Sales Cost of goods sold, Gross margin Selling and administrative expenses Net operating income (loss) Year 1 $ 841,600 610,160 231,440 199,880 Year 2 Year 3 $ 673,280 $ 841,600 420,800 652,240 252,480 189,360 189,360 178,840 $\10,520\ $ 31,560 $ 63,120 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 52.600 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 Year 11 52,600 Year 2 63,120 Sales in units 52,600 42,080 Year 3 42,080 52,600 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 $504,960 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 $142.080 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.)