During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows Year 1 595,000 493,000 Year 2 Sales (@ $64 per unit) Cost of goods sold (@ $35 per unit) $1,088,000 $1,728,000 945,000 Gross margin Selling and administrative expenses* 783,000 346,200 316,200 Net operating income $ 176,800 $ 436,800 * $3 per unit variable; $265,200 fixed each year. The company's $35 unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($286,000 12 13 $ 35 22,000 units) Absorption costing unit product cost 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 22,000 17,000 Year 2 22,000 27,000