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

* $3 per unit variable; $252,000 fixed each year.

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

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:

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.

Year 1 Year 2 Sales ($60 per unit) Cost of goods sold (@ $42 per unit) Gross margin Selling and administrative expenses $ 1,740,000 1,140,000 798,000 342,000 1,218,000 522,000 309,000 33,000 339,000 Net operating income 183,000 $ 9 Direct materials Direct labor 11 Variable manufacturing overhead Fixed manufacturing overhead ($456,000 + 24,000 units) 19 42 Absorption costing unit product cost m Year 1 Year 2 Units produced Units sold 24,000 24,000 29,000 19,000 Unit product cost Year 1 Year 2 Net operating income (loss) Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 2 Year 1 Variable costing net operating income (loss) Absorption costing net operating income