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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 (@ $62 per unit)$1,116,000$1,736,000
Cost of goods sold (@ $33 per unit)594,000924,000
Gross margin522,000812,000
Selling and administrative expenses*302,000332,000
Net operating income$220,000$480,000

* $3 per unit variable; $248,000 fixed each year.

The company’s $33 unit product cost is computed as follows:

Direct materials$5
Direct labor11
Variable manufacturing overhead3
Fixed manufacturing overhead ($322,000 ÷ 23,000 units)14
Absorption costing unit product cost$33

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 produced23,00023,000
Units sold18,00028,000

Questions:

1. Using variable costing, what is the unit product cost forboth years?

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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