's sales dropped by 20% during Year 2 even th Management had expected sales to remain constant at 52,000 units; the increa company with a buffer of protection against unexpected spurts in demand. By the inventory was excessive and that spurts in demand were unlikely. To reduce production during Year 3, as shown below: Year 1 Year 2 Year 3 Production in units 52,000 62,400 41,600 Sales in units 52,000 41,600 52,000 Additional information about the company follows: a. The company's plant is highly automated. Variable manufacturing costs manufacturing overhead) total only $3 per unit, and fixed manufacturing overhe b. Fixed manufacturing overhead costs are applied to units of product on the basi fixed manufacturing overhead rate is computed each year. c. Variable selling and administrative expenses were $1 per unit sold in each year totaled $72,000 per year. d. The company uses a FIFO inventory flow assumption. Starfax's management can't understand why profits doubled during Year 2 when s incurred during Year 3 when sales recovered to previous levels. Requirement 1: Prepare a contribution format variable costing income statement for each year. operating losses amount should be indicated by a minus sign. Omit the "$" Year 1 Year 2 Variable expenses: Total variable expenses Fixed expenses: Total fixed expenses Net operating income (loss) Requirement 2: Refer to the absorption costing income statements above. (a Compute the unit product cost in each year under absorption costing. ) unit and final answers to 2 decimal places. Omit the "$" sign in your resp Year 1 Year 2 Absorption costing unit product cost $ (b Reconcile the variable costing and absorption costing net operating incom ) deducted and Net Operating Losses amount should be indicated with mi to enter "0" wherever required. Omit the "$" sign in your response.) Year 1 Year 2 Variable costing net operating income (loss) Add (Deduct): Fixed manufacturing overhead cost deferred in Year 2 and released in year 3 : fixed manufacturing overhead cost deferred in (released from) inventory from Year 3 to the future under absorption costing Absorption costing net operating income (loss) Requirement 3: The reduction in cost due to increased production, combined with the large am deferred in inventory in the year 2 resulted in the rise of net operating income ev true or false? True False Requirement 4: The added costs charged against Year 3 were greater than the costs deferred to income for the year even though the same number of units was sold as in Year 1. True False Requirement 5: (a With lean production, production would have been geared to sales in each ) goods would have been built up in either Year 2 or Year 3. Is the statement tru True False (b) If lean production had been in use, the net operating income under absorptio under variable costing in all three years. Is the statement true or false? P7_16_A_id6 P7_16_A_id10 P7_16_A_id21 P7_16_A_id25 True False Hint 1 | Hint 2 | Hint 3 | Hint 4