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

	Year 1			Year 2
Sales (@ $62 per unit)	$	930,000		$	1,550,000
Cost of goods sold (@ $40 per unit)		600,000			1,000,000
Gross margin		330,000			550,000
Selling and administrative expenses*		291,000			321,000
Net operating income	$	39,000		$	229,000

* $3 per unit variable; $246,000 fixed each year.

The companys $40 unit product cost is computed as follows:

Direct materials	$	9
Direct labor		8
Variable manufacturing overhead		5
Fixed manufacturing overhead ($360,000 20,000 units)		18
Absorption costing unit product cost	$	40

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.

Using variable costing, what is the unit product cost for both years?

Unit product cost

What is the variable costing net operating income in Year 1 and in Year 2? (Loss amounts should be indicated with a minus sign.)

	Year 1	Year 2
Net operating income (loss)

Reconcile the absorption costing and the variable costing net operating income figures for each year.

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
	Year 1	Year 2
Variable costing net operating income (loss)
Absorption costing net operating income