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

	Year 1	Year 2
Sales (@ $63 per unit)	$ 1,134,000	$ 1,764,000
Cost of goods sold (@ $37 per unit)	666,000	1,036,000
Gross margin	468,000	728,000
Selling and administrative expenses*	305,000	335,000
Net operating income	$ 163,000	$ 393,000

* $3 per unit variable; $251,000 fixed each year.

The companys $37 unit product cost is computed as follows:

Direct materials	$ 8
Direct labor	9
Variable manufacturing overhead	1
Fixed manufacturing overhead ($437,000 23,000 units)	19
Absorption costing unit product cost	$ 37

Production and cost data for the first two years of operations are:

	Year 1	Year 2
Units produced	23,000	23,000
Units sold	18,000	28,000

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.