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

The company’s $18 unit product cost is computed as follows:

Production and cost data for the first two years of operations are:

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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Year 1 Year 2 Sales (@ $25 per unit) .... Cost of goods sold (@ $18 per unit) $1,000,000 $1,250,000 720,000 900,000 Gross margin 280,000 350,000 Selling and administrative expenses* 210,000 230,000 Net operating income $ 70,000 $ 120,000 *$2 per unit variable; $130,000 fixed each year.