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During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: $ Sales (@ $61 per unit) Cost of goods sold (@ $42 per unit) Year 1 976,000 672,000 Year 2 $1,586,000 1,092,000 Gross margin Selling and administrative expenses 304,000 265,600 494,000 295,600 Net operating income 38,400 $ 198,400 $3 per unit variable; $217,600 fixed each year. The company's $42 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($378,000 - 21.000 units) Absorption costing unit product cost 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 two years are: Units produced Units sold Year 1 21,000 16,000 Year 2 21,000 26,000 Required: 1. Prepare a variable costing contribution format income statement for each year. Heaton Company Variable Costing Income Statement Year 1 Year 2 Variable expenses: Total variable expenses Fixed expenses: Total fixed expenses Net operating income (loss) 2. Reconcile the absorption costing and the variable costing net operating income figures for each year. (Losses and deductions should be indicated with a minus sign.) Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Variable costing net operating income (loss) Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing Absorption costing net operating income (loss)