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

Sales (@ $62 per unit)	$	1,178,000		$	1,798,000
Cost of goods sold (@ $35 per unit)		665,000			1,015,000
Gross margin		513,000			783,000
Selling and administrative expenses*		312,000			342,000
Net operating income	$	201,000		$	441,000

* $3 per unit variable; $255,000 fixed each year.

The companys $35 unit product cost is computed as follows:

Direct materials	$	6
Direct labor		12
Variable manufacturing overhead		1
Fixed manufacturing overhead ($384,000 24,000 units)		16
Absorption costing unit product cost	$	35

variable costing per unit

19

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:

	year1	Year 2
Units produced	24,000	24,000
Units sold	19,000	29,000

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.