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 NYear 2 year 3 950,000 760,000 950,000 Cost of goods sold 710.000 496.000 755.000 Gross margin 240,000 264.000 195,000 Selling and administrative expenses 210,000 180,000 210,000 Net operating income (loss) 30,000 84.000 (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, 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 designed to provide the oompany with a buffer of protection against unexpected demand. By the start of Year 3, management could see that inventory was excessive and that spurts in demand were unlikely. To reduce the exoessive inventories, Starfax cut back production during Year 3, as shown below: Year 1 Year 2 Year 3 Sales in units Additional information about the company folows: a. The company's plant is highly automated. Variable manufacturing expenses (direct materials, direct variable manufacturing overhead) total only $340 per unit and fixed manufacturing overhead expenses S540.000 year b, Fixed manufacturing overhead costs are applied to units of product on the basis of each year's production. That is, a new fxed manufacturing overhead is computed year. variable selling and administrative expenses were $3 per unit sold in each year. Fixed selling and administrative expenses totaled $60,000 per year. The company uses a FIFO inventory fow assumption, 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