# During Heaton Company’s first two years of operations, it reported absorption costing net operating

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

Year 1

Year 2

Sales (@ \$61 per unit)
\$
1,098,000

\$
1,708,000

Cost of goods sold (@ \$40 per unit)

720,000

1,120,000

Gross margin

378,000

588,000

299,000

329,000

Net operating income
\$
79,000

\$
259,000

* \$3 per unit variable; \$245,000 fixed each year.
The company’s \$40 unit product cost is computed as follows:

Direct materials
\$
9

Direct labor

12

4

Fixed manufacturing overhead (\$345,000 ÷ 23,000 units)

15

Absorption costing unit product cost
\$
40

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 operatons
are:

Year 1
Year 2

Units produced
23,000
23,000

Units sold
18,000
28,000

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.

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