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)	$ 945,000	$ 1,575,000
Cost of goods sold (@ $39 per unit)	585,000	975,000
Gross margin	360,000	600,000
Selling and administrative expenses*	290,000	320,000
Net operating income	$ 70,000	$ 280,000

* $3 per unit variable; $245,000 fixed each year.

The companys $39 unit product cost is computed as follows:

Direct materials	$ 9
Direct labor	10
Variable manufacturing overhead	3
Fixed manufacturing overhead ($340,000 20,000 units)	17
Absorption costing unit product cost	$ 39

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

	Year 1	Year 2
Units produced	20,000	20,000
Units sold	15,000	25,000

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.