2 Problem 6-19 (Algo) Variable Costing Income Statement; Reconciliation [LO,6-1, LO6-2, LO6-3].

During Heaton Companys 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
Selling and administrative expenses*	304,000	334,000
Net operating income	$ 74,000	$ 254,000

* $3 per unit variable; $250,000 fixed each year.

The companys $40 unit product cost is computed as follows:

Direct materials	$ 7
Direct labor	12
Variable manufacturing overhead	3
Fixed manufacturing overhead ($414,000 23,000 units)	18
Absorption costing unit product cost	$ 40

Production and cost data for the first two years of operations 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.