During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows Year 2 ear 1 525,000 375,000 Sales( $60 per unit) Cost of goods sold ( $35 per unit) $ 900,000 1,500,000 875,000 Gross margin Selling and administrative expenses* 625,000 285,000 255,000 Net operating income $ 120,000 $ 340,000 $3 per unit variable; $210,000 fixed each year The company's $35 unit product cost is computed as follows 10 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($260,000 20,000 units) 13 Absorption costing unit product cost $ 35 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 20,000 15,000 Year 2 20,000 25,000