Problem 4 (Prepare and Interpret Statements; Changes in Both Sales and Production; JIT) Nemo, 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 P1,000,000 P800,000 P1,000,000 Cost of goods sold: Beginning inventory............. 0 0 280,000 Add cost of goods manufactured . 800,000 840,000 760,000 Goods available for sale............... 800,000 840,000 1,040,000 Less ending inventory 0. 280,000 190,000 Cost of goods sold ........ 800,000 560,000 850,000 Gross margin ....... 200,000 240,00 150,000 Less selling and administrative expenses..... 170,000 150,000 170,000 Net operating income (loss).... P 30.000 P 90,000 P (20.000) Sales dropped by 20% during Year 2 due to the entry of several foreign competitors into the market. Nemo 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, Nemo cut back production during Year 3, as shown below: Production in units Sales in units. Year 1 50,000 50,000 Year 2 60,000 40,000 Year 3 40,000 50,000 a. Additional information about the company follows: The company's plant is highly automated. Variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) total only P4 per unit, and fixed manufacturing costs total P600,000 per year. b. Fixed manufacturing costs are applied to units of product on the basis of each year's production. (That is, a new fixed overhead rate is computed each year). Variable selling and administrative expenses are P2 per unit sold. Fixed selling and administrative expenses total P70,000 per year. d. The company uses a FIFO inventory flow assumption. C. Required: 1. Prepare a new income statement for each year using the contribution approach with variable costing. 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. 3. Refer again to the absorption costing income statements. Explain why net operating income was higher in Year 2 than it was in Year 1 under the absorption approach, in light of the fact that fewer units were sold in Year 2 than in Year 1. 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 JIT inventory methods. b. If JIT had been in use during Year 2 and Year 3, what would the company's net operating income (or loss) have been in each year under absorption costing? Explain the reason for any differences between these income figures and the figures reported by the company in the statements above