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 (@ $38 per unit)		722,000			1,102,000
Gross margin		475,000			725,000
Selling and administrative expenses*		311,000			341,000
Net operating income	$	\164,000\		$	384,000

$3 per unit variable; $254,000 fixed each year. The company’s $38 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		10
Variable manufacturing overhead		3
Fixed manufacturing overhead ($432,000 ÷ 24,000 units)		18
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	24,000	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.

Answer 1