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 Cost of goods sold $ 950,000 $ 760,000 $ 950,000 496,000 755,000 710,000 Gross margin Selling and administrative expenses 240,000 210,000 264,000 195,000 180,000 210,000 Net operating income (loss) $ 30,000 $ 84,000 $ (15,000) 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 Sales in units 50,000 50,000 60,000 40,000 40,000 50,000 Additional information about the company follows a. The company's plant is highly automated. Variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) total only $3.40 per unit, and fixed manufacturing overhead costs b. Fixed manufacturing overhead costs are applied to units of product on the basis of each year's c. Variable selling and administrative expenses are $3 per unit sold. Fixed selling and administrative d. The company uses a FIFO inventory flow assumption total $540,000 per year production. That is, a new fixed overhead rate is computed each year. expenses total $60,000 per year. Memotec's management can't understand why profits increased during Year 2 when sales dropped by 20%, and why a loss was incurred during Year 3 when sales recovered to previous levels