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 $ 1,040,000 $ 936,000 $ 1,040,000 Cost of goods sold 880,000 720,000 924,000 Gross margin 160,000 216,000 116,000 Selling and administrative expenses 150,000 142,000 150,000 Net operating income (loss) $ 10,000 $ 74,000 $ (34,000) 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 10 during Year 2 even though production increased during the year Management had expected sales to remain constant at 40,000 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 Year 3 Production in units 40,000 45,000 36,000 Sales in units 40,000 36,000 40,000 Additional information about the company follows a The companys plant is highly automated Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $4 00 per unit, and fixed manufacturing overhead expenses total $720,000 per year b Fixed manufacturing overhead costs are applied to units of product on the basis of each years production That is, a new fixed manufacturing overhead rate is computed each year c Variable selling and administrative expenses were $2 per unit sold in each year Fixed selling and administrative expenses totaled $70,000 per year d The company uses a FIFO inventory flow assumption Starfaxs management cant understand why profits doubled during Year 2 when sales dropped by 10 , 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 2a Compute the unit product cost in each year under absorption costing (Round your answers to 2 decimal places ) 2b Reconcile the variable costing and absorption costing net operating income for each year 5b If Lean Production had been used during Year 2 and Year 3 and the predetermined overhead rate is based on 40,000 units per year, what would the companys net operating income (or loss) have been in each year under absorption costing (Losses should be indicated by a minus sign )

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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

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

1,040,000

936,000

1,040,000

Cost of goods sold

880,000

720,000

924,000

Gross margin

160,000

216,000

116,000

Selling and administrative expenses

150,000

142,000

150,000

Net operating income (loss)

10,000

74,000

(34,000)

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 10% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 40,000 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

Year 3

Production in units

40,000

45,000

36,000

Sales in units

40,000

36,000

40,000

Additional information about the company follows:

a.	The companys plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $4.00 per unit, and fixed manufacturing overhead expenses total $720,000 per year.
b.	Fixed manufacturing overhead costs are applied to units of product on the basis of each years production. That is, a new fixed manufacturing overhead rate is computed each year.
c.	Variable selling and administrative expenses were $2 per unit sold in each year. Fixed selling and administrative expenses totaled $70,000 per year.
d.	The company uses a FIFO inventory flow assumption.

Starfaxs management cant understand why profits doubled during Year 2 when sales dropped by 10%, and why a loss was incurred during Year 3 when sales recovered to previous levels.

Required:

Prepare a contribution format variable costing income statement for each year.

2a.

Compute the unit product cost in each year under absorption costing. (Round your answers to 2 decimal places.)

2b.	Reconcile the variable costing and absorption costing net operating income for each year.

5b. If Lean Production had been used during Year 2 and Year 3 and the predetermined overhead rate is based on 40,000 units per year, what would the companys net operating income (or loss) have been in each year under absorption costing? (Losses should be indicated by a minus sign.)