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

Year 1 Year 2

Sales (@ $61 per unit) $1,098,000 $1,708,000

Cost of goods sold (@ $31 per unit) 558,000 868,000

Gross margin 540,000 840,000

Selling and administrative expenses* 308,000 338,000

Net operating income $232,000 $502,000

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

The company's $31 unit product cost is computed as follows:

Direct materials $9

Direct labor 9

Variable manufacturing overhead 2

Fixed manufacturing overhead ($253,000 23,000 units) 11

Absorption costing unit product cost $31

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 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.