During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows:
Question:
During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows:
Year 1 Year 2
Sales (@ $61 per unit) $ 976,000 $ 1,586,000
Cost of goods sold (@ $43 per unit) 688,000 1,118,000
Gross margin 288,000 468,000
Selling and administrative expenses* 296,000 326,000
Net operating income $ 8,000 $ 142,000
* $3 per unit variable; $248,000 fixed each year.
The company's $43 unit product cost is computed as follows:
Direct materials $ 10
Direct labor 11
Variable manufacturing overhead 3
Fixed manufacturing overhead ($399,000 21,000 units) 19
Absorption costing unit product cost $ 43
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:
Year 1 Year 2
Units produced 21,000 21,000
Units sold 16,000 26,000
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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