During Heaton Company’s first two years of operations, itreported absorption costing net operating income as follows:
| Year 1 | | Year 2 |
| Sales (@ $63 per unit) | $ | 1,197,000 | | $ | 1,827,000 |
| Cost of goods sold (@ $37 per unit) | | 703,000 | | | 1,073,000 |
| Gross margin | | 494,000 | | | 754,000 |
| Selling and administrative expenses* | | 308,000 | | | 338,000 |
| 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 labor | | 13 |
| Variable manufacturing overhead | | 3 |
| 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 1 | Year 2 |
| Units produced | 24,000 | 24,000 |
| Units sold | 19,000 | 29,000 |
|
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.
