Problem 4-25 (Algo) Prepare and Interpret Income Statements; Changes in Both Sales and Production; Lean Production (L04-1, LO4-2, LO4-3) 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): Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income (loss) Year i $1,000,000 760,000 240, 230,000 $ 10,000 Year 2 $750,000 $12,000 218,000 198,000 $ 20,000 $1,000,000 788,500 211.500 230,000 $ (18,500) 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 40,000 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. Production in units Sales in units Year 1 0.00 40.000 Year 2 50.000 32.000 32,000 0,coe 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 $4.00 per unit, and foxed manufacturing overhead expenses total $600,000 per year b. A new fixed manufacturing overhead rate is computed each year based that year's actual fixed manufacturing overhead costs divided by the actual number of units produced 200 32,000 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 $4.00 per unit, and fixed manufacturing overhead expenses total $600,000 per year, b. A new fixed manufacturing overhead rate is computed each year based that year's actual fixed manufacturing overhead costs divided by the actual number of units produced. c. Variable selling and administrative expenses were $4 per unit sold in each year. Fixed selling and administrative expenses totaled $70,000 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 during Year 3 when sales recovered to previous levels. tear 2 when sales dropped by 20% and why a loss was incurred 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 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? Complete this question by entering your answers in the tabs below. Reg 1 Req ZA Reg 28 Rernncile the variable resting and action entine net oneration neame finures for each voar. Enter an inc r eductioncaca Starfax, Inc. Variable Costing Income Statement Year 1 Year 2 Sales $ 1,000,000 $ 730,000 Variable expenses Variable cost of goods sold 160,000 200,000 Variable selling and administrative expenses 160,000 200,000 Year 3 1,000,000 128,000 128,000 320,000 680,000 400,000 330,000 256,000 744,000 Total variable expenses Contribution margin ution margin Fixed expenses Fixed manufacturing overhead Fixed selling and administrative expenses 600,000 70,000/ 600,000 70,000 600,000 70,000 Total fixed expenses Net operating income (loss) 670,000 10,000 670,000 $ (340,000) S $ 670,000 74,000 Req 2A > wu LEJUILDILUUVICU IU 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 much of this cost is variable an 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 each year under absorption costing? Complete this question by entering your answers in the tabs below. Req 1 Reg 2A Req 2B Req 5B Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how m fixed. (Do not round intermediate calculations and round your final answers to 2 decimal places.) Year 2 Year 3 Variable manufacturing cost Fixed manufacturing cost Unit product cost Year 1 $ 4.00 15.00 $ 19.00 12.00 16.00 $ $ 22 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 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? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2A Reg 28 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.) Year 2 Year 3 Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Variable costing net operating income (loss) Add faced manufacturing overhead deferred in inventory Deduct fixed manufacturing overhead cost released from inventory Absorption costing net operating income (los) ( Req 2A Req 5B > 1. Prepared LOHIDUUT in Validule Con Me Side r Eaul yedi. 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? Complete this question by entering your answers in the tabs below. Reg 1 Req 2A Req 20 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?. Year 1 Year 2 Year 3