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Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 828,800 $ 663,040 $ 828,800 Cost of goods sold 600, 880 414,400 642,320 Gross margin 227,920 248,640 186,480 Selling and administrative expenses 196,840 186,480 176, 120 Net operating income (loss) $ 31,080 $ 62,160 $ 110,3601 In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. As a result, Starfax's sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 51,800 units; the increased production was designed to provide the company with a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that it had excess inventory and that spurts in demand were unlikely, To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below: Year 1 Year 2 Year) Production in units 51,800 62,160 41,440 Sales in units 51,800 41,440 51,800 Additional information about the company follows: a. The company's plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $2.00 per unit, and fixed manufacturing overhead expenses total $497,280 per year . b. A new fixed manufacturing overhead rate is computed each year based on that year's actual fixed manufacturing overhead costs divided by the actual number of units produced. c. Variable selling and administrative expenses were $1 per unit sold in each year. Fixed selling and administrative expenses totaled $141,440 per year. d. The company uses a FIFO inventory flow assumption. (FIFO means first in first-out. In other words, it assumes that the oldest units in inventory are sold first.) Starfax's management can't understand why profits doubled 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 variable costing income statement for each year. 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. b. Reconcile the variable costing and absorption costing net operating income figures for each year. 5b. If Lean Production had been used during Year 2 and Year 3, what would the company's net operating income (or loss) have been in each year under absorption costing? Answer is not complete. Complete this question by entering your answers in the tabs below. Reg 1 Req 2A Reg 2B Reg 58 Reconcile the variable costing and absorption costing net operating income figures for each year. (Enter any losses or deductions as a negative value.) Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Year 3 Variable costing net operating income (loss) $ 34,680 $ 34,680 Add fixed manufacturing overhead deferred in Inventory (100,000) Deduct fixed manufacturing overhead cost released from inventory 31,080 62,160 10,360 Absorption costing net operating income (loss) $ 3.600 $ $ 45,040 (162,160) 80 DIL F1 FS ES 540 Starfax's management can't understand why profits doubled during Year 2 when sales dropped by 20% and why a loss was inc during Year 3 when sales recovered to previous levels. Required: 1. Prepare a variable costing income statement for each year. 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 b. Reconcile the variable costing and absorption costing net operating income figures for each year. 5b. If Lean Production had been used during Year 2 and Year 3, what would the company's net operating income (or loss) have each year under absorption costing? Answer is not complete. Complete this question by entering your answers in the tabs below. Reg 1 Reg 2A Req 2B Req 5B If Lean Production had been used during Year 2 and Year 3, what would the company's net operating income (or loss) have been in each year under absorption costing? $ 34,680 Year 1 Year 2 Year 3 Net operating income Net operating loss Net operating income