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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 (@ $60 per

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

Year 1 Year 2
Sales (@ $60 per unit) $ 900,000 $ 1,500,000
Cost of goods sold (@ $41 per unit) 615,000 1,025,000
Gross margin 285,000 475,000
Selling and administrative expenses* 297,000 327,000
Net operating income $ -12,000 $ 148,000

* $3 per unit variable; $252,000 fixed each year.

The companys $41 unit product cost is computed as follows:

Direct materials $ 6
Direct labor 13
Variable manufacturing overhead 4
Fixed manufacturing overhead ($360,000 20,000 units) 18
Absorption costing unit product cost $ 41

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

Year 1 Year 2
Units produced 20,000 20,000
Units sold 15,000 25,000

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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