Reference no: EM132514368

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

                                                                    Year 1               Year 2

Sales (@ $60 per unit)                        $ 1,080,000              $ 1,680,000

Cost of goods sold (@ $36 per unit)            648,000                1,008,000

Gross margin                                              432,000              672,000

Selling and administrative expenses*           305,000                  335,000

Net operating income                                $ 127,000              $ 337,000

• * $3 per unit variable; $251,000 fixed each year.
• The company's $36 unit product cost is computed as follows:

Direct materials $ 9

Direct labor 12

Variable manufacturing overhead 4

Fixed manufacturing overhead ($253,000 ÷ 23,000 units) 11

Absorption costing unit product cost $ 36

• 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 23,000          23,000

Units sold         18,000         28,000

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.