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

Year 1Year 2Sales (@ $63 per unit)$ 1,071,000$ 1,701,000Cost of goods sold (@ $36 per unit)612,000972,000Gross margin459,000729,000Selling and administrative expenses*305,000335,000Net operating income$ 154,000$ 394,000

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

The companys $36 unit product cost is computed as follows:

Direct materials$ 9Direct labor12Variable manufacturing overhead2Fixed manufacturing overhead ($286,000 22,000 units)13Absorption costing unit product cost$ 36

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

Year 1Year 2Units produced22,00022,000Units sold17,00027,000

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.