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During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows:
| | Year 1 | | Year 2 |
| Sales (@ $60 per unit) | $ | 1,140,000 | | $ | 1,740,000 |
| Cost of goods sold (@ $37 per unit) | | 703,000 | | | 1,073,000 |
| Gross margin | | 437,000 | | | 667,000 |
| Selling and administrative expenses* | | 306,000 | | | 336,000 |
| Net operating income | $ | 131,000 | | $ | 331,000 |
| |
* $3 per unit variable; $249,000 fixed each year.
The companys $37 unit product cost is computed as follows:
| | | |
| Direct materials | $ | 8 |
| Direct labor | | 8 |
| Variable manufacturing overhead | | 3 |
| Fixed manufacturing overhead ($432,000 24,000 units) | | 18 |
| Absorption costing unit product cost | $ | 37 |
| |
Production and cost data for the first two years of operations are:
| | Year 1 | Year 2 |
| Units produced | 24,000 | 24,000 |
| Units sold | 19,000 | 29,000 |
| |
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.
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