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

	Year 1			Year 2
Sales (@ $61 per unit)	$	1,037,000		$	1,647,000
Cost of goods sold (@ $40 per unit)		680,000			1,080,000
Gross margin		357,000			567,000
Selling and administrative expenses*		305,000			335,000
Net operating income	$	52,000		$	232,000

* $3 per unit variable; $254,000 fixed each year.

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

Direct materials	$	9
Direct labor		11
Variable manufacturing overhead		3
Fixed manufacturing overhead ($374,000 22,000 units)		17
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	22,000	22,000
Units sold	17,000	27,000

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.