Starfax, Incorporated, 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$)$:

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 $52,600$ 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:

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 $$2\mathrm{.}00$ per unit, and fixed manufacturing overhead expenses total $$504,960$ 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

$$142,080$ 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.$)$

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.Required:

Prepare a variable costing income statement for each year.

Refer to the absorption costing income statements above.

a$.$ Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much is fixed.

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

$5$b$.$ 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?