During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows Year 1 Year 2 Sales ( $63 per unit) Cost of goods sold ( $37 per unit) Gross margin Selling and administrative expenses $. 1,260,000 740,000 520,000 312,000 1,890,000 1,110,000 780,000 342,000 Net operating income $ 1208,000 438,000 "$3 per unit variable; $252,000 fixed each year. The company's $37 unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($325,000 25,000 units) Absorption costing unit product cost 12 4 13 $ 37 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