Jerry Sanchez is president of Heatco, Inc., a manufacturer of a single product. He is comparing this year's income statement with last year's and is wondering why net income is different for the same level of sales. "Our costs have not changed at all, yet look at our income. What did we do right this year?" The statements, both prepared using absorption costing, look like this:

Last year, the first year of operations, the company produced 40,000 units and sold them all. This year, the company increased production to maintain a margin of safety in its finished goods inventory. Fixed costs are applied to products on the basis of the number of units produced each year. Here is a summary of Heatco's production results, variable production costs, and fixed manufacturing overhead cost for both years:

\section*{Required}
A. Calculate the unit product cost under variable costing and absorption costing.
B. Prepare an income statement for each year using variable costing.
C. Compare the net income figures in the variable-costing income statement [requirement (B)] and the absorption-costing income statement for each of the years. Explain any differences.
D. Why did Heatco earn more this year than last year using absorption costing, even though the company sold the same number of units?

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Sales revenue (40,000 units each year) Less cost of goods sold Gross margin Less selling and administrative expenses Net income This Year $800,000 Last Year $800,000 400,000 460,000 $400,000 $340,000 300,000 300,000 $100,000 $ 40,000