During Heaton Company\'s first two years of operations, the company reported abs

Question

During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows Year 2 ear 1 525,000 375,000 Sales( $60 per unit) Cost of goods sold ( $35 per unit) $ 900,000 1,500,000 875,000 Gross margin Selling and administrative expenses* 625,000 285,000 255,000 Net operating income $ 120,000 $ 340,000 $3 per unit variable; $210,000 fixed each year The company's $35 unit product cost is computed as follows 10 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($260,000 20,000 units) 13 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 two years are Units produced Units sold Year 1 20,000 15,000 Year 2 20,000 25,000

Explanation / Answer

1.Prepare variable costing income statement :

Reconcile :

Year 1 Year 2 Sales 900000 1500000 Variable cost Variable cost of goods sold 330000 550000 Variable selling and administrative expense 45000 75000 Total variable cost 375000 625000 Contribution margin 525000 875000 Fixed expenses : Fixed manufacturing overhead 260000 260000 Fixed selling and administrative expense 210000 210000 Total fixed expense 470000 470000 Net operating income 55000 405000

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