Problem 6-25 Prepare and Interpret Income Statements; Changes in Both Sales and Production; Lean Production [LO6-1, LO6-2, LO6-3 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) 1,040,000 $936,000 $1,040,000 924.000 216,000924,000 116,000 Cost of gooda sold Gross margin Selling and administrative expensen150,000 Net operating income (loss) 160,000 142,000 150.000 10,000 74,000 (34,000) 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, ta tax's sales dropped by 10% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 40,000 units; the increased production was designed to provide the company with a buffer of protection aga ainst 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 40,000 40,000 45,000 36,000 36,000 40,000 Additional information about the company follows