During Gates Companys first two years of operations, the company reported absorption costing net operating income as follows:

	Year 1		Year 2
Sales (@ $62 per unit)	$	992,000	$	1,612,000
Cost of goods sold (@ $38 per unit)		608,000		988,000
Gross margin		384,000		624,000
Selling and administrative expenses*		296,000		326,000
Net operating income	$	88,000	$	298,000

* $3 per unit variable; $248,000 fixed each year.

The companys $38 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		12
Variable manufacturing overhead		2
Fixed manufacturing overhead ($357,000 21,000 units)		17
Absorption costing unit product cost	$	38

Production and cost data for the two years are given below:

	Year 1	Year 2
Units produced	21,000	21,000
Units sold	16,000	26,000

Required:

1.	Prepare a variable costing contribution format income statement for each year.

2.	Reconcile the absorption costing and variable costing net operating income figures for each year. (Loss and deduction amounts should be indicated with a minus sign.)