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

During Heaton Company's 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 (@ $36 per unit) 720,0001,080,000

Gross margin 540,000 810,000

Selling and administrative expenses* 311,000 341,000

Net operating income $229,000 $469,000

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

The company's $36 unit product cost is computed as follows:

Direct materials $7

Direct labor 11

Variable manufacturing overhead 4

Fixed manufacturing overhead ($350,000 25,000 units) 14

Absorption costing unit product cost $36

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.