Memotec, Inc., 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 $ 1,000,000 $ 800,000 $ 1,000,000 Cost of goods sold 740,000 520,000 785,000 Gross margin 260,000 280,000 215,000 Selling and administrative expenses 220,000 190,000 220,000 Net operating income (loss) $ 40,000 $ 90,000 $ (5,000) Sales dropped by 20% during Year 2 due to the entry of several foreign competitors into the market. Memotec 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 of protection 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, Memotec cut back production during Year 3, as shown below: Year 1 Year 2 Year 3 Production in units 50,000 60,000 40,000 Sales in units 50,000 40,000 50,000 Additional information about the company follows: a. The company