Question

During Heaton Company’s first two years of operations, the company reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $63 per unit) $ 1,197,000 $ 1,827,000 Cost of goods sold (@ $41 per unit) 779,000 1,189,000 Gross margin 418,000 638,000 Selling and administrative expenses* 303,000 333,000 Net operating income $ 115,000 $ 305,000 * $3 per unit variable; $246,000 fixed each year. The company’s $41 unit product cost is computed as follows: Direct materials $ 8 Direct labor 9 Variable manufacturing overhead 4 Fixed manufacturing overhead ($480,000 ÷ 24,000 units) 20 Absorption costing unit product cost $ 41 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 two years are: Year 1 Year 2 Units produced 24,000 24,000 Units sold 19,000 29,000?

Answer 1

HEATON COMPANY
Variable costing Income Statement
	Year 1	Year 2
	$	$
Sales	1197000	1827000
Less : Variable Expenses:
variable cost of goods sold	399000	609000
	($21X 19000)	($21X 29000)
variable selling and administrative expenses	57000	87000
	($3X 19000)	($3X 29000)
Total variable Expenses	456000	696000
Contribution margin	741000	1131000
Less : Fixed Expenses
Fixed Manufacturing Overhead
Wages and salaries	152000	232000
	($20X19000 X40%)	($20X29000X40%)
Depreciation of building	228000	348000
	($20X19000 X60%)	($20X29000X60%)
Total Fixed Manufacturing Overhead	380000	580000
Fixed selling expenses	246000	246000
Total Fixed cost	626000	826000
Net operating income	115000	305000