During Durton Companys first two years of operations, the company reported absorption costing operating income as shown below. Production and cost data for the two years are given:

	Year 1	Year 2
Units produced	25,000	25,000
Units sold	20,000	30,000

	Year 1			Year 2
Sales (at $50 per unit)	$	1,000,000		$	1,500,000
Cost of goods sold:
Beginning inventory		0			170,000
Add cost of goods manufactured (at $34 per unit)		850,000			850,000
Goods available for sale		850,000			1,020,000
Less ending inventory (at $34 per unit)		170,000			0
Cost of goods sold		680,000			1,020,000
Gross margin		320,000			480,000
Selling and administrative expenses*		310,000			340,000
Operating income	$	10,000		$	140,000

*$3 per unit variable; $250,000 fixed each year.

The companys $34 unit product cost is computed as follows:

Direct materials	$	8
Direct labour		10
Variable manufacturing overhead		2
Fixed manufacturing overhead ($350,000 25,000 units)		14
Unit product cost	$	34

1. Prepare a variable costing income statement for each year in the contribution format. Variable Costing Income Statement Year 1 Year 2 Variable expenses: Total variable expenses 0 0 0 0 Fixed expenses: 0 0 Total fixed expenses Operating income (loss) $ 0 $ 0 2. Reconcile the absorption costing and variable costing operating income figures for each year. (Loss amounts should be indicated by a minus sign.) Year 2 Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Variable costing operating income (loss) Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing Absorption costing operating income $ 0 $ 0