Reference no: EM132517639

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*       302,000             332,000

Net operating income$                        \173,000          \ $393,000

• * $3 per unit variable; $245,000 fixed each year.

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

Direct materials$9

Direct labor 13

Variable manufacturing overhead 1

Fixed manufacturing overhead ($384,000 ÷ 24,000 units) 16

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.