During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: Year 1 Year 2 Sales $62 per unit) 930,000 1,550,000 570,000 950,000 Cost of goods sold $38 per unit) 360,000 600,000 Gross margin 299,000 329,000 Selling and administrative expenses* Net operating income 61,000 271,000 $3 per unit variable; $254,000 fixed each year. The company's $38 unit product cost is computed as follows Direct materials 9 Direct labor 11 Variable manufacturing overhead Fixed manufacturing overhead ($260,000 20,000 units) 13 38 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 Units produced 20,000 20,000 Units sold 15,000 25,000