During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $61 per unit) $ 1,098,000 $ 1,708,000 Cost of goods sold (@ $29 per unit) 522,000 812,000 Gross margin 576,000 896,000 Selling and administrative expenses* 299,000 329,000 Net operating income $ 277,000 $ 567,000 * $3 per unit variable; $245,000 fixed each year. The companys $29 unit product cost is computed as follows: Direct materials $ 5 Direct labor 8 Variable manufacturing overhead 1 Fixed manufacturing overhead ($345,000 23,000 units) 15 Absorption costing unit product cost $ 29 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 23,000 23,000 Units sold 18,000 28,000 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.