TechnoSide, Inc., manufactures and sells a unique electronic part. Operating results for the first

three years of activity were as follows $($absorption costing basis$)$:

Year $1$ Year $2$ Year $3$

Sales $ $1,500,000$ $ $1,200,000$ $ $1,500,000$

Cost of goods sold $ $1,200,000$ $ $840,000$ $ $1,230,000$

Gross margin $ $300,000$ $ $360,000$ $ $270,000$

Selling and administrative expenses

$ $255,000$ $ $225,000$ $ $300,000$

Net operating income $($loss$)$ $ $45,000$ $ $135,000$ $ $(30,000)$

Sales dropped by $20\%$ during Year $2$ due to the entry of several foreign competitors into the

market. TechnoSide had expected sales to remain constant at $100,000$ units for the year;

production was set at $100,000$ units in order to build a buffer of protection against unexpected

spurts in demand. By the start of Year $3,$ management could see that spurts in demand were

unlikely and that the inventory was excessive. To work off the excessive inventories, TechnoSide

cut back production during Year $3,$ as shown below:

Year $1$ Year $2$ Year $3$

Production in units $100,000120,00080,000$

Sales in units $100,00080,000100,000$

Additional information about the company follows:

$1.$ The company$$s plant is highly automated. Variable manufacturing costs $($direct materials,

direct labor, and variable manufacturing overhead$)$ total only $$4$ per unit, and fixed

manufacturing overhead costs total $$500,000$ per year.

$2.$ Fixed manufacturing overhead costs are applied to units of product on the basis of each year$$s

production $($units produced$).$ That is$,$ a new fixed overhead rate is computed each year.

$3.$ Variable selling and administrative expenses are $$2$ per unit sold. Fixed selling and

administrative expenses total $$90,000$ per year.

TechnoSide$$s management can$$t understand why profits tripled during Year $2$ when sales

dropped by $20\%,$ and why a loss was incurred during Year $3$ when sales recovered to previous

levels.

$**$Submission Due Date: $16/12/2023**5$

Required:

$1.$ Compute the unit product cost in each year under:

a$)$ Absorption costing $($Show how much of this cost is variable and how much is fixed$)$

b$)$ Variable costing

$2.$ Prepare a contribution format variable costing income statement for each year.

$3.$ Refer to the absorption costing income statements, reconcile the variable costing and

absorption costing net operating incomes for each year.

$4.$ Refer again to the absorption costing income statements, explain why net operating income

was higher in Year $2$ than it was in Year $1$ under the absorption approach, in light of the fact

that fewer units were sold in Year $2$ than in Year $1.$

$5.$ Refer again to the absorption costing income statements, explain why the company suffered

a loss in Year $3$ but reported a profit in Year $1,$ although the same number of units was sold

in each year.

$6.$ Assume that the company must obtain additional financing. As a member of top

management, which of the income statements above would you prefer to take with you to

negotiate with the creditor? Why?