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)	$	1,200,000		$	1,800,000
Cost of goods sold (@ $35 per unit)		700,000			1,050,000
Gross margin		500,000			750,000
Selling and administrative expenses*		313,000			343,000
Net operating income	$	187,000		$	407,000

* $3 per unit variable; $253,000 fixed each year.

The companys $35 unit product cost is computed as follows:

Direct materials	$	8
Direct labor		8
Variable manufacturing overhead		3
Fixed manufacturing overhead ($400,000 25,000 units)		16
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 first two years of operations are:

	Year 1	Year 2
Units produced	25,000	25,000
Units sold	20,000	30,000

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.