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 $ 825,600 598,560 227,040 196,080 $ 30,960 Year 2 $ 660, 480 412,800 247, 680 185, 760 $ 61,920 Year 3 $ 825,600 639,840 185, 760 175,440 $ \10,3201 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 51,600 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: Production in units Sales in units Year 1 51,600 51,600 Year 2 61,920 41,280 Year 3 41,280 51,600 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 $495,360 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 $141,280 per year. 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.) Starfay's management can't understand why nrofits doubled during Year 2 when sales dronned hv 20% and why a loss was incurred Req 1 Req 2A Req 2B Req 5B Prepare a variable costing income statement for each year. Starfax, Inc. Variable Costing Income Statement Year 1 Year 2 Year 3 Sales Variable expenses: Variable cost of goods sold 200,000 160,000 200,000 Variable selling and administrative expenses Total variable expenses 200,000 160,000 200,000 Contribution margin (200,000) (160,000) (200,000) Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative expenses Total fixed expenses 0 0 0 Net operating income (loss) $ (200,000) $ (160,000) $ (200,000) Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 2B Req 5B Reconcile the variable costing and absorption costing net operating income figures for each year. (Enter any losses or deductions as a 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 (deduct) fixed manufacturing overhead deferred in (released from) inventory Absorption costing net operating income (loss) Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 2B Req 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? Year 1 Year 2 Year 3