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)	$	976,000		$	1,586,000
Cost of goods sold (@ $38 per unit)		608,000			988,000
Gross margin		368,000			598,000
Selling and administrative expenses*		301,000			331,000
Net operating income	$	\67,000\		$	267,000

* $3 per unit variable; $253,000 fixed each year.

The companys $38 unit product cost is computed as follows:

Direct materials	$	8
Direct labor		11
Variable manufacturing overhead		1
Fixed manufacturing overhead ($378,000 21,000 units)		18
Absorption costing unit product cost	$	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:

	Year 1	Year 2
Units produced	21,000	21,000
Units sold	16,000	26,000

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.