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

Year 1 Year 2

Sales (@ $64 per unit) $ 1,216,000 $ 1,856,000

Cost of goods sold (@ $38 per unit) 722,000 1,102,000

Gross margin 494,000 754,000

Selling and administrative expenses* 306,000 336,000

Net operating income $ 188,000 $ 418,000

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

The companys $38 unit product cost is computed as follows:

Direct materials $ 7

Direct labor 12

Variable manufacturing overhead 1

Fixed manufacturing overhead ($432,000 24,000 units) 18

Absorption costing unit product cost $ 38

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

Year 1 Year 2

Units produced 24,000 24,000

Units sold 19,000 29,000

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.