point II UUNI JU lucts such as home PROBLEM 6-25 Prepare and interpret Income Statements; Changes in Both Sales and Produkt Lean Production L06-1, L06-2, L06-3 Starfax, Inc., manufactures a small part that is widely used in various electronic products such computers. Results for the first three years of operations were as follows (absorption costinghe Year 2 Sales Cost of goods sold .... Gross margin Selling and administrative expenses.... Net operating income (loss).......... Year 1 $800,000 580.000 220,000 190,000 $ 30,000 $640,000 400.000 240,000 180,000 $ 60.000 $800,000 620,000 180.000 190,000 $ (10,000) In the latter part of Year 2. a competitor went out of business and in the process dumned 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 con stant at 50,000 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 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 expenses (direct materials direct labor, and variable manufacturing overhead) total only $2 per unit, and fixed manufae, turing overhead expenses total $480,000 per year. b. A new fixed manufacturing overhead rate is computed each year based that year's actualise 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 se and administrative expenses totaled $140,000 per year. d. The company uses a FIFO inventory flow assumption. (FIFO means first-in first-out in 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 dropper 20% and why a loss was incurred during Year 3 when sales recovered to previous levels Required: 1. Prepare a contribution format 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 this cost is variable and how much is fixed. b. Reconcile the variable costing and absorption costing net operating income each year. 3. Refer again to the absorption costing income statements. Explain why net operating was higher in Year 2 than it was in Year 1 under the absorption approach, in light that fewer units were sold in Year 2 than in Year 1. - Show how much of come figures for units were sold in Year 2 bearunder the aboo Explain why net operating income light of the fact 4. Refer again to the absorption costing income statements. Explain why the company suffered a loss in Year 3 but reported a profit in Year 1 although the same number of units was sold in each year. 5. a. Explain how operations would have differed in Year 2 and Year 3 if the company had been using Lean Production, with the result that ending inventory was zero. b. 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? No com putations are necessary. point II UUNI JU lucts such as home PROBLEM 6-25 Prepare and interpret Income Statements; Changes in Both Sales and Produkt Lean Production L06-1, L06-2, L06-3 Starfax, Inc., manufactures a small part that is widely used in various electronic products such computers. Results for the first three years of operations were as follows (absorption costinghe Year 2 Sales Cost of goods sold .... Gross margin Selling and administrative expenses.... Net operating income (loss).......... Year 1 $800,000 580.000 220,000 190,000 $ 30,000 $640,000 400.000 240,000 180,000 $ 60.000 $800,000 620,000 180.000 190,000 $ (10,000) In the latter part of Year 2. a competitor went out of business and in the process dumned 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 con stant at 50,000 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 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 expenses (direct materials direct labor, and variable manufacturing overhead) total only $2 per unit, and fixed manufae, turing overhead expenses total $480,000 per year. b. A new fixed manufacturing overhead rate is computed each year based that year's actualise 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 se and administrative expenses totaled $140,000 per year. d. The company uses a FIFO inventory flow assumption. (FIFO means first-in first-out in 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 dropper 20% and why a loss was incurred during Year 3 when sales recovered to previous levels Required: 1. Prepare a contribution format 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 this cost is variable and how much is fixed. b. Reconcile the variable costing and absorption costing net operating income each year. 3. Refer again to the absorption costing income statements. Explain why net operating was higher in Year 2 than it was in Year 1 under the absorption approach, in light that fewer units were sold in Year 2 than in Year 1. - Show how much of come figures for units were sold in Year 2 bearunder the aboo Explain why net operating income light of the fact 4. Refer again to the absorption costing income statements. Explain why the company suffered a loss in Year 3 but reported a profit in Year 1 although the same number of units was sold in each year. 5. a. Explain how operations would have differed in Year 2 and Year 3 if the company had been using Lean Production, with the result that ending inventory was zero. b. 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? No com putations are necessary