Diesel Fuel Guage Problems

My '87 300SDL, which I just purchased about a month ago, had an erratic fuel gauge. When it got down to about 1/4 tank it would fall to zero and I mean zero, then bounce back and forth to what I assumed was the correct fuel level. I ran it way down once and the fuel light did not come on.

So, thanks to Tom Hansen, I got a new float unit and it was installed yesterday. The fuel light came on for the mechanic and that was good, but it registered only about 1/8 of a tank and was approximate 1/2 full. I filled it up tonight thinking you might have to fill the reservoir the first time???? But, nothing changed...it hangs at 1/8 tank.

Ideas?

Thanks for your help.