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

	Year 1			Year 2
Sales (@ $61 per unit)	$	1,220,000		$	1,830,000
Cost of goods sold (@ $34 per unit)		680,000			1,020,000
Gross margin		540,000			810,000
Selling and administrative expenses*		306,000			336,000
Net operating income	$	234,000		$	474,000

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

The companys $34 unit product cost is computed as follows:

Direct materials	$	6
Direct labor		12
Variable manufacturing overhead		3
Fixed manufacturing overhead ($325,000 25,000 units)		13
Absorption costing unit product cost	$	34

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	25,000	25,000
Units sold	20,000	30,000

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

Unit product cost

What is the variable costing net operating income in Year 1 and in Year 2? (Loss amounts should be indicated with a minus sign.)

	Year 1	Year 2
Net operating income (loss)

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

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
	Year 1	Year 2
Variable costing net operating income (loss)
Absorption costing net operating income