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

	Year 1	Year 2
Sales (@ $60 per unit)	$ 960,000	$ 1,560,000
Cost of goods sold (@ $42 per unit)	672,000	1,092,000
Gross margin	288,000	468,000
Selling and administrative expenses*	301,000	331,000
Net operating income	$ -13,000	$ 137,000

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

The companys $42 unit product cost is computed as follows:

Direct materials	$ 8
Direct labor	13
Variable manufacturing overhead	5
Fixed manufacturing overhead ($336,000 21,000 units)	16
Absorption costing unit product cost	$ 42

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

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

Required:

1. Reconcile the absorption costing and the variable costing net operating income figures for each year.