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During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $63 per

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

Year 1 Year 2
Sales (@ $63 per unit) $ 1,071,000 $ 1,701,000
Cost of goods sold (@ $37 per unit) 629,000 999,000
Gross margin 442,000 702,000
Selling and administrative expenses* 297,000 327,000
Net operating income $ 145,000 $ 375,000

* $3 per unit variable; $246,000 fixed each year.

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

Direct materials $ 9
Direct labor 11
Variable manufacturing overhead 3
Fixed manufacturing overhead ($308,000 22,000 units) 14
Absorption costing unit product cost $ 37

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

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

Year 1 Year 2
Units produced 22,000 22,000
Units sold 17,000 27,000

Required:

1. Using variable costing, what is the unit product cost for both years?

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

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

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