Starfax, Inc , manufactures a small part that is widely used in various electronic products such as home computers Operating results for the first three years of activity were as follows (absorption costing basis) Year 1 Year 2 Year 3 Sales $ 800,000 $ 640,000 $ 800,000 Cost of goods sold 580,000 400,000 620,000 Gross margin 220,000 240,000 180,000 Selling and administrative expenses 190,000 180,000 190,000 Net operating income (loss) $ 30,000 $ 60,000 $ (10,000) 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, Starfaxs 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 inventory was excessive 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 50,000 60,000 40,000 Sales in units 50,000 40,000 50,000 Additional information about the company follows a The companys 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 Fixed manufacturing overhead costs are applied to units of product on the basis of each years production That is, a new fixed manufacturing overhead rate is computed each year c 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 Starfaxs management cant 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 1 Prepare a contribution format variable costing income statement for each year 2 a Compute the unit product cost in each year under absorption costing 2 b Reconcile the variable costing and absorption costing net operating incomes for each year 5b If Lean Production had been used during Year 2 and Year 3, and the predetermined overhead rate is based on 50,000 units per year, what would the companys net operating income (or loss) have been in each year under absorption costing

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 30, 2024

Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Operating results for the first three years

Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Operating results for the first three years of activity were as follows (absorption costing basis):

	Year 1		Year 2		Year 3
Sales	$	800,000	$	640,000	$	800,000
Cost of goods sold		580,000		400,000		620,000

Gross margin		220,000		240,000		180,000
Selling and administrative expenses		190,000		180,000		190,000

Net operating income (loss)	$	30,000	$	60,000	$	(10,000)

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, Starfaxs 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 inventory was excessive 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	50,000	60,000	40,000
Sales in units	50,000	40,000	50,000

Additional information about the company follows:

a.	The companys 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.	Fixed manufacturing overhead costs are applied to units of product on the basis of each years production. That is, a new fixed manufacturing overhead rate is computed each year.
c.	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.

Starfaxs management cant 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.

Prepare a contribution format variable costing income statement for each year

2-a.

Compute the unit product cost in each year under absorption costing

2-b.

Reconcile the variable costing and absorption costing net operating incomes for each year.

5b.	If Lean Production had been used during Year 2 and Year 3, and the predetermined overhead rate is based on 50,000 units per year, what would the companys net operating income (or loss) have been in each year under absorption costing?