During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $62 per unit) $ 992,000 $ 1,612,000 Cost of goods sold (@ $35 per unit) 560,000 910,000 Gross margin 432,000 702,000 Selling and administrative expenses* 302,000 332,000 Net operating income $ 130,000 $ 370,000 * $3 per unit variable; $254,000 fixed each year. The companys $35 unit product cost is computed as follows: Direct materials $ 5 Direct labor 9 Variable manufacturing overhead 2 Fixed manufacturing overhead ($399,000 21,000 units) 19 Absorption costing unit product cost $ 35 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.