Reference no: EM132581595

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)                      $900,000              $1,500,000

Cost of goods sold (@ $38 per unit)         570,000              950,000

Gross margin                                        330,000                550,000

Selling and administrative expenses              294,000               324,000

Net operating income                                   $36,000            $226,000

• $3 per unit variable; $249,000 fixed each year.

The company's $38 unit product cost is computed as follows:

Direct materials$6

Direct labor 13

Variable manufacturing overhead 4

Fixed manufacturing overhead ($300,000 ÷ 20,000 units) 15

Absorption costing unit product cost$38

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       20,000            20,000

Units sold                15,000            25,000

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.