During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows:

	Year 1			Year 2
Sales (@ $60 per unit)	$	900,000		$	1,500,000
Cost of goods sold (@ $40 per unit)		600,000			1,000,000
Gross margin		300,000			500,000
Selling and administrative expenses*		295,000			325,000
Net operating income	$	5,000		$	175,000

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

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

Direct materials	$	10
Direct labor		12
Variable manufacturing overhead		2
Fixed manufacturing overhead ($320,000 20,000 units)		16
Absorption costing unit product cost	$	40

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	20,000	20,000
Units sold	15,000	25,000

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.