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During Heaton Company’s first two years of operations, it reported absorption costing net operating income as...

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Accounting

During Heaton Company’s first two years of operations, itreported absorption costing net operating income as follows:

Year 1Year 2
Sales (@ $63 per unit)$1,197,000$1,827,000
Cost of goods sold (@ $37 per unit)703,0001,073,000
Gross margin494,000754,000
Selling and administrative expenses*308,000338,000
Net operating income$186,000$416,000

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

The company’s $37 unit product cost is computed as follows:

Direct materials$8
Direct labor13
Variable manufacturing overhead3
Fixed manufacturing overhead ($312,000 ÷ 24,000 units)13
Absorption costing unit product cost$37

Forty percent of fixed manufacturing overhead consists of wagesand salaries; the remainder consists of depreciation charges onproduction equipment and buildings.

Production and cost data for the first two years of operationsare:

Year 1Year 2
Units produced24,00024,000
Units sold19,00029,000

Required:

2. What is the variable costing net operating income in Year 1and in Year 2?

3. Reconcile the absorption costing and the variable costing netoperating income figures for each year.

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