During Heaton Companys first two years of operations, the company reported absorption costing net operating income as follows: Sales (@ $63 per unit) Cost of goods sold (@ $37 per unit) Year 1 Year 2 $ 1,260,000 $ 1,890,000 740,000 1,110,000 Gross margin Selling and administrative expenses 520,000 309,000 780,000 339,000 Net operating income $ 211,000 $ 441,000 * $3 per unit variable; $249,000 fixed each year. The company's $37 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($475,000 +25,000 units) $ 7 19 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. Production and cost data for the two years are: Units produced Units sold Year 1 25,000 20,000 Year 2 25,000 30,000