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 2Year 3 Sales Cost of goods sold $1,000,000 800,000 $1,000,000 750,000 540,000 787,500 Gross margin Selling and administrative expenses 250,000 260,000 212,500 200,000 230,000 230,000 Net operating income (loss) $ 20,000 60,000 S (17,500) 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; 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 60,000 40,000 Year 3 Production in units Sales in units 50,000 50,000 40,000 50,000 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 $6.00 per unit, and fixed manufacturing overhead expenses total $450,000 per year b. Fixed manufacturing overhead costs are applied to units of product on the basis of each year's production That is a new fixed manufacturing overhead rate is computed each year