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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 (@ $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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