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An Electronics, Inc. $($AEI$)$ commenced operations in $20$X$1,$ manufacturing a small component used in various electronic products. In the latter part of year two of operations, a competitor went out of business and flooded the market with similar units, resulting in a $20\%$ drop in AEI's sales year$-$over$-$year. AEI had originally projected sales growth over year one and did not adjust production timely following the news of their competitor going under. Production thus increased from Year $20$X$1$ to Year $20$X$2,$ however was adjusted down for Year $20$X$3$ on account of the excess inventory. Selling price per unit of $$16$ remained constant. Production and sales results in units are shown below by year:

$\backslash$table$[[,$Year $20$X$1,$Year $20$X$2,$Year $20$X$3],[$Production in units,$50,000,60,000,40,000],[$Sales in units,$50,000,40,000,50,000]]$

Additional information about AEI's operations follows:

The AEI plant is highly automated, such that variable manufacturing expenses $($direct materials, direct labor, and variable manufacturing overhead$)$ amounts to just $$2$ per unit.

Fixed manufacturing overhead expenses total $$480,000$ per annum for the foreseeable future. AEI reports annual results to investors under the absorption costing and presentation method, with fixed manufacturing overhead allocated based on actual number of units produced.

Variable selling and administrative expenses amount to $$1$ per unit sold, while fixed selling and administrative expenses total $$140,000$ annually.

The company uses the FIFO $($first$-$in first$-$out$)$ inventory flow assumption, whereby it assumes the oldest units in inventory are sold first.

Part II$.$ Management reports and analysis

Solve and give solution:

Reconcile the variable costing and absorption costing net operating income figures for each year, including specifically how each variance in net operating income can be recalculated using the difference between units produced and units sold. Briefly discuss the results to explain to AEI management why net operating income differs between costing methods.

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