Problem 4-25 (Static) Prepare and Interpret Income Statements; Changes in Both Sales and Production; Lean Production [LO4-1, 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): Year 1 Year 2 Year 3 Sales $ 800, 080 $ 640,809 $ 800, 090 Cost of goods sold 580, 080 490, 908 620, 290 Gross margin 220,080 240, 890 180, 809 Selling and administrative expenses 190, 080 180, 808 190, 090 Net operating income (loss) $ 30,080 60, 890 (10, 090) 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 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 50, 080 40, 908 Sales in units 50, eea 40, 080 50, Gee 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 manufacturing overhead expenses total $480,000 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. . Variable selling and administrative expenses were $1 per unit sold in each year. Fixed selling and administrative expenses totaled $140,000 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 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?Complete this question by entering your answers in the tabs below. Req 1 Reg 2A Req 28 Req 58 Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much is fixed. (Do not round intermediate calculations and round your final answers to 2 decimal places.) Year 1 Year 2 Year 3 Variable manufacturing cost 2.00 2.00 2.00 Fixed manufacturing cost 9.60 8.00 12.00 Unit product cost S 11.60 10.00 14.00 Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 28 Req 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) 3 30,000 (100,000) $ 30,000 Add fixed manufacturing overhead deferred in inventory 160,000 (40,000) Deduct fixed manufacturing overhead cost released from inventory Absorption costing net operating income (loss) $ 30,000 $ 60,000 $ (10,000) Complete this question by entering your answers in the tabs below. Reg 1 Reg 2A Req 28 Req 58 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 Net operating income 30.000 Year 2 Net operating loss Year 3 Net operating income