1.

During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows:

	Year 1	Year 2
Sales (@ $64 per unit)	$ 1,280,000	$ 1,920,000
Cost of goods sold (@ $37 per unit)	740,000	1,110,000
Gross margin	540,000	810,000
Selling and administrative expenses*	313,000	343,000
Net operating income	$ 227,000	$ 467,000

* $3 per unit variable; $253,000 fixed each year.

The companys $37 unit product cost is computed as follows:

Direct materials	$ 7
Direct labor	12
Variable manufacturing overhead	3
Fixed manufacturing overhead ($375,000 25,000 units)	15
Absorption costing unit product cost	$ 37

Production and cost data for the first two years of operations are:

	Year 1	Year 2
Units produced	25,000	25,000
Units sold	20,000	30,000

Required:

What is the variable costing net operating income in Year 1 and in Year 2?

Reconcile the absorption costing and the variable costing net operating income figures for each year.