During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows:

	Year 1	Year 2
Sales (@ $64 per unit)	$ 1,088,000	$ 1,728,000
Cost of goods sold (@ $39 per unit)	663,000	1,053,000
Gross margin	425,000	675,000
Selling and administrative expenses*	304,000	334,000
Net operating income	$ 121,000	$ 341,000

* $3 per unit variable; $253,000 fixed each year.

The companys $39 unit product cost is computed as follows:

Direct materials	$ 8
Direct labor	12
Variable manufacturing overhead	2
Fixed manufacturing overhead ($374,000 22,000 units)	17
Absorption costing unit product cost	$ 39

Production and cost data for the first two years of operations are:

	Year 1	Year 2
Units produced	22,000	22,000
Units sold	17,000	27,000

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.