During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows Year 1 Year2 Sales ( $61 per unit) Cost of goods sold ( $38 per unit) Gross margin Selling and administrative expenses* Net operating income 1,037,0001,647,000 621,000 326,000 $195,0001295,000 646,000 026000_ 391,000 296,000 $3 per unit variable; $245,000 fixed each year The company's $38 unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($374,000 22,000 units) Absorption costing unit product cost s 10 10 17 s 38 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 Units produced Units sold Year 1 Year 2 22,000 22, 000 17,000 27,000