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) $ 1,220,000 $ 1,830,000

Cost of goods sold (@ $41 per unit) 820,000 1,230,000

Gross margin 400,000 600,000

Selling and administrative expenses* 313,000 343,000

Net operating income $ 87,000 $ 257,000

* $3 per unit variable; $253,000 fixed each year.

The company's $41 unit product cost is computed as follows:

Direct materials $ 8

Direct labor 11

Variable manufacturing overhead 4

Fixed manufacturing overhead ($450,000 25,000 units) 18

Absorption costing unit product cost $ 41

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 25,000 25,000

Units sold 20,000 30,000

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.