Starfax, Incorporated, manufactures a small part widely used in various electronic products. 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 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 $50,400$ units; the increased production was designed to provide a buffer of protection against unexpected spurts in

demand. By the start of Year $3,$ management had excess inventory and realized growth in demand was unlikely; thus, it cut back

production throughout the year, as shown below:

Additional information about the company follows:

a$.$ The company's plant is highly automated. Variable manufacturing expenses $($direct materlals, direct labor, and varlable

manufacturing overhead$)$ total only $$2\mathrm{.}00$ per unit, and fixed manufacturing overhead expenses total $$483,840$ 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$.$ Varlable selling and administrative expenses were $$1$ per unit sold in each year. Fixed selling and administrative expenses totaled

$$140,320$ per year.

d$.$ The company uses a FIFO inventory flow assumption. $($FIFO means first$-$in first$-$out. In other words, it assumes 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.

Requlred:

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 varlable 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?