During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows Year 1 Year 2 Sales (@ $61 per unit) Cost of goods sold ( $35 per unit) Gross margin Selling and administrative expenses Net operating income $ 1,159,000 $1,769,000 665,0001,015,000 754,000 334,000 494,000 304,000 1190,00420 $3 per unit variable; $247,000 fixed each year The company's $35 unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($312,000 24,000 units) Absorption costing unit product cost 8 13 $ 35 Forty percent of fixed manufacturing overhead consists of wages and salaries, the remainder consists of depreciation charges on production equipment and buildings