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.

During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Sales (@ $63 per unit) Cost of goods sold (@ $35 per unit) Gross margin Selling and administrative expenses Net operating income Year 1 $ 1,260,000 700,000 560,000 307,000 $ 253,000 Year 2 $ 1,890,000 1,050,000 840,000 337,000 $ 503,000 * $3 per unit variable: $247,000 fixed each year. The company's $35 unit product cost is computed as follows: $ Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($400,000 - 25,000 units) Absorption costing unit product cost $ 7 10 2 16 $ 35 Production and cost data for the first two years of operations are: Units produced Units sold Year 1 25,000 20,000 Year 2 25,000 30,000