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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) $ 1,240,000 $ 1,860,000
Cost of goods sold (@ $37 per unit) 740,000 1,110,000
Gross margin 500,000 750,000
Selling and administrative expenses* 311,000 341,000
Net operating income $ \189,000\ $ 409,000

* $3 per unit variable; $251,000 fixed each year.

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

Direct materials $ 7
Direct labor 11
Variable manufacturing overhead 3
Fixed manufacturing overhead ($400,000 25,000 units) 16
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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