During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: Year 1 Year 2 Sales $60 per unit) 900 $1,500 Cost of goods sold @$36 per unit) 540,000 900,000 Gross margin 360,000 600,000 Selling and administrative expenses 296, 326,000 Net operating income 4,000 274,000 $3 per unit variable: S251,000 fixed each year. The company's $36 unit product cost is computed as follows: Direct materials 7 Direct labor 12 Variable manufacturing overhead Fixed manufacturing overhead ($260,000 20,000 units) 13 36 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: Year 2 Units produced 20.000 20,000 Units sold 15.000 25,000