Problem 6-19 (Algo) Variable Costing Income Statement; Reconciliation [LO,6-1, LO6-2, LO6-3]

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

	Year 1	Year 2
Sales (@ $63 per unit)	$ 1,260,000	$ 1,890,000
Cost of goods sold (@ $38 per unit)	760,000	1,140,000
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 $38 unit product cost is computed as follows:

Direct materials	$ 6
Direct labor	10
Variable manufacturing overhead	3
Fixed manufacturing overhead ($475,000 25,000 units)	19
Absorption costing unit product cost	$ 38

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.