During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows ear 1 Year 2 Sales (@S64 per unit) Cost of goods sold (@ $42 per unit) $1,120,000 $1,760,000 735,000 1,155,000 Gross margin Selling and administrative expenses* 385,000 318,500 605,000 348,500 Net operating income $66,500 $ 256,500 $3 per unit variable; $266,000 fixed each year The company's $42 unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($427,500 12 4 22,500 units) Absorption costing unit product cost $ 42 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 ear 1 22,500 17,500 Year 2 22,500 27,500