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	$	835,200		$	668,160		$	835,200
Cost of goods sold		605,520			417,600			647,280
Gross margin		229,680			250,560			187,920
Selling and administrative expenses		198,360			187,920			177,480
Net operating income (loss)	$	31,320		$	62,640		$	\10,440	\

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 52,200 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	52,200	62,640	41,760
Sales in units	52,200	41,760	52,200

Additional information about the company follows:

1. The companys 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 $501,120 per year.

2. 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.

3. Variable selling and administrative expenses were $1 per unit sold in each year. Fixed selling and administrative expenses totaled $141,760 per year.

4. 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.)

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.

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 companys net operating income (or loss) have been in each year under absorption costing?

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? Answer is not complete. Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 2B Req 5B 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) Add fixed manufacturing overhead deferred in inventory Deduct fixed manufacturing overhead cost released from inventory Absorption costing net operating income (loss) $ 35,720 $ 35,720 (100,000) 0 167,040 (167,040) X 125,280 X $ 35,720 $ 67,040 $ (6,040) X 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? X Answer is not complete. Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 2B 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 Req 2B Req 5B >