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)


Cost of goods sold (@ $40 per unit)



Gross margin



Selling and administrative expenses*



Net operating income


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

Direct materials

Direct labor


Variable manufacturing overhead


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


Absorption costing unit product cost

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

Year 1
Year 2

Units produced

Units sold

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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