PROBLEM 7-19 Variable Costing Income Statement; Reconciliation LO7-2, L07-3 During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Year 1 $1,000,000 720,000 Year 2 $1,250,000 900,000 Sales (@ $25 per unit) .... Cost of goods sold (@ $18 per unit) Gross margin ..... Selling and administrative expenses* Net operating income .... 280,000 210,000 $ 70,000 350,000 230,000 $ 120,000 *$2 per unit variable; $130,000 fixed each year. Chapter 7 The company's $18 unit product cost is computed as follows: $ 4 7 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($270,000 = 45,000 units) Absorption costing unit product cost 1 6 $18 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 Units sold 45,000 40,000 45,000 50,000 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