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Memotec, 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	$	900,000	$	720,000	$	900,000
Cost of goods sold		720,000		546,000		820,000
Gross margin		180,000		174,000		80,000
Selling and administrative expenses		120,000		108,000		120,000
Net operating income (loss)	$	60,000	$	66,000	$	(40,000)

Sales dropped by 20% during Year 2 due to the entry of several foreign competitors into the market. Memotec had expected sales to remain constant at 30,000 units for the year; production was set at 32,000 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, Memotec cut back production during Year 3, as shown below:

	Year 1	Year 2	Year 3
Production in units	30,000	32,000	24,000
Sales in units	30,000	24,000	30,000

Additional information about the company follows:

a.	The companys plant is highly automated. Variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) total only $4.00 per unit, and fixed manufacturing overhead costs total $600,000 per year.
b.	Fixed manufacturing overhead costs are applied to units of product on the basis of each years production. That is, a new fixed overhead rate is computed each year.
c.	Variable selling and administrative expenses are $2 per unit sold. Fixed selling and administrative expenses total $60,000 per year.
d.	The company uses a FIFO inventory flow assumption.

Memotecs management cant 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.

Required:

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

2a.	Compute the unit product cost in each year under absorption costing. (Round your answers to 2 decimal places.)

2b.	Reconcile the variable costing and absorption costing net operating incomes for each year. (Losses should be indicated by a minus sign.)

5b.	If Lean Production had been in use during Year 2 and Year 3, and the predetermined overhead rate is based on 30,000 units per year, what would the companys net operating income (or loss) have been in each year under absorption costing? (Losses should be indicated by a minus sign.)

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