During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows Year 1 Year 2 Sales (@ $63 per unit) Cost of goods sold ( $38 per unit) $1,102,500 $1,732,500 665,000 1,045,000 Gross margin Selling and administrative expenses* 437,500 318,500 687,500 348,500 Net operating income $ 119,000 339,000 $3 per unit variable; $266,000 fixed each year The company's $38 unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($360,000 + 22,500 units 16 12 4 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 two years are: Units produced Units sold Year 1 22,500 17,500 27,500 Year 2 22,500