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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 (@ $63 per

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

Year 1 Year 2
Sales (@ $63 per unit) $ 945,000 $ 1,575,000
Cost of goods sold (@ $42 per unit) 630,000 1,050,000
Gross margin 315,000 525,000
Selling and administrative expenses* 299,000 329,000
Net operating income $ 16,000 $ 196,000

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

The companys $42 unit product cost is computed as follows:

Direct materials $ 9
Direct labor 12
Variable manufacturing overhead 4
Fixed manufacturing overhead ($340,000 20,000 units) 17
Absorption costing unit product cost $ 42

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:

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

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