Question

During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales ( $63 per unit) Cost of goods sold ( $35 per unit) Gross margin Selling and administrative expenses $ 1,260,000 700,000 $ 1,890,000 1,050,000 840,000 338,000 560,000 308,000 $ \252,000\ $ 502,000 Net operating income *$3 per unit variable; $248,000 fixed each year. The company's $35 unit product cost is computed as follows: Direct materials 5 Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($350,000 25,000 units 12 4 14 Absorption costing unit product cost 35 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 25,000 30,000 Units produced Units sold 25,000 20,000

Answer 1

1
	Year 1	Year 2
Direct materials	5	5
Direct labor	12	12
Variable manufacturing overhead	4	4
Unit product cost	21	21
Unit product cost = 21
2
	Year 1	Year 2
Sales	1260000	1890000
Variable expenses:
Variable cost of goods sold	420000	630000
Variable selling and administrative expenses	60000	90000
Total Variable expenses	480000	720000
Contribution margin	780000	1170000
Fixed expenses:
Fixed manufacturing overhead	350000	350000
Fixed selling and administrative expenses	248000	248000
Total Fixed expenses	598000	598000
Net operating income	182000	572000
3
	Year 1	Year 2
Variable costing net income(loss)	182000	572000
Add: Fixed manufacturing overhead deferred in inventory under absorption costing	70000		=5000*14
Deduct: Fixed manufacturing overhead released from inventory under absorption costing		(70000)	=(5000)*14
Absorption costing net operating income	252000	502000