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

	Year 1	Year 2
Sales (@ $63 per unit)	$ 945,000	$ 1,575,000
Cost of goods sold (@ $42 per unit)	630,000	1,050,000
Gross margin	315,000	525,000
Selling and administrative expenses*	299,000	329,000
Net operating income	$ 16,000	$ 196,000

* $3 per unit variable; $254,000 fixed each year.

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

Direct materials	$ 9
Direct labor	12
Variable manufacturing overhead	4
Fixed manufacturing overhead ($340,000 20,000 units)	17
Absorption costing unit product cost	$ 42

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

	Year 1	Year 2
Units produced	20,000	20,000
Units sold	15,000	25,000

Required

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

VARIABLE COSTING NET OPERATING INCOME YEAR 1 AND 2

ABSORPTION COSTING NET OPERATING INCOME YEAR 1 AND YEAR 2