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Question - During Heaton Company's first two years of operations, it reported 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 (@ $40 per unit)
760,000
1,160,000
Gross margin
437,000
667,000
Selling and administrative expenses*
305,000
335,000
Net operating income
$132,000
$332,000
* $3 per unit variable; $248,000 fixed each year.
The company's $40 unit product cost is computed as follows:
Direct materials
$9
Direct labor
13
Variable manufacturing overhead
2
Fixed manufacturing overhead ($384,000 ÷ 24,000 units)
16
Absorption costing unit product cost
$40
Production and cost data for the first two years of operations are:
Units produced
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.
Consider a 2-year CDS. Assume the conditional default probability is 5% in year 1 and 12% in year 2. Calculate the equilibrium CDS Spread
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