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

Year 1Year 2Sales (@ $64 per unit)$1,216,000$1,856,000Cost of goods sold (@ $39 per unit)741,0001,131,000Gross margin475,000725,000Selling and administrative expenses*302,000332,000Net operating income$\173,000\$393,000

* $3 per unit variable; $245,000 fixed each year.

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

Direct materials$9Direct labor13Variable manufacturing overhead1Fixed manufacturing overhead ($384,000 24,000 units)16Absorption 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 1Year 2Units produced24,00024,000Units sold19,00029,000

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.