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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 (@ $61 per

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

Year 1 Year 2
Sales (@ $61 per unit) $ 1,220,000 $ 1,830,000
Cost of goods sold (@ $37 per unit) 740,000 1,110,000
Gross margin 480,000 720,000
Selling and administrative expenses* 314,000 344,000
Net operating income $ \166,000\ $ 376,000

* $3 per unit variable; $254,000 fixed each year.

The companys $37 unit product cost is computed as follows:

Direct materials $ 6
Direct labor 11
Variable manufacturing overhead 3
Fixed manufacturing overhead ($425,000 25,000 units) 17
Absorption costing unit product cost $ 37

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 25,000 25,000
Units sold 20,000 30,000

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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