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)	$992,000	$1,612,000
Cost of goods sold (@ $37 per unit)	592,000	962,000
Gross margin	400,000	650,000
Selling and administrative expenses*	302,000	332,000
Net operating income (loss)	$98,000	$318,000

*$3 per unit variable; $254,000 fixed each year.

The company's $37 unit product cost is computed as follows:

Direct materials	$6
Direct labor	13
Variable manufacturing overhead	4
Fixed manufacturing overhead ($294,000