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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 (@ $62 per

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) $ 992,000 $ 1,612,000
Cost of goods sold (@ $39 per unit) 624,000 1,014,000
Gross margin 368,000 598,000
Selling and administrative expenses* 297,000 327,000
Net operating income $ 71,000 $ 271,000

* $3 per unit variable; $249,000 fixed each year.

The companys $39 unit product cost is computed as follows:

Direct materials $ 8
Direct labor 10
Variable manufacturing overhead 1
Fixed manufacturing overhead ($420,000 21,000 units) 20
Absorption costing unit product cost $ 39

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

Year 1 Year 2
Units produced 21,000 21,000
Units sold 16,000 26,000

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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