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

Year 1 Year 2Sales (@ $62 per unit)

$ 1,116,000 $ 1,736,000

Cost of goods sold (@ $32 per unit) 576,000 896,000

Gross margin 540,000 840,000

Selling and administrative expenses* 304,000 334,000

Net operating income $ 236,000 $ 506,000

* $3 per unit variable; $250,000 fixed each year.

The companys $32 unit product cost is computed as follows:

Direct materials $ 7

Direct labor 12

Variable manufacturing overhead 1

Fixed manufacturing overhead ($276,000 23,000 units) 12

Absorption costing unit product cost $ 32

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges onproduction equipment and buildings.

Production and cost data for the first two years of operations are:

Year 1 Year 2

Units produced 23,000 23,00

0Units sold 18,000 28,000

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.