Year 1	Year 2
Sales (@ $64 per unit)	$ 1,152,000	$ 1,792,000
Cost of goods sold (@ $37 per unit)	666,000	1,036,000
Gross margin	486,000	756,000
Selling and administrative expenses*	305,000	335,000
Net operating income	$ 181,000	$ 421,000

* $3 per unit variable; $251,000 fixed each year. The companys $37 unit product cost is computed as follows:

Direct materials	$ 7
Direct labor	12
Variable manufacturing overhead	1
Fixed manufacturing overhead ($391,000 23,000 units)	17
Absorption costing unit product cost	$ 37

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

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.