During the first two years of Heaton Company's operations, the cost of absorbing net operating income was as follows:

	Year 1			2 years
Sales ($61 per unit)	$	1,159,000		$	1,769,000
Cost of goods sold ($39 per unit)		741,000			1,131,000
gross margin		418,000			638,000
Selling and administrative expenses*		311,000			341,000
Net operating income	$	107,000		$	297,000

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

The company's $39 unit product cost is calculated as follows:

Direct materials	$	7
direct labor		13
Variable production load		3
Fixed production overhead ($384,000 ÷ 24,000 units)		16
Absorption cost per unit product cost	$	39

Forty percent of fixed manufacturing overheads are from wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production and cost data for the first two years of operations:

	Year 1	2 years
Produced units	24.000	24.000
units sold	19.000	29.000

Necessary:

1. Using the variable cost method, what is the unit cost of product for both years?

2. What is the variable cost net operating income in Year 1 and Year 2?

3. Reconcile the absorption cost with the variable cost net operating income figures for each year.