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

Year 1

Year 2

Sales (@ $62 per unit) $1,054,000

$1,674,000

Cost of goods sold (@ $40 per unit) 680,000

1,080,000

Gross margin 374,000

594,000

Selling and administrative expenses* 303,000

333,000

Net operating income $\71,000\

$261,000

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

The company's $40 unit product cost is computed as follows:

Direct materials $10

Direct labor 12

Variable manufacturing overhead 4

Fixed manufacturing overhead ($308,000 22,000 units) 14

Absorption costing unit product cost $40

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 operatons are:

Year 1 Year 2

Units produced 22,000 22,000

Units sold 17,000 27,000

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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