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 3 950,000 760,000 $950,000 496,000 Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income (loss) 710,000 240,000 210,000 755,000 195,000 264,000 180,000 210000_ 30,000 60,000 (15,000) 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; against unexpected spurts in demand. By the start of Year 3, management could see that it had excess in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below: the increased production was designed to provide the company with a buffer of protection ventory and that spurts in Year 1 Year 2 Year 3 Production in units 50,000 60,000 40,000 50,000 40,000 50,000 Sales in units