During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows Year 1 Year 2 Sales ( $60 per unit) Cost of goods sold ( $37 per unit) Gross margin Selling and administrative expenses* Net operating income $ 960,000 $1,560,00e 962,80e 598,088 302,000332,00 $ 166,0001 266,000 592,006e 368,0060 $3 per unit variable; $254,000 fixed each year The company's $37 unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($357,000 21,000 units 17 Absorption costing unit product cost $ 37 Forty percent of fixed manufacturing overhead consists of wages and salaries, the remainder consists of depreciation charges on production equipment and buildings