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 (@ $61 per unit)	$ 976,000	$ 1,586,000
Cost of goods sold (@ $36 per unit)	576,000	936,000
Gross margin	400,000	650,000
Selling and administrative expenses*	303,000	333,000
Net operating income	$ 97,000	$ 317,000

* $3 per unit variable; $255,000 fixed each year.

The companys $36 unit product cost is computed as follows:

Direct materials	$ 5
Direct labor	12
Variable manufacturing overhead	2
Fixed manufacturing overhead ($357,000 21,000 units)	17
Absorption costing unit product cost	$ 36

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

	Year 1	Year 2
Units produced	21,000	21,000
Units sold	16,000	26,000

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.