During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows Year2 Year1 1,037,000 Sales ( $61 per unit) Cost of goods sold ( $36 per unit) Gross margin Selling and administrative expenses* Net operating income 1,647,000 612,000 972,000 675,000 302,000332,000 $ 343,000 425,000 1123,000 $3 per unit variable; $251,000 fixed each year The company's $36 unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($242,000 22,000 units) Absorption costing unit product cost 12 5 s 36 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 Units produced Units sold Year 1 Year 2 22,000 22,000 17,000 27,000