During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows Year 1 Year 2 Sales (e $63 per unit) Cost of goods sold ( $44 per unit) Gross margin Selling and administrative expenses* Net operating income 1,134,000 1,764,000 1,232,000 532,000 305,000 335,000 $ 197,000 792,000 342,000 $ 137,000 $3 per unit variable; $251,000 fixed each year The company's $44 unit product cost is computed as follows: 10 12 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($414,000 23,000 units) Absorption costing unit product cost 18 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 23,000 23,000 18,000 28,000