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

Year 1 Year 2

Sales (@ $60 per unit) $960,000 $1,560,000

Cost of goods sold (@ $34 per unit) 544,000 884,000

Gross margin 416,000 676,000

Selling and administrative expenses* 302,000 332,000

Net operating income $114,000 $344,000

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

The company's $34 unit product cost is computed as follows:

Direct materials$6

Direct labor12

Variable manufacturing overhead3

Fixed manufacturing overhead ($273,000 21,000 units)13

Absorption costing unit product cost $34

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 21,000 21,000

Units sold 16,000 26,000

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.