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

* $3 per unit variable; $246,000 fixed each year.

The companys $37 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 Sales (@ $62 per unit) $1,116,000 Cost of goods sold (@ $37 per unit) 666,000 Gross margin 450,000 Selling and administrative expenses* 300,000 Net operating income $ 150,000 Year 2 $1,736,000 1,036, 000 700,000 330,000 $ 370,000 $10 11 2 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($322,000 = 23,000 units) Absorption costing unit product cost 14 $37 Units produced Units sold Year 1 Year 2 23,000 23,000 18,000 28,000