Reference no: EM132520442

During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows:

                                                                               Year 1                              Year 2

Sales (@ $64 per unit)                               $ 1,216,000              $ 1,856,000

Cost of goods sold (@ $39 per unit)                741,000                   1,131,000

Gross margin                                               475,000                   725,000

Selling and administrative expenses                 305,000                   335,000

Net operating income                                 $ 170,000                  $ 390,000

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

The company's $39 unit product cost is computed as follows:

Direct materials                                                         $ 8

Direct labor                                                               10

Variable manufacturing overhead                                     4

Fixed manufacturing overhead ($408,000 ÷ 24,000 units)    17

Absorption costing unit product cost                             $ 39

• Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

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:

Question 1. Using variable costing, what is the unit product cost for both years?

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

Question 3. Reconcile the absorption costing and the variable costing net operating income figures for each year.