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) $ 1,054,000 $ 1,674,000 Cost of goods sold (@ $38 per unit) 646,000 1,026,000 Gross margin 408,000 648,000 Selling and administrative expenses* 304,000 334,000 Net operating income $ 104,000 $ 314,000 * $3 per unit variable; $253,000 fixed each year. The companys $38 unit product cost is computed as follows: Direct materials $ 9 Direct labor 12 Variable manufacturing overhead 2 Fixed manufacturing overhead ($330,000 22,000 units) 15 Absorption costing unit product cost $ 38 Production and cost data for the first two years of operations are: Year 1 Year 2 Units produced 22,000 22,000 Units sold