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

Year 1 Year 2

Sales (@ $64 per unit) $ 1,216,000 $ 1,856,000

Cost of goods sold (@ $39 per unit) 741,000 1,131,000

Gross margin 475,000 725,000

Selling and administrative expenses* 305,000 335,000

Net operating income $ 170,000 $ 390,000

* $3 per unit variable; $248,000 fixed each year.

The company's $39 unit product cost is computed as follows:

Direct materials $ 8

Direct labor 10

Variable manufacturing overhead 4

Fixed manufacturing overhead ($408,000 24,000 units) 17

Absorption costing unit product cost $ 39

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 24,000 24,000

Units sold 19,000 29,000

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.