Sales (@ $62 per unit)	$	1,116,000		$	1,736,000
Cost of goods sold (@ $37 per unit)		666,000			1,036,000
Gross margin		450,000			700,000
Selling and administrative expenses*		309,000			339,000
Net operating income	$	\141,000\		$	361,000

* $3 per unit variable; $255,000 fixed each year.

The companys $37 unit product cost is computed as follows:

Direct materials	$	9
Direct labor		12
Variable manufacturing overhead		2
Fixed manufacturing overhead ($322,000 23,000 units)		14
Absorption costing unit product cost	$	37

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 first two years of operations are:

	Year 1	Year 2
Units produced	23,000	23,000
Units sold	18,000	28,000

Required:

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

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

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.