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): Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income (loss) Year 1 Year 2 $ 835,200 $ 668, 160 605,520 417,600 229,680 250,560 198,360 187,920 $ 31,320 $ 62,640 Year 3 $ 835,200 647,280 187,920 177,480 $ 110,440 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, Starfax's sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 52,200 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: 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 $501,120 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 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. 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. Reg 1 Req 2A Reg 28 Req 5B Prepare a variable costing income statement for each year. sarfax, Inc. Variable Costing Income Statement Year 1 Year 2 Sales $ 835,200 $ 668,100 $ Variable expenses Variable cost of goods sold 104,400 83,520 Variable selling and administrative expenses 52,200 41.7601 Year 3 835.200 ces 104.400 52 200 150,000 125,280 542,880 156,600 678,600 678,600 Total variable expenses Contribution margin Food expenses Fixed manufacturing overhead Fixed selling and administrative expenses 501,120 141.760 501,120 141,760 501,120 141,760 Year 3 Starfax, Inc. Variable Costing Income Statement Year 1 Year 2 Sales $ 835,200 $ 668,160 $ Variable expenses: Variable cost of goods sold 104,400 83,520 Variable selling and administrative expenses 52,200 41,760 835,200 104,400 52,200 156,600 125,280 156,600 678,600 678,600 542,880 Total variable expenses Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative expenses 501,120 141,760 501,120 141,760 501,120 141,760 Total fixed expenses 642,880 642,880 35,720 $ (100,000) $ 642,880 35,720 Net operating income (loss) Req 1 Req 2A Req 2B Req 5B Compute the unit product cost in each year under absorption costing. Show F fixed. (Do not round intermediate calculations and round your final answers t Year 1 Year 2 Year 3 Variable manufacturing cost Fixed manufacturing cost Unit product cost $ $ 0.00 $ 0.00 $ 0.00 Req 1 Req 2A Ref 2B Req 5B Reconcile the variable costing and absorption costing net operating income figures for each year. (Enter any losses or deduc 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) Req 1 Req 2A t Req 2B Ret 5B If Lean Production had been used during Year 2 and Year 3, what would been in each year under absorption costing? ences Year 1 Year 2 Year 3