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):

Problem 5-25 Prepare and Interpret Income Statements, Changes in Both Sales and Production; Lean Production LO5-1, LO5-2, LO5-3] 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 1,100,000 880,000 1,100,000 Cost of goods sold 860,000 608.000 10,000 Gross margin 240,000 272,000 90,000 Selling and administrative expenses 220.000 90.000 220.000 20,000 82,000 30,000) Net operating income (loss) 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 Year2 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 Year 2 Year 3 50,000 60,000 Production n units, 40,000 Sales in units 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 ove total only $5.20 per unit, and fixed manufacturing overhead rhead) expenses total $600,000 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. c. Variable selling and administrative expenses were $3 per unit sold in each year. Fixed selling and administrative expenses totaled $70,000 per year. d. The company uses a FlFO inventory flow assumption Starfax's management can't understand why profits more than doubled during Year2 when sales dropped by 20%, and why a loss was incurred during Year 3 when sales recovered to previous levels Required: 1. Prepare a contribution format variable costing income statement for each year