Problem 6-25 (Algo) Prepare and Interpret Income Statements; Changes in Both Sales and Production: Lean Production [LO6-1, LO6-2, LO6-3] Starfax, Incorporated, manufactures a small part that is widely used in various electronic products such os 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 53,200 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 inventorles, Starfax cut back production during Year 3, as shown below: Additional information obout the compony follows: - The company's plant is highly outomoted. Variable manufactuting expenses (direct materials, direct labor, and variable manufocturing overhead) totol only $2.00 per unit, and fixed manufacturing overhead expenses totol $510,720 per yeor: b. A new fixed monufacturing overhead rate is computed each year based on thot year's actual fixed manufacturing overheod 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 $142.560 per year. d. The company uses a FFO inventory flow assumption. (FFFO means first-in first-out. In other words, it assumes thot the oldest units in inventory ore sold first) Starfax's management can't understand why profis doubled during Year 2 when sales dropped by 20% and why a loss was incurred duning Year 3 when sales recovered to previous levels Required: 1. Prepare a variable costing income statement for eoch yeac. 2. Refer to the obsorption costing income statements obove. a. Compute the unit product cost in each year under absorption costing. Show how much of this cast is variable and how much is fixed. b. Reconcle the varioble costing and absorption costing net operating income figures for each year. 5b. If Lean Production hod been used during Year 2 and Year 3 , what would the company's net operating income (or loss) have been in eoch year under obsorption costing? Complete this question by entering your answers in the tabs below. Prepare a variable costing income statement for each year. Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much is fixed. (Do not round intermediate calculations and round your final answers to 2 decimal places.) Reconcle the variable costing and absorption costing net operating income figures for each year. (Enter any losses or deductions as a negative value. Lean Production had been used during Year 2 and Year 3 , what would the company's net operating income (or loss) have een in each year under absorption costino