During Heaton Company’s first two years of operations, itreported absorption costing net operating income as follows:
| Year 1 | | Year 2 |
| Sales (@ $62 per unit) | $ | 1,240,000 | | $ | 1,860,000 |
| Cost of goods sold (@ $35 per unit) | | 700,000 | | | 1,050,000 |
| Gross margin | | 540,000 | | | 810,000 |
| Selling and administrative expenses* | | 315,000 | | | 345,000 |
| Net operating income | $ | 225,000 | | $ | 465,000 |
|
* $3 per unit variable; $255,000 fixed each year.
The company’s $35 unit product cost is computed as follows:
| | |
| Direct materials | $ | 8 |
| Direct labor | | 9 |
| Variable manufacturing overhead | | 3 |
| Fixed manufacturing overhead ($375,000 ÷ 25,000 units) | | 15 |
| Absorption costing unit product cost | $ | 35 |
|
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 | 25,000 | 25,000 |
| Units sold | 20,000 | 30,000 |
|
Required:
1. Using variable costing, what is the unit product cost forboth years? =$20
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.
