During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: Year 1 Year 2 Sales $64 per unit) 1,088,000 1,728,000 578,000 Cost of goods sold $34 per unit) 918,000 510,000 810.000 Gross margin 300,000 Selling and administrative expenses 330,000 210,000 480,000 Net operating income $3 per unit variable; $249,000 fixed each year. The company's $34 unit product cost is computed as follows: 9 Direct materials Direct labor 10 Variable manufacturing overhead Fixed manufacturing overhead ($242,000 +22,000 units) 11 34 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 1 Year 2 22,000 22,000 17,000 27,000 Units produced Units sold