Question

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

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

Year 1 Year 2
Sales (@ $62 per unit) $ 1,054,000 $ 1,674,000
Cost of goods sold (@ $43 per unit) 731,000 1,161,000
Gross margin 323,000 513,000
Selling and administrative expenses* 299,000 329,000
Net operating income $ 24,000 $ 184,000

* $3 per unit variable; $248,000 fixed each year.

The company’s $43 unit product cost is computed as follows:

Direct materials $ 9
Direct labor 11
Variable manufacturing overhead 3
Fixed manufacturing overhead ($440,000 ÷ 22,000 units) 20
Absorption costing unit product cost $ 43

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 22,000 22,000
Units sold 17,000 27,000

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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