During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows Year 1 S 960,000 1,560,000 608,000 Year 2 988,000 572,000 Sales (@ S60 per unit) Cost of goods sold ( $38 per unit) 352,000 278,400 Gross margin Selling and administrative expenses 308,400 Net operating income $ 73,600 263,600 $3 per unit variable; $230,400 fixed each year The company's $38 unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($357,000 21,000 units) 4 17 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 21,000 16,000 Year 2 21,000 26,000