Question
During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $25 per
During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows:
Year 1 | Year 2 | |
---|---|---|
Sales (@ $25 per unit) | $ 1,000,000 | $ 1,250,000 |
Cost of goods sold (@ $18 per unit) | 720,000 | 900,000 |
Gross margin | 280,000 | 350,000 |
Selling and administrative expenses* | 210,000 | 230,000 |
Net operating income | $ 70,000 | $ 120,000 |
*$2 per unit variable; $130,000 fixed each year.
The companys $18 unit product cost is computed as follows:
Direct materials | $ 4 |
---|---|
Direct labor | 7 |
Variable manufacturing overhead | 1 |
Fixed manufacturing overhead ($270,000 45,000 units) | 6 |
Absorption costing unit product cost | $ 18 |
Production and cost data for the first two years of operations are:
Year 1 | Year 2 | |
---|---|---|
Units produced | 45,000 | 45,000 |
Units sold | 40,000 | 50,000 |
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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