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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 (@ $64 per

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

Year 1 Year 2
Sales (@ $64 per unit) $ 1,216,000 $ 1,856,000
Cost of goods sold (@ $28 per unit) 532,000 812,000
Gross margin 684,000 1,044,000
Selling and administrative expenses* 310,000 340,000
Net operating income $ 374,000 $ 704,000

* $3 per unit variable; $253,000 fixed each year.

The companys $28 unit product cost is computed as follows:

Direct materials $ 6
Direct labor 8
Variable manufacturing overhead 2
Fixed manufacturing overhead ($288,000 24,000 units) 12
Absorption costing unit product cost $ 28

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 24,000 24,000
Units sold 19,000 29,000

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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